National Bank Direct: Now With Free ETF Transactions

Edited Photo. Source: Flickr - Dinesh Kumar

I love competition. It lowers costs for consumers, requires companies to innovate, and ensures consumers get a good product at a fair price.

Since Questrade and other online discount brokers stormed on the brokerage scene nearly two decades ago, we have seen a steady drop in the cost of commissions and a steady increase in the quality of services and tools offered by discount brokerages.

In 2006, Questrade dropped commissions to as low as $4.95 per trade. Absolutely amazing considering many other brokerages were charging ten times that! Then, in 2013, Questrade began offering no commissions on the purchase of ETFs. This was a game changer for passive index investors!

Virtual Brokers basically copied Questrade with no commissions on ETF purchases, but are somewhat notorious for questionable customer service and they charge higher commissions on other trades. Other brokerages offered commission free ETF transaction on a very limited number of ETFs (think Scotia iTrade and QTrade).

However, Questrade does charge ECN fees for transactions that take liquidity out of the market. This means you are charged an exchange fee for any transaction that does not equal a round lot—some multiple of 100 shares/units. The ECN fees are tiny, but do amount to a very small “commission” of sorts when making small purchases.

Well, in summer 2017, National Bank Direct has really come out to challenge Questrade and Virtual Brokers. National now offers commission-free ETF purchases and sales on all ETFs listed on Canadian or U.S. stock exchanges—with a small catch. Each transaction must include at least 100 units.

Who Can Benefit

Considering that most ETFs in Canada trade at a price ranging from $20 - $50 per unit, this means you could eliminate all commissions and ECN fees if you are an aggressive saver, or a retiree living off your ETF portfolio.

If you are still in those accumulation years, to benefit from National Bank Direct’s ETF program, you should be saving at least $2,500 a month. This means you could make a 100% commission free purchase of ETFs every month or two. ETF sales—for rebalancing purposes or withdrawals—shouldn’t be an issue because they would almost always include more than 100 units in the transaction.

This free commission offer can also be effective for investors who are using a Dual Momentum investment strategy. The Dual Momentum strategy calls for periodic turnover of your entire portfolio; you would make transactions to sell your entire holding of one ETF and buy a different ETF once or twice per year (on average). That transaction is bound to include more than 100 units.

Other National Bank Direct Considerations


National Bank might be the best place for you to open a self-directed family RESP account—especially if you are a lower income family. RESP contributions are often made in lump-sums and your contributions get topped up by government programs, so the 100-unit transaction minimum shouldn’t be a problem.

National Bank is possibly the only self-directed discount brokerage in Canada that is eligible to get funding from every federal and provincial education grant program available. This includes the Canada Education Savings Grant, the Additional Canada Education Savings Grant, Canada Learning Bond, the Saskatchewan Advantage Grant for Education Savings, and the BC Training and Education Savings Grant. Check the list here.

Margin Accounts

While not quite competitive with Interactive Brokers, National Bank Direct has really stepped up their game with margin pricing as well. This, combined with the commission-free ETF transactions, can be a nice option for more aggressive investors employing margin.

National Bank Direct currently charges the bank prime rate for margin amounts in excess of $100,000. As of January 2018, that’s just 3.45% interest which is completely tax deductible off your income. That translates to a net interest rate in the range of 2% for many people, less than the current rate of inflation.

Aside from Interactive Brokers, which is cheaper still, the only other brokerage I’m aware of that charges interest rates this low is RBC Direct for their Royal Circle members (investors with combined account values over $250,000).

Is It Worth Switching

While the National Bank Direct pricing package is very compelling (we all love FREE), I don’t think it is the best option for most people. The benefit of no commissions can easily be eroded if you have cash sitting in your accounts for months at a time while you try to save up enough money to purchase 100 units of more.

The National Bank Direct offer will be most attractive to retirees who will always be making transactions involving over 100 ETF units without thinking out it. It may also attract some very aggressive savers who are also higher earning individuals that can easily make regular purchases involving more than 100 ETF units. That means people saving $5,000 a month or more—a very small portion of the Canadian population.

It’s a smart offer on the part of National Bank Direct because it means they will generally be attracting a higher net-worth client who is probably familiar with self-directed investing and requires less customer service work.

Personally, I will keep my registered accounts with Questrade for the time being. My trading is very minimal—even with my trend strategy. I currently spend less than $50 a year on trading commissions. For that price I get instant price quotes, great customer service, and a platform that I’m familiar with and is incredibly easy to understand and use. Questrade gives me nothing to complaint about!

I’m not saying that National Bank Direct won’t give me the same experience, but I’m just not sure it’s worth switching from a service I’m very happy with for the potential of saving less than $50 per year in trading costs. However, if Questrade ever fails me in a big way, or if their current commission structure changes for the worse, it’s nice to know there’s another competitive option out there.

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I Switched to Interactive Brokers

Edited Photo. Source: Flickr - 95wombat

A few weeks ago I dropped a line admitting to treason. After years of managing my entire portfolio with full loyalty to Questrade, I've moved my Cash/Margin account to Interactive Brokers.

