ETFs

This blog is about saving and investing my way to a $1 million portfolio.  I use ETFs to help us get there.

Before you select any products for your portfolio, you’re best to understand what Exchange Traded Funds (ETFs) are.  Read about ETFs in my 101 post here.

What makes a great ETF?

Here is a free book from Rob Carrick on ETFs here.

Here are some ETF considerations for your portfolio.

Why do I like ETFs?

We use ETFs for part of our portfolio for the following:

  • To achieve near-market performance less minuscule money management fees.
  • To obtain great diversification.
  • To “set and forget” that part of the portfolio.

If you are fearful at all of owing any individual stocks then index invest using low-cost ETFs.

What are my favourite low-cost ETFs?

  • Canadian equity – XIU or XIC or VCN or ZCN (inside TFSA or RRSP).
  • U.S. equity – VTI (inside U.S. $$ RRSP) or VUN (inside RRSP).
  • International equity – VXUS (inside U.S. $$ RRSP) or VXC or VDU (inside RRSP).

What are my favourite low-cost dividend ETFs?

My ETF strategy:

  • After buying and holding 30-40 Canadian dividend paying and U.S. dividend paying stocks – we focus on owning only U.S.-listed ETFs in our RRSPs.  example:  Vanguard VYM.  We like this ETF inside our RRSP.   Why?
  1. We get solid yield (income) of about 3%.
  2. We get capital gains over time.
  3. The management fee is low costing us next to nothing.
  4. We avoid withholding taxes.  This ETF makes the most sense in an RRSP because U.S. listed ETFs held inside an RRSP escape withholding taxes of 15%.  It’s worth reminding you foreign dividends are taxed at your marginal rate.  With U.S. listed ETFs the Internal Revenue Service will take a 15% withholding tax on all dividends received.

The other key point is that Canada has tax treaties with the US and many other countries.  Those tax treaties waive withholding taxes on U.S. stocks or U.S. ETFs in registered accounts like RRSPs, RRIFs and Locked-In Retirement Accounts (LIRAs).  TFSAs don’t apply to these tax treaties, it is not considered a retirement account (even though I do).  In a TFSA you must pay 15% withholding taxes on distributions earned using a U.S. ETF or 15% withholding a U.S. stock like Coca-Cola.

Other considerations?

Canadian investors should also consider holding Canadian-listed ETFs in any registered account. Why?  You won’t have to worry about U.S. withholding taxes.  You also do not need to worry about any currency conversion risks, from Canadian to U.S. money, to buy your U.S.-listed ETFs.  When in doubt keep it simple:  own Canadian-listed ETFs.

Another consideration:  we don’t own any Canadian ETFs (although we used to!).  The reason?  I have decided to unbundle my Canadian ETF for income. Yes, indexing is great.  However, part of my investing approach focuses on dividends.  Cash flow from Canadian stocks will pay for some of our retirement expenses. They can do the same for you too!

To learn more about ETFs consider visiting these sites from leading ETF providers:

iShares Canada

Vanguard Canada

Bank of Montreal ETFs

First Asset Management