TD Mutual Funds Proposing Changes to Fundamental Investment Objectives

[mikazo]

As a holder of several different TD e-Series index mutual funds, I received some mail advising me of proposed changes to investment objectives of several of the TD mutual fund offerings. I was intrigued, so I read the management information circular (available here: https://www.tdassetmanagement.com/document/PDF/news-insight/MANAGEMENT_INFORMATION_CIRCULAR_IN_RESPECT_OF_SPECIAL_MEETINGS_OF_UNITHOLDERS_EN.pdf)

 

To summarize, several of the index mutual funds propose to change the language that describes the index on which they are based. More specifically, to "replace the name of the benchmark index with a general description of its benchmark index instead". The intention is to change the index to one of the appropriate Solactive indices. In addition, a second change is proposed, that would allow up to 100% of the mutual fund to be invested in the equivalent TD index ETF. I wonder if this would allow the mutual funds not to have to pay fees to Solactive at all, since the funds would hold the ETFs, and not direct positions to mimic the index.

 

Here's a summary of the proposed changes:

 

• TD Canadian Bond Index Fund -> Solactive Canadian Select Universe Bond Index -> achieved with TD Canadian Aggregate Bond Index ETF
  
• TD Canadian Index Fund -> Solactive Canada Broad Market Index -> achieved with TD Canadian Equity Index ETF
  
• TD U.S. Index Fund -> Solactive US Large Cap CAD Index -> achieved with TD U.S. Equity Index ETF
  
• TD International Index Fund -> Solactive GBS Developed Markets ex North America Large & Mid Cap CAD Index -> achieved with TD International Equity Index ETF
  

 

The resulting lower fees paid to Solactive are partially passed on to the investors in the form of management fee reductions on each of the affected mutual funds. The e-Series funds see a small reduction, and other series a more significant reduction (details in the circular).

 

With regard to taxes, the circular mentions that small portions of the funds will incur capital gains tax, but not enough capital gains to warrant a special dividend. Units held in tax-sheltered accounts would not be affected.

 

There has been some discussion elsewhere on the internet about the changes, but most people don't seem too worried.

 

https://www.reddit.com/r/PersonalFinanceCanada/comments/cwa7bn/td_eseries_index_switching_index_provider/

https://www.reddit.com/r/PersonalFinanceCanada/comments/cgw4yl/investing_changes_to_td_eseries/

http://www.holypotato.net/?p=2242

https://www.canadianmoneyforum.com/showthread.php/138494-TDAM-e-series-funds

 

Two specific questions come to my mind:

 

[*]Will Solactive indicies affect the asset mix in any negative way? These indicies are calculated in large part by computers and automation.

[*]Is it too risky to invest in a mutual fund that invests solely in a single ETF? Specifically, if there is a liquidity crisis and high demand for fund redemptions, I assume it would be much harder to liquidate units of a single ETF, rather than various stock or bond positions.