I still love Questrade and believe they are a solid best choice for beginning investors and for registered investment accounts (your self-directed TFSA and RRSP). Questrade is easy to use, they are independent, they are cheap, and I've never had any issues with them.

Questrade is almost the perfect brokerage for anyone with a passive, buy-and-hold ETF portfolio. No commissions on ETF purchases means you can buy even small blocks of ETF units every two weeks or monthly and not have to pay $10 or $15 commission fees with each purchase. This is a huge advantage to an investor who practices automated investing!

However, I'm past the beginning stages of investing and saving and I do not maintain a buy-and-hold portfolio. There are a few areas where Questrade simply does not compete.

Leveraged Investing

In 2017 I introduced leverage in my investment strategy. The idea was simple. We have no debt, we have an enormous savings rate, my risk tolerance is quite high, and my portfolio strategy is designed to shield our investments from prolonged market downturns.

Based on historical data, I believe the likelihood of my strategy resulting in a 50% drawdown is very low. It's possible if a October 19, 1987 on steroids occurred, but I have protections in place for that type of event.

With leveraged investing there are two main ways to get higher exposure. The first way is by using margin. Margin allows you to buy 2:1 or higher depending on the product. I use ETFs, so for every $1,000 of cash I put into the account, I buy up to $2,000 worth of ETF units.

The second method is by using a leveraged ETF. In Canada, Horizons offers a suite of leveraged ETF options called BetaPro. They are a decent option, but the fees are on the high side and the daily rebalancing aspect can hurt returns. These can be a good choice if you are using trend-based investing in a registered account.

Using margin to buy regular ETFs is the preferred way to get leveraged exposure. While I like Questrade, they tend to hammer you on margin fees. Their current margin interest rate runs near 7%. Though fully tax deductible when used to buy income generating ETFs or stocks, it still takes a hefty bite out of your total return.

Interactive Brokers, on the other hand, is made for sophisticated investors who often employ leverage. Their margin interest cost is under 2.5%! After your tax deduction, you are getting money at less than the rate of inflation. You don't argue with virtually free money!

Powerful Interface

As noted before, Interactive caters to sophisticated investors. Their system fills orders faster and better than anyone else I know of. They also offer some nice order tools.

Adaptive Orders are the coolest thing I have ever seen and it works amazingly well. Basically, this type of order will quickly fill an order in tranches searching for the best price for each tranche between the Bid and Ask prices, up to your Limit price.

It is great when making large block purchases or sales – the  kind that occur from time to time when investing in a Dual Momentum type strategy. It can easily cover the cost of the commission fee and then some.

For example, let's say my margin account has a net value of $300,000. At a 2:1 leverage ratio, this implies I'm holding $600,000 worth of ETFs. If the ETF unit trades at $30/share, a trade will contain 20,000 units! If the Adaptive Order saves me $0.01/unit on the buy side and makes me $0.01/unit on the sale side, that's $400 in saved costs. From my estimation, the benefit can be even higher than this on more thinly traded ETFs.

Currency Transactions

Although I'm not interested in this in my current investment stage, I believe at some point I will be doing most of my trading on the U.S. stock exchanges. Their ETF fees are lower and they are much more liquid than comparable Canadian-listed ETFs. When my margin account gets up to $1 million and I'm trading $2 million worth of a single ETF in one trade, I could be critical to move to a more liquid product.

Questrade charges about 2% of the transaction value to convert to U.S. dollars when purchasing U.S. listed products if your account is currently holding Canadian dollars. You can convert currency cheaper using Norbert's Gambit (the DLR/DLR.U trick). However, you expose yourself to market fluctuations and you have to call Questrade to have your DLR shares journaled over to DLR.U.

Interactive Brokers charges just 0.01% of the transaction value (minimum $2.50) to convert currency. There are no other spread costs, so the fees to change from one base currency to another are virtually free. Also, I can move money easily to virtually any commonly traded currency on the planet and then withdraw from the account as needed.

International Flexibility

Unlike many brokerages, including the big bank brokerages, Interactive Brokers is very expat friendly. They might be the premier brokerage for expats around the world and are proud of that fact.

While you might not think this is a big deal, with all the new "anti-terrorism" and money laundering laws floating around many brokerages simply are not willing to offer expat banking anymore. Not being prepared could mean your account gets locked and you having to navigate a myriad of regulatory crap to gain access to your own money.

Living abroad is definitely on our bucket list. Since this may include becoming a non-resident for tax purposes, I will need to liquidate certain assets and put them in a regular investment account. It's nice to plan ahead for this and have an active investment account in place that accommodates expats.

The ability to convert funds to many different currencies at virtually no cost is also important.

Comments & Questions

All comments are moderated before being posted for public viewing. Please don't send in multiple comments if yours doesn't appear right away. It can take up to 24 hours before comments are posted.

Comments containing promo links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.