Part of my investment strategy is index investing. I index part of our portfolio to:
- Achieve market performance less minuscule management fees.
- Obtain great diversification.
- “Set and forget” part of my retirement portfolio.
I think indexed products make sense for the majority of investors.
Indexing is part of our plan to have an investment portfolio worth $1 million+ (excluding pensions and home value) to retire on by 2028.
My Asset Allocation Strategy
Diversification is great but it comes at a cost unless you put your ETFs in the right location. This is because many countries levy taxes on ETF distributions paid to foreign investors. You can read more here. Here is a summary of what I’ve learned and how I try and manage my portfolio to keep taxes in check.
1. Canadian ETF that holds international stocks: Vanguard VFV
For these ETFs in a non-registered account withholding taxes will apply (15%) but they are recoverable when investors file their income tax returns. In an RRSP or TFSA withholding taxes apply and you cannot claim a credit for this.
2. Canadian ETF that holds US stocks: Vanguard VUS
Using this ETF in a non-registered account withholding taxes will apply (15%) but they are recoverable. In an RRSP or TFSA withholding taxes apply and you cannot claim a credit for this.
For this reason, I prefer to own U.S. stocks or U.S. ETFs in my RRSP. When my RRSP is maxed out with mostly U.S. equities I will consider owning a Canadian ETF that holds U.S. stocks or just one U.S. ETF. This ETF could go into my non-registered account but more than likely I will put the ETF in TFSA.
3. US ETF that holds US stocks: Vanguard VTI
I own this ETF but US ETFs make the most sense in RRSP. This is because U.S. listed ETFs like VTI held inside an RRSP escape withholding taxes of 15%.
You should know that 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 that have agreed to waive withholding taxes on U.S. stocks or U.S. ETFs in registered retirement accounts like RRSPs, RRIFs and Locked-In Retirement Accounts (LIRAs). TFSAs don’t apply to this Treaty.
In a TFSA you must pay 15% withholding taxes on a U.S. ETF like VTI (or a U.S. stock for that matter) and you cannot claim a credit for this.
4. US ETF that holds international stocks: Vanguard VWO
I don’t own this ETF but it would make the most sense in an RRSP. A U.S. listed ETF like VWO will be subject to withholding taxes but the withholding taxes do not apply in an RRSP, RRIF or LIRA.
Here are some of my favourite ETF products.
Fixed-Income – ideas for your RRSP or TFSA
Equity – ideas for your RRSP or TFSA
VUN is almost the same as Vanguard Total Stock Market (VTI). In a non-registered account, the tax is recoverable by claiming the foreign tax credit. In a TFSA the tax cannot be recovered.
Unfortunately, there is also withholding tax on ETF distributions. VUN’s management fee is dirt cheap.
Equity – ideas for your RRSP