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 market performance less minuscule money management fees.
  • To obtain great diversification.
  • To “set and forget” 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 ETFs?

  • Canadian equity – XIU or XIC or VCN (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).

My ETF strategy:

  • We focus on U.S.-listed ETFs in our RRSPs.  example:  Vanguard VTI.  Disclosure:  I own this ETF.   Why?

This ETF makes the most sense in an RRSP because U.S. listed ETFs like VTI 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 a U.S. ETF like VTI or U.S. stocks 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.

We don’t own many Canadian ETFs.  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