This blog is about saving and investing my way beyond a $1 million portfolio.
…investing in low-cost ETFs has helped us get there. Investing this way can help you too!
Why do I like using Exchange Traded Funds (ETFs)?
- To obtain near-market performance less minuscule money management fees.
- To obtain great diversification (from companies and countries from around the world).
- To “set and forget” part of our portfolio.
Mind you, not all ETFs are indexed funds (hardly, many ETFs are actively managed) and not all indexed funds are ETFs. Read on.
What are my favourite low-cost diversified ETFs?
Any of these funds will give you access to a Canadian market that is typically dominated by financials and energy stocks. Pick one of these funds and sleep easy for the Canadian portion of your portfolio.
|iShares Core S&P/TSX Capped Composite Index ETF (XIC)||S&P/TSX Capped Composite Index||0.06%||Own all the major stocks in the Canadian market, >200 of them and ride their returns less minor fund fees.|
|iShares S&P/TSX 60 Index ETF (XIU)||S&P/TSX 60 Index||0.18%||Own the biggest names in Canada, get consistent 3% yield + long term growth. Win-win and one of my personal favourites.|
|Vanguard FTSE Canada All Cap Index ETF (VCN)||FTSE Canada All Cap Domestic Index||0.06%||Exposure to small, medium and large cap stocks in the Canadian market, similar product to XIC but different provider of course.|
|BMO S&P TSX Capped Composite Index ETF (ZCN)||S&P/TSX Capped Composite Index||0.06%|
|BMO Low Volatility Canadian Equity ETF (ZLB)||Uses smart beta/rules based approach||0.39%||Yes, higher MER but low-volatility fund for any defensive times. Think a better balance of financials, utilities, grocery stores/consumer staples and telcos as top holdings.|
U.S. listed ETFs inside the U.S. dollar portion of your RRSP are the most efficient way to invest in the U.S. stock market.
Alternatively, you can invest in a Canadian-listed ETF that holds U.S. stocks as assets.
You’ll pay a bit more (due to withholding taxes) but at least you won’t have to worry about Canadian to U.S. currency conversions.
|Remember with these U.S. listed ETFs below these do not have any 15% withholding taxes applied inside the RRSP, RRIF or LIRA!|
|Vanguard Total Stock Market ETF (VTI)*||CRSP US Total Market Index||0.03%||Own entire U.S. market in one fund, > 3,000 stocks!|
*Disclosure I own this fund and have done so for >10 years.
|Vanguard S&P 500 ETF (VOO)||S&P 500 Index||0.03%||Own the biggest (~500) stocks in the U.S. and ride their collective returns including all the tech stocks.|
|iShares Core S&P 500 ETF (IVV)||S&P 500 Index||0.03%|
|iShares Core S&P Total U.S. Stock Market ETF (ITOT)||S&P Total Market Index||0.03%||Similar to VTI, own the U.S. market, > 3,000 stocks!|
|Remember with these Canadian-listed ETFs below (that hold U.S. assets) withholding taxes will apply!|
|Vanguard U.S. Total Stock Market Index ETF (VUN)||CRSP US Total Market Index||0.16%||Canadian equivalent of VTI (invests primarily in the U.S.-domiciled Vanguard Total Stock Market ETF).|
|Vanguard S&P 500 Index ETF (VFV)||S&P 500 Index||0.09%||Canadian equivalent of VOO (invests primarily in the U.S.-domiciled Vanguard S&P 500 ETF.)|
|iShares Core S&P Total U.S. Stock Market Index ETF (XUU)||S&P Total Market Index||0.07%||“A fund of funds” with mostly IVV and ITOT; great for Canadian-listed access to the U.S. market.|
|BMO S&P 500 Index ETF (ZSP)||S&P 500 Index||0.09%||Another Canadian fund to track the U.S. S&P 500 and avoid CDN <> USD $$ currency conversions. Also available in USD units (ZSP.U) and trades in USD on the TSX.|
What about hedging?
Read on for this great article when comparing Vanguard products VFV and VSP specifically.
“When investing internationally, investors should consider whether to hedge currency exposure. Through hedging, VSP seeks to eliminate the effects of changes in the foreign exchange rate, while the unhedged VFV allows for positive or negative returns from fluctuations in the value of the Canadian dollar.”
