Episode 383: AMA #10 - Dollar cost averaging & mutual funds vs. ETFs

What It Covers

The team addresses seven listener questions covering dollar cost averaging versus lump sum investing, mutual funds versus ETFs in Canada, bond taxation, buffer funds, and portfolio construction decisions with updated research and data.

Key Questions Answered

• •Lump Sum Investing: Research across six stock markets shows lump sum investing beats dollar cost averaging 65% of the time with an approximate annualized cost of 38 basis points over ten years for dollar cost averaging. Even in the worst 10% of lump sum outcomes, dollar cost averaging still trails more than 50% of the time.
• •Canadian Tax Efficiency: In Canada, mutual funds may be more tax efficient than ETFs due to the Capital Gains Refund Mechanism. Dimensional's Global Equity portfolio has never distributed capital gains since inception, while Vanguard's all equity ETF distributed 30, 80, 10, and 20 basis points in consecutive recent years.
• •Discount Bond Advantage: A 2008 Canadian Tax Journal study of Government of Canada bonds from 1986 to 2006 found discount bonds consistently provide higher after tax yields than premium bonds for individual investors, with no evidence this tax advantage gets priced into pretax yields.
• •Buffer Fund Performance: AQR research titled Rebuffed shows buffer funds overwhelmingly underperform simple stock and cash portfolios during worst drawdowns. The majority produce inferior risk adjusted returns compared to their reference assets, with realized returns often worse than their payoff diagrams suggest due to expensive options and high fees.
• •Portfolio Simplicity: The original Rational Reminder model portfolios using Avantis ETFs remain perfectly viable despite new Dimensional vector ETFs launching. Switching between quality factor tilted products creates unnecessary complexity when both approaches provide proper multifactor exposure with different implementation methodologies and universe definitions.