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Exchange Traded Funds: Recommendations


Exchange Traded Funds: Recommendations

Contributed by: martingale

Mutual Funds 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.

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Exchange Traded Funds: Recommendations | 9 comments | Create New Account
The following comments are owned by whomever posted them. This site is not responsible for what they say.
Exchange Traded Funds: Recommendations
Authored by: Anonymous on Monday, March 14 2005 @ 11:28 PM EST
Nice website, nice articles. Dimensional Fund Advisor now has a line of funds designed for the Canadian market. Ignoring the fact that you can only buy them from financial advisors who charge 1% on top of their 0.6% MER, what do you think of their Canadianized offerings? Compared against the Vanguard ETF's, for example?
Exchange Traded Funds: Recommendations
Authored by: Anonymous on Wednesday, April 13 2005 @ 11:18 PM EDT

The iShares EAFE fund has an MER of 0.35%, the same as the synthetic iUnits fund you quote! If foreign content doesn't matter (knock on wood) this is just as good a reccomendation for EAFE content, if not better because of the economy of scale. At least, it's worth thinking about!
Exchange Traded Funds: Recommendations
Authored by: murray on Tuesday, December 06 2005 @ 12:23 AM EST
I have about $60,000 in my action direct self directed rrsp and was planning on investing in a core portfoio using etf's after reading the online book abetterwaytoinvest about us based etf's. I have also read the paperback the new investent frontier III a new 05 book on canadian etf's. I was wondering if it was possible/advisable to invest in us based etf's for my rrsp account due to there lower mer and more varitey as well as I would just impliment something similar to the core portfolio eg in abetterwayto invest. I know us dividends etc are realized as regular interest income in canada but I thought that wouldn't matter as it is in an rrsp. Then i read the one posting on aug 3 05 saying as a non us citizen you have to pay us withholding tax and thus you rrsp in no longer tax defered. Let me know what you think or if anyone knows of any good sites similar to abetterwaytoinvest that are canadian based.

Thank you in advance. Murray
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