Hard to believe but there’s only one more long weekend of summer left! I don’t know where the time has gone. Almost depressing to think about for a second, but not any longer. That’s because our summer in Ottawa has been great, the weather has been amazing and my wife and I have taken advantage of it – biking, running and enjoying some beer on the patio as well! Winter is just far too cold and long here. Some rain has recently hit the area amongst predominantly sunny, hot humid days, which has made the grass green and lush on the golf courses – and that’s good news for me – because I’m hitting the links later this week.
Today, I’ve got much more positive news to share than the weather…
Just a few days ago, we completed our last transaction related to 2010 financial goal # 3: “clean-up” RRSP accounts!
This housekeeping exercise was a big one for us. It started in earnest in late 2009, after revisiting our RRSP mutual fund holdings and their calendar year performance over the last few years. This work also accelerated because my understanding and passion for index investing has grown in the last year or so. If you’ve been following my blog, I’ve written about the benefits of ETFs before. I’ve learned their low-cost structure and strong allegiance to the indexes they follow give them advantages in the long-run over actively-managed mutual funds. “This makes ETFs a great fit for our RRSPs”, I thought, and so for the last eight months the switch has been on. We recently completed the switch of out some high-MER mutual funds into ETFs because they give us:
1. Confidence with our investments. With our ETFs, we know what we own. We couldn’t say that with confidence before since our actively-managed funds buried most holdings beyond their top-10.
2. Performance transparency. We now know our long-term RRSP investment results will reflect, pretty much, index performance. For us, that’s going to be:
• Performance replicated by companies of the S&P/TSX 60 (60 of the biggest, most liquid (most reliable and consistent) companies in Canada),
• Performance replicated by companies of the Dow Jones Canada Select Dividend Index (30 top dividend-payers in Canada), and
• Performance replicated by the DEX Universe Bond Index (diversified federal, provincial, municipal and corporate bonds; for market security).
We can live with that.
3. An easy recipe to manage our asset allocation. With actively-managed funds it was a little more challenging to determine our weight in bonds or equities. Not anymore. Our ETFs make rebalancing a breeze; buy more of the index we want when it’s priced right. When equities move up, we buy bonds; when bonds move up, we buy equities.
4. Nowhere to hide. With our ETFs, our results are pretty much the indexes results. With actively-managed funds, our results could be (and were) worse than the indexes. This isn’t always the case, I know, since some actively-managed funds do beat their index. I think I read about (only) 5% do over a ten-year period, but I’m not taking any chances (anymore) over our next 10 years.
5. Instant risk management. The whole equity index goes up (or down) we go with it. That isn’t so bad since we’re not introducing any risk or unpredictability with actively-managed funds making bets on select stocks on our behalf.
6. More money to reinvest. Yup, our ETFs pay some healthy dividends and those dividends get reinvested (two of our ETFs reinvest frequently, every month) to buy us more units:
• XIU currently yields ~2.5%,
• XDV currently yields ~6%, and
• XBB currently yields ~3.9%.
Earlier this year we started the process to dump all our high-MER mutual funds and instead, get into more transparent, easier to manage, risk averse ETFs in our RRSPs. As of this post, our move to ETFs is complete. Our investments are riding the market and giving us steady dividends to reinvest in the process. Our money is working harder so we don’t have to someday. One more long weekend to go; another financial goal complete. Absolutely nothing to be negative about, not even for a second.
I want to hear from you…have you taken a similar journey with ETFs from mutual funds?