How does security selection work at Wealthsimple?

After we determine the appropriate asset class weights based on your risk score, we have to choose ETFs for you to hold in order to give you those exposures.

We do this by assessing the total cost of ownership (TCO) of each ETF that represents an asset class we think a client belongs in, and select the ETF with the lowest TCO for each account. TCO consists of a management fee (MER), other fund expenses, transaction costs like spreads and our FX fee, and taxes. We amortize one-time costs like taxes or transaction costs over the time horizon that you’ve given us. This is so they can be compared with recurring expenses, like MER.

Why does security selection matter?

Wealthsimple picks ETFs for each asset allocation which are specific to your time horizon, account type, and tax bracket; as described above, a number of factors come into play in determining how to minimize TCO for each investor.

Here are some example situations where security selection matters:

• In RRSPs, it is often cheaper to hold US-based ETFs, even after accounting for FX charges, because there is favorable tax treatment of dividends received
• In non-registered accounts, we sometimes hold ETFs with a special tax structure that give dividends a lower tax rate (the capital gains tax rate), which may charge a higher management fee, but can make sense for certain clients in a high tax bracket
• Your time horizon influences which ETFs we pick; if you have a longer time horizon, we may choose ETFs with higher one-time costs (spreads and FX fee) but lower management fee. The opposite may be true if you have a very short time horizon; you may prefer to pay a higher MER but incur fewer one-time fees, since they are amortized over a short expected holding period.

How do you determine whether or not to switch ETFs?

Since we recently rolled out dynamic security selection, you might have seen some of your accounts switch from one ETF to another. When we evaluate whether or not to trade, we look at the benefits (savings on total cost of ownership over your time horizon) and weigh them against the costs (transaction fees and capital gains taxes). When the benefits outweigh the costs, we will switch into the ETF with the lower total cost of ownership. Otherwise, you will continue to hold your existing ETF, but any new deposits or dividends might be invested into another, lower-cost ETF.

Why did you switch from an ETF with lower MER to one with a higher MER?

There are two possible explanations for this:

• It’s possible that other considerations, like tax treatment or FX fee, mean that the higher MER option is ultimately the better option for your account and circumstances from an all-in cost perspective
• Wealthsimple also negotiates with certain ETF providers to provide MER rebates to our clients, which reduce the fees that you pay relative to what is shown on those ETF providers’ websites