In my recent blog post, Breaking Up With Your Vanguard Asset Allocation ETF, I shared a 5-ETF portfolio you could consider for your RRSP accounts:
Relative to a simpler, one-fund solution, it could reduce your product costs and foreign withholding taxes by up to 0.37%. That said, it also could add a few gray hairs to your head having to manage it all. Naturally, several clever readers were quick to ask whether other 3- and 4-ETF alternatives could accomplish the same goal, with a little less hassle.
I’ve answered two of these reader questions below, and provided the current asset allocations and costs for each portfolio.
John: Rather than using VTI, VEA and VWO for the foreign equity allocations, why not just replace them with VT? This would be simpler and require less rebalancing.
Bender: Replacing VTI, VEA and VWO with the Vanguard Total World Stock ETF (VT) would definitely be simpler, and reduce the trading commissions when investing new cash or rebalancing the portfolio. You’ll pay a bit more for the convenience – between 0.01%–0.06% per year, depending on your asset allocation – but this seems like a reasonable trade-off. You’ll also lose out on U.S. micro-cap stock exposure. U.S. micro-cap stocks are included in VTI, but excluded in VT. That said, these stocks account for less than 1% of the VTI/VEA/VWO trio. VWO also includes a small allocation to China A shares, but VT is expected to gradually include China A shares this year, making both options even more alike.
Erin: Would holding VTI and VXUS be similar to holding VTI, VEA and VWO? Other than losing China A shares, is there any other difference?
Bender: Holding a combination of the Vanguard Total Stock Market ETF (VTI) and the Vanguard Total International Stock ETF (VXUS) would be very similar to holding VTI, VEA and VWO. Even the total costs are within a basis point of one another. As you noted, VWO already includes a small allocation to China A shares, but VXUS is expected to gradually include China A shares this year, making both options even more alike.
Good Things Come to Those Who Weight
If you’ve decided to switch to one of these more tax-efficient portfolios in your RRSP, you’ll likely need help calculating the ETFs’ target weights whenever you’re placing trades. Remember, the asset allocations I’ve included above can change daily.
This is where my new calculator comes in handy. Whenever you’re ready to place trades in or rebalance your portfolio, simply reference the most recent month-end index fact sheet (in USD) for the indexes listed to the right of your desired portfolio. Locate the relevant market capitalizations (in USD) on the fact sheets, and enter the values into the blue cells in the spreadsheet. The asset allocations will automagically adjust on the left-hand side. You can then enter these weights into your portfolio rebalancing calculator.
For example, let’s assume you’re managing the 3-ETF Portfolio.
- Download the FTSE Global All Cap Index (in USD) fact sheet as of May 31, 2019. You’ll see the total market cap for this index is $49,605,584 USD, while Canada has a market cap of $1,551,527 USD.
- Input both of these figures into the spreadsheet to the right of the 3-ETF Portfolio, which will adjust the asset allocations for the ETFs on the left.
- Now you’ll be able to determine, if you were trying to mimic the equity weights in VGRO, your target weights should be 20.00% in VAB, 22.19% in VCN, and 57.81% in VT.
Got more questions about Vanguard’s Asset Allocation ETFs? You can now send me your queries as voice recordings, and you’ll likely end up with a cameo role in the new CPM Podcast!
Hi Justin: How would you go about to convert the FTSE Canada All Cap Index market capitalizations into USD from the most recent month-end index fact sheet?
@Steve: Just google “FTSE Developed All Cap Index Fact Sheet USD”, and Canada’s market cap in USD will be available on page 2 of the index fact sheet (1,726,343 USD as of December 31, 2019):
Thanks Justin. Just two follow-up questions:
1. Should cell J46 (Developed All Cap ex US Index Market Cap) from the Asset Allocation Weights Calculator on this page be unlocked for editing as well?
2. As an alternative to your calculator, can I also leverage the Asset Allocation ETF’s region exposure data from Vanguards’s site? How do you account for the 0.1% of the funds that may be allocated to Treasuries or Cash when trying to replicate the weightings of VEQT?
1. Cell J46 should not be unlocked for editing (cells J43 and J45 will calculate J46).
2. Because VT, VXUS and VEA all include an allocation to Canadian stocks, my method would be the most accurate.
Thanks again Justin. Any chance you can release a similar calculator to calculate the latest target weights for splitting XAW as per your Model ETF Portfolios?
