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War of the Worlds (ex Canada)

The competition has been heating up in the global equity ETF space.  First, Vanguard released the Vanguard FTSE All-World ex Canada Index ETF (VXC), which gave Canadians instant exposure to large and mid-sized companies throughout the world in a single trade (excluding Canadian companies).  VXC is a “fund of funds” ETF, meaning that it simply holds other existing US-listed Vanguard ETFs to obtain its market exposure.

Now, iShares has released the iShares Core MSCI All Country World ex Canada Index ETF (XAW), which has basically the same market exposure as VXC (except that it includes small-sized companies).  Most of its underlying holdings are US-listed iShares ETFs, with one exception – the developed market exposure comes from the iShares Core MSCI EAFE IMI Index ETF (XEF), which is a Canadian-listed ETF that holds the underlying stocks directly.  XEF’s tax-efficient fund structure would be expected to lower the overall cost of XAW, relative to VXC.

To compare the overall costs of both ETFs (including the additional cost of foreign withholding taxes), I’ve used a similar methodology to the one found in our white paper, Foreign Withholding Taxes.   I’ve assumed that the ETFs are being held in either a tax-deferred or tax-free account.

After taking into account the additional tax drag from foreign withholding taxes, the estimated cost of VXC increases to 0.66% (from 0.27%), while the estimated cost of XAW increases to 0.56% (from 0.23%).

Estimated cost of the Vanguard FTSE All-World ex Canada Index ETF (VXC) when held in a tax-deferred or tax-free account

As of March 31, 2015 Vanguard Large-Cap ETF (VV) Vanguard FTSE Europe ETF (VGK) Vanguard FTSE Pacific ETF (VPL) Vanguard FTSE Emerging Markets ETF (VWO)
Dividend Yield Index 1.98 2.97 2.23 2.81
FWT Level I 0.28 0.11 0.11 0.27
FWT Level II 0.00 0.41 0.30 0.36
Expense Ratio 0.27 0.27 0.27 0.27
Total Cost 0.55 0.79 0.68 0.90
Region Weight Index 52.32% 23.45%* 14.87% 9.36%
Weighted-Average Cost 0.29 0.19 0.10 0.08
Estimated Cost of VXC 0.66%

Sources:  FTSE, Vanguard

*Israel is 0.26% of the FTSE All-World ex Canada Index, but is excluded in the component indices.  I have included its weight in the FTSE Developed Europe Index.

Estimated cost of the iShares Core MSCI All Country World ex Canada Index ETF (XAW) when held in a tax-deferred or tax-free account

As of March 31, 2015
  • iShares Core S&P 500 ETF (IVV)
  • iShares Core S&P Mid-Cap ETF (IJH)
  • iShares Core S&P Small-Cap ETF (IJS)
iShares Core MSCI EAFE IMI Index ETF (XEF) iShares Core MSCI Emerging Markets ETF (IEMG)
Dividend Yield Index 1.91 2.80 2.57
FWT Level I 0.27 0.34 0.28
FWT Level II 0.00 0.00 0.32
Expense Ratio 0.23 0.23 0.23
Total Cost 0.50 0.57 0.83
Region Weight Index 53.74% 35.53% 10.73%
Weighted-Average Cost 0.27 0.20 0.09
Estimated Cost of XAW 0.56%

Sources:  S&P Dow Jones, MSCI, BlackRock

It’s important to take these differences into perspective.  An additional cost of 0.10% on a $10,000 holding is only $10 per year.  An investor choosing either of these ETFs to gain low-cost diversified exposure to global stocks would be making a prudent decision.

27 Responses to War of the Worlds (ex Canada)

  1. Tyler 13/04/2015 at 9:53 pm #

    What do you make of BlackRock using IEMG instead of XEC? Is that an indication that they don’t intend to ever have XEC hold securities directly, like XEF does?

    • Justin 14/04/2015 at 10:09 am #

      @Tyler – I don’t believe that BlackRock is indicating anything by holding IEMG (as it serves the same purpose) – they’re also holding IVV instead of XUS.