Personally, I don’t mind the currency fluctuations and could live with them.
Admittedly there are more choices here as well but these are my favourites.
|iShares Core MSCI EAFE IMI Index ETF (XEF)||MSCI EAFE Investable Market Index||0.22%||Owns > 1,500 international stocks directly from mainly Europe, Asia and Australia developed markets.|
|Vanguard FTSE Emerging Markets All Cap Index ETF (VEE)||Tracks FTSE Emerging Markets All Cap China A Inclusion Index (or any successor to)||0.24%||· Invests primarily in the U.S.-domiciled Vanguard FTSE Emerging Markets ETF (VWO).|
· Owns >5,000 stocks; >40% from China.
|Vanguard FTSE Developed All Cap ex-North America Index ETF (VIU)||Tracks the FTSE Developed All Cap ex North America Index (or any successor to).||0.22%||· More diversified than XEF, owns > 3,500 stocks.|
· >20% Japan, >10% UK – focuses on developed nations.
|Want diversification away from just the U.S.? Check out these ex-U.S. ETFs below|
|Vanguard Total International Stock ETF (VXUS) – U.S.-listed ETF||FTSE Global All Cap ex US Index, which measures the investment return of stocks issued by companies located outside the United States.||0.08%||· In one fund, own the world of stocks outside the U.S.|
· Owns >7,500 stocks.
|Vanguard FTSE Developed All Cap ex U.S. Index ETF (VDU)||Tracks the FTSE Developed All Cap ex US Index (or any successor to).||0.22%||· Owns >3,800 stocks outside the U.S.|
· Top countries include Japan, UK, Canada and France which typically comprise >50% of assets.
Own Canadian dividend paying stocks like I do and looking for ex-Canada?
These ETFs are excellent low-cost ways to diversify away from Canada and avoid currency conversion headaches inside your TFSA, RRSP or RRIF, RESP and more.
- Canadian iShares XAW – MER 0.22% (>7,000 stocks) – my favourite and disclosure, I own this one too.
- Canadian Vanguard VXC – MER 0.26% (>10,000 stocks).
What about some all-world equity ETFs?
For super-lazy investing, in all-equities for long-term growth no-less there are some great all-in-one funds to consider. This way:
- There is no re-balancing work between Canadian and U.S. and international stocks or ETFs.
- There is built-in global equity diversification.
- There are very low ongoing money management fees to own the fund with time.
- It works for TFSAs, RRSPs, RESPs, and many more wealth-building accounts.
- You can do it on your own, without an advisor, by managing your own brokerage account.
What are my favourite low-cost dividend ETFs?
What is my ETF strategy?
After buying and holding these Canadian and U.S. stocks for income – we focus on owning ETFs in our registered accounts for diversification.
Why U.S.-listed ETFs in my RRSP or LIRA specifically?
- I like diversification beyond individual stock selection – less individual stock risk.
- The management fee to own low-cost ETFs is next to nothing.
- We avoid foreign withholding taxes (FWT) of 15% using U.S. ETFs inside our RRSP. It’s worth reminding you again that foreign dividends are taxed at your marginal rate otherwise. Be aware Canada has tax treaties with the U.S. 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. In a TFSA you must pay 15% withholding taxes on distributions earned owning a U.S. ETF or a U.S. stock. So, best to own Canadian ETFs inside the TFSA.
Withholding tax considerations:
Since a Canadian ETF that holds a U.S.-listed ETF of international stocks (e.g., VEF, XEM), has international FWT that are not recoverable, it seems to make sense to me if you’re going to invest in a taxable account then consider the following for U.S. exposure only:
Own a U.S. ETF that holds stocks
iShares S&P 500 (IVV) or Vanguard Total Stock Market (VTI)
- In a taxable account, US withholding taxes apply, but are recoverable.
- In an RRSP, US withholding taxes do not apply.
- In a TFSA, US withholding taxes apply and are not recoverable.
Own a Canadian ETF that holds a U.S.-listed ETF that holds U.S. stocks
iShares S&P 500 (XSP) or Vanguard MSCI U.S. Broad Market (VUS)
- In a taxable account, US withholding taxes apply, but are recoverable.
- In an RRSP or TFSA, US withholding taxes apply and are not recoverable.
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