National Bank Direct: Now With Free ETF Transactions

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 transactions 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 (suspended as of 2018), 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 about it. It may also attract some very aggressive savers who are also higher earning individuals and 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 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 complain 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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Dual Momentum: Easy Trend Investing

One form of trend investing I really love for many reasons is Dual Momentum Investing.

Dual Momentum Investing has shown great results, it is easy to administer, it is pervasive across many market conditions, and it really reduces the kind of portfolio volatility that makes many investors do stupid, stupid things.

It might be the near-perfect solution to many self-directed investor problems—particularly human psychology.

Dual Momentum Background

The Dual Momentum strategy was brought to the public by Canadian money manager Gary Antonacci. He wrote a detailed white paper on the strategy a few years back and then published a book on the strategy as well.

Gary's Optimal Momentum website explains the strategy in good detail and his white papers are posted for your reading pleasure on SSRN.

The great thing about Gary is that he freely shares this strategy which is simple and has handily outperformed the broader stock market over whole market cycles (top-to-top or bottom-to-bottom).

Hearing several podcasts featuring Gary and reading his blog faithfully, I genuinely get the impression that Gary is an all-around good guy who shares this great information because he cares to make the investment returns of amateur self-directed investors better.

Gary is also super blunt. When criticized by many over the pervasiveness of the strategy over other investment approaches like buy-and-hold, his answer is simple: I'll be the first to tell everyone to ditch the strategy when it actually underperforms a whole market cycle.

Dual Momentum Results

Based on Gary's data—which is done in U.S. dollar investing—the Dual Momentum strategy has returned over 17% compounded annually since 1974. That beat the MSCI World IMI Index by approximately 9% per year over 4 decades!

Putting that into real money perspective, if you follow my minimum savings rules and put away $562 a month for 35 years, a regular buy-and-hold strategy would net you about $800,000 in today's dollars at 6% net return.

With Dual Momentum, if historical returns stay the same, you would have $8.2 million. That's a whopping 10x difference: the real power of compounding interest!

Even more appealing to me is this strategy has not had a draw-down of more than 20% since 1974. To get a comparable max draw-down with buy-and-hold investing, your portfolio would have consisted of more than 60% bonds. That would have left just 40% for the higher growth stock allocation. Your gross returns on a portfolio with similar risk would have been 7% per year (4.5% after inflation).

A lot of investors can tolerate a 20% loss without too much panic. Sure losing $100,000 on a $500,000 portfolio stings, but you can probably carry on with your plan.

Losing half your portfolio is what makes people go squirrelly, panic, dump everything into GICs, and moan and bitch to everyone who lends them an ear about the dangers of stocks and why their house is a so much better "investment".

Basics of Dual Momentum

Dual Momentum Investing is based on considering two factors: relative momentum and absolute momentum. Dual Momentum (GEM) strategy evaluates just three asset classes: U.S. stocks, international stocks, and cash using three different ETFs.

Basically you consider momentum factors and then invest 100% of your portfolio in the asset which has performed the best over a specified period of time.

Historically the invested asset class has changed just over once per year. This means minimal trading costs and little stress about picking the right day to evaluate. It really doesn't matter whether you are religious about checking in on your portfolio the first trading day of each month, or if you let it slip a few days every now and then.

For Canadians, I would suggest the best options for evaluation today are: XUU.TO for U.S. stocks, XEF.TO for international stocks, and XSB.TO for short-term bonds.

Once a month we evaluate our options and choose the best performing ETF for our portfolio holding. It's extremely simple and very effective.

For those who are okay doing something just a bit different but don't want to be a dedicated trader, Dual Momentum Investing may be the best long-term sustainable choice.

Evaluating Relative Momentum

Relative Momentum means comparing the historical performance of an asset with others in its broader asset class over a specified time period.

While opinion differs on the timeline that should be used, I personally like looking at the past 12 month performance and the past 6 month performance and averaging the two.

This is where we evaluate the total return performance of the two broad stock asset classes: XUU.TO and XEF.TO.

Here is the comparison on July 31, 2017:

XUU.TO 6 month: +4.13%
XUU.TO 12 month: +11.11%
XUU.TO Average: +7.62%

XEF.TO 6 month: +9.54%
XEF.TO 12 month: +13.22%
XEF.TO Average: +11.38%

By this relative momentum evaluation, XEF.TO is the clear winner. Therefore XEF.TO is our choice for the stock asset class.

However, we are not done here. Now we need to evaluate the performance for the absolute momentum side.

Evaluating Absolute Momentum

Absolute Momentum is the evaluation of an investable asset's performance compared to cash (T-bills) over a specified time period. Again, I like averaging the 12 month and 6 month performance.

T-bills (very short-term government bonds) are used here because they are widely perceived to be a nearly risk-free asset class. A short-term bond index ETF (such as VSB.TO or XSB.TO), does a decent job of substituting for T-bills in this evaluation.

Some other writers, including Antonacci himself, compare to T-bills but choose a broad bond index for their investment choice. To me, using a short-term bond index ETF for our comparison and investment choice is easier and just as effective.

Here is the comparison as of July 31, 2017:

XEF.TO 6 month: +9.54%
XEF.TO 12 month: +13.22%
XEF.TO Average: +11.38%

VSB.TO 6 month: -0.31%
VSB.TO 12 month: -0.59%
VSB.TO Average: -0.45%

In this absolute momentum evaluation, XEF.TO is again the clear winner.

So, currently you would have 100% of your portfolio invested in just one ETF: XEF.TO. This gives you an indirect stake in 2,500 companies located across Europe, Australia, and Japan.

I will be publishing the Dual Momentum recommended signal based on this evaluation every month in the Portfolio Update posts. I think it would be a great strategy to keep an eye on.

Comments & Questions

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