      • Dave 28/04/2015 at 2:52 pm #

        If you look on BlackRock Canada, you’ll see that XEC holds ~100% IEMG. If they held XEC within XAW it would be wrapping a wrapper.

  2. Be'en 14/04/2015 at 8:31 pm #

    If one is comfortable doing the Norbert’s Gambit, holding VEA in an RRSP is still the most cost-effective alternative, right?

    • Justin 14/04/2015 at 8:36 pm #

      @Be’en – if you’re comfortable doing Norbert’s gambit, holding US-listed global equity ETFs in your RRSP is still likely to be cheaper than holding Canadian-domiciled ones over the long term. I normally recommended using RBC Direct Investing if you plan to do this, as Norbert’s gambit is much easier to implement online than at other brokerages.

  3. RJ 14/04/2015 at 9:16 pm #

    Norbert gambit’s at Questrade using DLR and DLR.U are relatively painless although you do have to call into journal the shares if you want to do it the same day. I opted for them over TD and RBC as there account fees are lower (especially on small accounts) and I get free ETF purchases.

  4. Onkar 15/04/2015 at 11:17 am #

    Justin, thank you for the analysis. I am in the process of trying to simplify my portfolio and I was considering vxc but your calculations have me second guessing. I looked at Vanguard Canada site and for 2014 Foreign tax paid is $0.03865 on $0.25809, which is 15%, so you would add 15bps to 0.25% management fee, overall the cost should be around 0.40%, and since this is vanguard, we know eventually they will reduce the fee. I own FTSE Developed ex North America Index ETF (CAD-hedged) (VEF), and again the foreign tax is 15%.


    Year Eligible dividends Non eligible dividends Other income Capital gains Return of capital Foreign income Foreign tax paid Total distribution per unit for tax purpose
    2014 $0.00000 $0.00000 $0.00000 $0.00000 $0.00629 $0.25809 $0.03865 $0.22573

  5. Todd 22/04/2015 at 11:53 am #

    With XAW being relatively new, would you have any concerns about the lower volumes and wider bid-ask spread in considering it as a substitute for the more established VXC? If one intends to buy and hold, how much should this factor into the decision?

    • Justin 22/04/2015 at 12:03 pm #

      @Todd – for a long term buy and hold investor, I would not be as concerned with the current larger bid-ask spread of XAW versus VXC. I would estimate that this would add less than $7 onto a $10,000 purchase of XAW, relative to VXC (the ongoing tax savings of XAW would likely be higher than this initial cost).

  6. william 05/05/2015 at 11:04 am #

    Justin, great analysis as always. Your blog (and CCP) are the only public sources for this level of analysis.

    I have XIC+VXC in my corp account but have long been tempted to switch to swap-based ETFs, eg HXT+HXS+XEF+IEMG for the better tax efficiency. It seems to mee that the tax argument is even stronger in a corp due to some of the double taxation issues.

    I know that none of your blog portfolios use swap-based ETFs – is this due to simplicity, or do you have any specific concerns (beyond counterparty risk). Do you think there is a meaningful advantage?


    • Justin 05/05/2015 at 12:56 pm #

      @William – thank you for your generous comments :)

      My specific concerns with swap-based ETFs are that I honestly do not understand precisely how the income and growth is seemingly tax-deferred and later taxed as a capital gain when sold. I’ve heard claims of “tax arbitrage” and that the “taxes are being paid by someone”, but have never read any concrete analysis or explanation from a reliable source. Perhaps if CRA was to state that this was a completely acceptable security structure, and that it was not on their radar, it would satisfy my objections.

      • william 05/05/2015 at 1:46 pm #

        @Justin- yes, it does seem too good to be true. I was told that the counterparty pays the taxes, but that doesn’t seem like something a bank would voluntarily do for you…

        Thanks for your insights,


  7. Mark 01/08/2015 at 1:15 pm #

    I noticed you updated the Model EFT Portfilio from VAB, VCN, VUN, VDU, VEE to VAB, VCN, VUN, XEF, XEC. Replacing VDU with XEF and VEE with XEC.

