Spoiled for (ETF) Choice

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Okay, so if you look at my 4 brokerage accounts you’d see that so far on my journey to FI I have not decided on my long term retirement portfolio. Because of this I have a bunch of different Exchange Traded Funds (ETFs) that I bought for free, but that are going to cost me a lot when I sell them. However, I have now decided on my FINAL* long term ETF portfolio, allocation (*for now) and brokerage!

I made a goal to choose no more than 3 ETFs to buy in 2019 and to decide on an allocation. While I was doing this I also decided to move all my accounts into one. The decision on my brokerage accounts was made easier when I saw that Questrade was offering to pay for account transfers of any size until the end of March 2019.

Wait… I was just rudely interrupted, the Accountant just showed and is now sampling my whiskey collection!

…Okay so two days later and I am finally getting to the meat of this post and what I wanted to write about, my allocation!

I decided that I do not want to hold any bonds because I am okay with volatility and that I wanted to aim for an allocation of around 30 percent Canadian equities, 50 percent US equities and 20 percent international equities (both developed and emerging markets).

Let’s start with my Canadian Fund. I wanted a total return index and since I had already done a Canadian Index ETF Review I knew I was choosing between VCN, XIC, and ZCN. While XIC and ZCN have a few more holdings (around 250) than VCN (around 210) I went with VCN because the Management Expense Ratios (MERs) of 0.06 percent were the same and Vanguard is such a standby in the FIRE community. I considered going with ZCN because it has the lowest per share price which means dripping sooner and more often but in the end, I didn’t go that way.

I also wanted a US total return index and turned to MoneySense’s Top ETFs for 2018 to guide me. The only total return index they listed was iShare’s XUU with a MER of 0.07 and over 3,400 holdings. I checked out Vanguard’s VUN and VUS (the hedged version of VUN) but with MERs of 0.16 they were too expensive for me to choose.

I also wanted some international exposure, both developed and emerging markets, in my portfolio so I again turned to MoneySense and found they rated iShares XAW, an all world index – excluding Canada with a MER of 0.20. The equivalent Vanguard fund, VXC was again more expensive at 0.27 MER. I could not find what I really wanted, which was a global fund – excluding North America. About 55 percent of XAW is made up of US equities so, unfortunately, I am paying a premium on those in this ETF (0.20 percent versus 0.07 percent in XUU). I found many ETFs that included a portion of the international markets that excluded all of North America but none with all of the international markets – boo!

I decided on a breakdown of my ETFs of 30 percent VCN, 40 percent XUU, and 30 percent XAW. I adjusted from my target allocation slightly because of the increased price on the US portion of XAW and I am going to hold under 15 percent international equities and over 55 percent US equities. And I’m going to keep it that way for good – or at least until I find an ETF that provides a global index – excluding North America! Please let me know if you find it before I do!

And there is only one more thing to do – ask the Accountant how I should allocate these funds between my TFSA, RRSP and taxable accounts? But I’m going to wait until he sobers up after all that whiskey ‘sampling’.

** Disclosure, I already own a position in many of the ETFs outlined in this post and the content of this post is my personal opinion.

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About the Author: The Economist

3 Comments

  1. Hey Economist,

    LOL I like how you carry the humor from the podcast into your post. Keeps this dry investing stuff fun. 😉

    Like you, I hold no bonds in my portfolio. I’m also fine with volatility. I also like your allocation—good choice to include some emerging markets and overweight the US stocks.

  2. Woah, Woah, first of all I was invited over to sample whiskey, stop making me look like an alcoholic to all of our readers!
    Secondly, as for your allocation, in the case of Canadian ETF’s you can’t recover the foreign withholding taxes like you do with other foreign securities so your allocation is less important. If you did hold a US listed ETF, it would be best held in your RRSP as the US recognizes RRSPs as retirement accounts and does not require any withholding on payments to these accounts. In your case I would simply place as much of your portfolio as possible into your registered accounts. If you don’t have the room for this then place the ones with the highest payouts in tax sheltered accounts and the rest in your non registered accounts. Since any payment from an ETF outside of a registered account is taxable this will allow you to defer the most tax. I won’t dive into the specifics of taxation on different forms of income but if your in a position where you have significant decisions on what to hold inside and outside of registered accounts it might be worthwhile to have a conversation with your tax professional about the most tax efficient structure for you. (Another offer of Whiskey and I might be able to come over and look at your specific situation 😉 )

  3. You mention that you want international, and emerging exposure with your choice of XAW. Considering the 55% weighting of US Stocks, I think any ’emerging market’ exposure is too diluted. By looking at the top holdings, China at 3.62% is really the only ’emerging’ market. My personal choices to fulfill these allocations in my portfolio are VIU and VEE. VIU holds Europe and developed Asia. VEE holds China and other developing. I know you’ll probably argue that I’m paying an additional MER of .23% for an additional fund. But, I think that the proper exposure to those markets will be worth that fee. In addition, instead of x amount of my investment going into one fund, 1/2 or 1/3 or whatever will go into both funds. So the same dollar amount of investment will see the same MER regardless of one or two funds.

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