Contributed by: martingale
 Now that you can own whatever you like in your RRSP the question on everyone's mind is, what? In this article I've briefly summarized the exchange traded funds that I recommend you use to build the foreign portion of your portfolio. The majority of these funds trade on the American stock exchanges.
American investors have access to some excellent mutual funds: High quality, well managed indexed funds with very, very low management expense ratios. We have no such thing in Canada. The cheapest funds here still have MER's well above 0.25%, and some of them astronomically so--it's not hard to find funds in canada with absurd 2% MER's, something I think verges on theft. Unfortunately as a Canadian investor you are unable to purchase these excellent American products in your RRSP--your financial institution simply won't sell them to you.
Fortunately some American funds trade on the stock market like an ordinary stock. These funds are called "exchange traded funds", and if you don't know what that means or you don't know how to purchase one start here. You can buy these stock market funds in your RRSP, and in this article I am going to give you a list of the funds I recommend you consider.
Before we go any further please note this well: I am talking about the equity portion of your portfolio. Your financial situation is different than everyone else, and you have a particular tolerance for risk, and a certain amount of risk that you can afford to take. Please do not fill up your portfolio with these equities blindly. Please consider your risk tolerance and make sure that you hold enough risk-free investments that you can sleep at night.
Here are the exchange traded funds that are available to you in the United States that I recommend, as at 26 February 2005:
| Symbol
| MER
| Description
| Comment
|
| VTI
| 0.15%
| Vanguard Total Market
| Should represent 15-50% of your equities. Dominated by the S&P 500, but better because it covers the entire US market.
|
| VTV
| 0.15%
| Vanguard Value Vipers; large-cap "value" stocks
| Up to 15% of your portfolio. Value stocks have anomolously out-performed growth stocks in the past.
|
| VB
| 0.18%
| Vanguard Small-Cap Vipers
| Up to 10% of your portfolio U.S. small caps are higher risk and therefore higher return than the average stock.
|
| VBR
| 0.22%
| Vanguard Small-Cap Value Vipers
| Up to 10% of your portfolio. High risk, may go negative for years, but eventually show a higher return.
|
| VNQ
| 0.18%
| Vanguard REIT fund
| Up to 10% of your portfolio. Gain exposure to the U.S. real-estate market.
|
| EPP
| 0.50%
| iShares Pacific Ex-Japan
| Up to 10% of your portfolio. Expense ratio is a bit too high.
|
| EWJ
| 0.64%
| iShares Japan
| Up to 10% of your portfolio, to round out EPP. Expense ratio is a bit too high.
|
| EEM
| 0.76%
| iShares Emerging Markets
| Up to 10% of your portfolio. Very high risk, long-term high-return. Maybe short-term pain.
|
| ILF
| 0.50%
| iShares Latin America 40
| Up to 10% of your portfolio. Very high risk, long-term high-return. Maybe short-term pain.
|
| FXI
| 0.74%
| iShares FTSE/XinHua China 25
| Up to 10% of your portfolio. Very high risk, long-term high-return. Maybe short-term pain.
|
| AGG
| 0.20%
| iShares / Lehman Aggregate Bond Fund
| Duration under 5 years; a good broad bond index. Note the US Currency risk.
|
| SHY
| 0.15%
| iShares / U.S. Short-term treasury bonds
| Duration under 2 years; Canadian bonds may be better if you wish to limit your US currency exposure.
|
Something is missing in the above: There's no EAFE listed. That's because the EAFE funds available on the US exchanges such as EFA, IEF, and EZU, or the country-specific funds, all have the same or higher cost than a fund that is available to you right here in Canada, so there is no point to buy them.
Here are the Canadian offerings you should consider:
| Symbol
| MER
| Description
| Comment
|
| XIN
| 0.35%
| iUnits iIntR MSCI EAFE Fund
| Up to 25% of your portfolio. This should be fairly large in your portfolio, as a balance to the US VTI. Note that it should be held in an RRSP because the distributions are taxed as regular income.
|
| XIC
| 0.17%
| iUnits TSX Capped Index
| Up to 10% of your portfolio. It's still worth holding some Canadian equity.
|
| XBB
| 0.30%
| iUnits iBond Broad Bond Index
| MER is a little too high, and the duration is unfortunately greater than 5 years.
|
| XGV
| 0.25%
| iUnits iG5 Cdn. Govt. Bond Fund
| 5 year government bonds, MER is higher than the US product, but no currency risk.
|
There are some things I have specifically left out from this list, and I want to mention why:
- The iShares country funds are too expensive. I've listed Japan and China because those economies are so important it might be worth paying the higher price, but generally, they're too expensive.
- It is worth holding some Canadian REITs, but XRE is dominated by just a few REITs. It's cheaper to buy them yourself.
- It is worth holding some oil stocks as a hedge against an oil-driven recession. However, again, the ETFs available are dominated by just a few companies and trusts which you could purchase directly.
- I have preferred the Vanguard funds over iShares funds when there are similar offerings because the Vanguard funds are cheaper. Unfortuantely Vanguard doesn't offer much in the international arena.
One final note: Please think about where you will be when you spend your investment savings. If you are planning to live in Canada then your expenses will be paid in Canadian dollars. In that case it would be worthwhile making sure a lot of your investments are in Canadian dollars as well--perhaps by concentrating on Canadian bonds. If you plan to retire overseas or in the United States then you ought to look at using the US Bond ETF's for the bond portion of your portfolio--they are cheaper than the Canadian versions anyway.
|