    I would speculate that the Canadian Portfolio Manager Model ETF Portfolio was updated due to this post. Is this the reason behind this change?

    Some other information I found that might be related:


    It would be great to confirm the reasoning behind this change.


  8. Nik 01/12/2015 at 11:11 pm #

    Hi Justin,

    I have just gone through a recalculation of XAW using current dividend yield and expense ratios both of which are a bit lower than at the time of this post) and it would seem that XAW’s current cost after FWT is 0.50%. Does this seem like a reasonable decrease in cost if both yields and ERs decrease? Would it be fair to say that the actual after-tax cost of XAW (or VXC) will vary from time to time depending on yields and ERs?

    Many thanks!

    (To calculate FWT, I used the same formulas that you used in your white paper.)

    • Nik 01/12/2015 at 11:15 pm #

      Additionally, I have calculated the cost of VUN/XEF/XEC to be approx 0.42%. Does this seem reasonable for the difference between XAW and VUN/XEF/XEC to be 0.08%? Seems quite small. Would the main benefit lie in being able to separate VUN/XEF/XEC for efficient asset location?

      • Justin 02/12/2015 at 5:22 pm #

        @Nik – you may be mixing up FWT with “total cost”. If holding a combination of VUN/XEF/XEC already costs less from an MER perspective that holding XAW, this is probably where most of the difference is coming from.

        • Nik 02/12/2015 at 6:37 pm #

          Hi Justin,

          If I am not mistaken, the MER of XAW is currently 0.21%, while an equally weighted VUN/XEF/XEC is about 0.177%, a difference of about 0.032% (all before FWT). So the difference of MERs appears to be about 0.032%, whereas after FWT are applied, the difference increases to 0.08%. Do these differences seems reasonable? Many thanks.

          • Justin 02/12/2015 at 10:15 pm #

            @Nik – for the purposes of this analysis, an equally weighted VUN/XEF/XEC is not the same as XAW (XAW is about 54.9% US, 35.3% developed, and 9.7% emerging markets). As well, an equally weighted VUN/XEF/XEC would have an expected MER of approx. 0.22% (not 0.177%). I can’t comment on any of the other numbers you’ve posted without doing another in-depth analysis. I will be updating my foreign withholding tax paper in the new year, so hopefully this will help.

          • Nik 02/12/2015 at 11:23 pm #

            My apologies, I have been being far too loose with my words. I meant I weighted VUN/XEF/XEC equal to XAWs weightings (the percentages you posted). Nonetheless, I know you could only be certain after your own analysis. However, for the sake of argument, suppose my calculations are correct (besides my mistakes in words, I am certain I followed your methodology correctly from your White Paper, and obtained the correct data from the ETF sites). All of this aside, does the difference in MER that I’ve posted seem reasonable? Or does it seems too big or too small? Thanks again.

    • Justin 02/12/2015 at 5:19 pm #

      Hi Nik – lower dividend yields would generally result in lower foreign withholding taxes (all else equal). Higher expense ratios can also lower the total FWT, as these are subtracted prior to calculating the second level of FWT.

  9. Gavin 14/04/2016 at 3:52 pm #

    I noticed your comment (timestamped 02/12/2015 at 10:15 pm), above, saying that you will be updating the foreign withholding tax paper in the new year. I can’t wait to see the new appendix, especially with offerings like XAW and VXC in the mix. Any sense of the timeframe for this update?

    • Justin 14/04/2016 at 4:04 pm #

      @Gavin – I’m getting married this May, but after that, I’m going to be updating the FWT white paper and also working on a number of other white papers that have been on the backburner for awhile (a “smart beta” paper will likely be the next one).

      • Gavin 14/04/2016 at 4:07 pm #

        @Justin – Congratulations! All the best!

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