@Steve: I’m not planning to release another calculator, but you can create a simple spreadsheet using the market caps (in USD) for the following indices:
MSCI USA IMI Index
MSCI EAFE IMI Index
MSCI Emerging Markets IMI Index
@Justin: Thanks Justin. I found your other blog post which was very helpful to determine the XAW target weights: https://www.canadianportfoliomanagerblog.com/where-does-your-global-stock-etf-weigh-in/
Justin, to try to escape the difficulty of rebalancing between USD and CAD denominated ETFs, I was wondering about the possibility of using USD-denominated ETFs of Canadian securities. E.g., instead of VUN for the Canadian equity component of a VT / VUN asset allocation in an RRSP, using the USD-denominated iShares MSCI Canada Index ETF (NYSEARCA: EWC). (That’s the ETF that came up when trying to Google for something like this. I couldn’t find a USD-denominated index fund of Canadian bonds though.)
@Moti: I’m assuming you are referring to VCN (not VUN). Although using EWC may create some very small rebalancing conveniences from time-to-time, its annual expenses are 0.47% (relative to VCN’s MER of 0.06%). It is also not as diversified (no small-caps).
It sounds like you’re trying to trade off one small inconvenience for a few bigger ones.
thanks very much, justin. yes, sorry meant VCN.
For a TFSA 100% portfolio, I could save 0.06% if I choose XUU/XEF/XEC instead of XAW.
What will happen with XAW ETF in case US stock will have the same end as Japan stock 1991/1992? For this scenario, will XAW “adjust” automatically by replacing US with a different country – let’s say UK for example?
And in this case isn’t “safer” to have XAW rather than XUU/XEF/XEC?
@Ale: If the U.S. stock market starts to underperform other stock markets around the world going forward, its relative weight within XAW will automatically decrease (and vice versa).
XAW will not replace an entire country with another, just because it’s not performing well. The only way U.S. stocks would no longer be included in XAW or XUU is if the United States of America no longer existed.
Even though Japanese stocks have not performed as well as U.S. stocks since 1993, Japanese stocks still make up a significant portion of XAW and XEF. Japan is the second largest country holding in XAW at 7.5% weight, and the largest single country holding in XEF, at 24.43%.
As long as you weight XUU/XEF/XEC accordingly (like in my model ETF portfolios), it will have similar performance to simply holding XAW.
Could you make a new article about the difference between taxes paid for Canadian listed ETFs vs US listed ETFs ? It would be interesting to see the difference between 3, 4 and 5-ETF portfolios and maybe take into consideration the cost of the Norbert Gambit conversion. It could be an estimation of how many years it takes to get a benefit from the US-listed ETFs after conversion fees.
Hope you keep my idea for a future article. Thank you for all the informations you share with us.
@Sebastien: Great idea – I’ll put it on the list :)
@Justin: You say “Depending on the brokerage,there could be a delay in processing the gambit, which is a risk”, but in fact, there is almost no risk when converting from CAD to USD as the exchange rate is locked as soon as DLR is bought.
When converting from USD to CAD, then there is risk that the exchange rate become worse as DLR can change value while DLR.U stay the same price.
DLR seeks to reflect the price in Canadian dollars of the U.S. dollar. I suggested to Horizons to create a new ETF listed on CAN and US exchanges that seeks to reflect the price in U.S. dollars of the Canadian dollars. That way, we could lock the exchange rate as soon as the US ETF is bought.
@Sebastien: The risk I’m referring to is if you sell the asset allocation ETF and buy DLR on the same day, you’ll generally have to wait a few business days until DLR is journaled, DLR.U sold, and the U.S.-listed ETF/ETFs purchased (so you’re out of the stock and bond markets for a few days on a portion of your portfolio, and exposed to the U.S. dollar on this same portion).
I understand what you meant now. Thank you for the clarification.
Once a 5-, 4-, or 3- ETF portfolio is set up using both US and Canadian listed ETF’s, how do you recommend investors manage the currency conversion for new contributions? Norbert’s Gambit probably would not make sense for smaller, more frequent contributions. So – just suck up the brokerage’s currency conversion fee? Invest in CAD listed equivalents (extra ETF) and then sell and ‘gambit’ everything over to the US funds once per year? Something else?
@Mark: I generally just add new contributions to an asset allocation ETF (you could buy individual ETFs as well). Once the amount to convert is significant (perhaps $10,000), I sell the ETFs and use the gambit to convert the CAD to USD (and then purchase the U.S.-listed ETFs).
Depending on the brokerage, there could be a delay in processing the gambit, which is a risk (RBC DI and BMO IL are brokerage options that don’t carry this settlement risk).
Hi Justin, Do you have a 3 or 4 – ETF’s portfolio suggestion for a Taxable account. Thanks, Sharon
@Sharon Hynes: My CPM Model ETF Portfolios include suggestions for RRSP, TFSA and Taxable accounts (page 3 of the PDF):
Thank you for including VXUS in your Foreign Tax Withholding calculator! As someone that uses ZAG/VTI/VXUS it’s appreciated!
@SL: You were the first one to notice VXUS’ inclusion in the FWT calculator, so congratulations! ;)