Robb Engen: Hey Justin, it’s Robb Engen from the Boomer and Echo blog. My question to you is about the cost savings of using U.S.-listed ETFs. Right now, 100% of my portfolio is in Vanguard’s all-equity fund, VEQT. There’s about $200,000 in my RRSP, and $50,000 in my TFSA. At what point would you say to me, “Robb, look, you’re absolutely crazy not to break up with your one-ticket fund and switch to a portfolio that includes U.S.-listed ETFs.”
In other words, when it comes to portfolio value, when does math trump simplicity?
Bender: Hey Robb, thanks for your question. Let me start off by saying, congratulations on a perfectly sane investment choice. Regardless of portfolio size, there’s absolutely nothing wrong with sticking with a one-fund solution like the Vanguard All-Equity ETF Portfolio (VEQT). This is especially true in your TFSA. If you sold VEQT and repurchased a two-ETF portfolio (comprised of a Canadian equity ETF and a U.S.-listed global equity ETF), you would only save about 0.04% per year, or just $20 on a $50,000 TFSA ($50,000 × 0.04%). This also unrealistically assumes no costs to implement and manage your more complex TFSA.
So, I think we can both agree that VEQT can hang out in your TFSA for the foreseeable future. Enough said.
| Security | Weight (%) | Market Value | Total Costs (%) |
|---|---|---|---|
| Vanguard FTSE Canada All Cap Index ETF (VCN) | 27.8% | $13,900 | 0.06% |
| Vanguard Total World Stock ETF (VT) | 72.2% | $36,100 | 0.61% |
| Total | 100.0% | $50,000 | 0.46% |
| Security | Weight (%) | Market Value | Total Costs (%) |
|---|---|---|---|
| Vanguard All-Equity ETF Portfolio (VEQT) | 100.0% | $50,000 | 0.50% |
Sources: FTSE Russell index fact sheets as of July 31, 2019. CPM Foreign Withholding Tax Calculator
But what about the VEQT holding in your RRSP? Here, in the spirit of your own question, I can provide an easy answer … or a mathematical one. I’ll offer both. You decide.
The Easy Answer
Math aside, I would maintain that most DIY investors would be wise to stick like glue to their one-fund solutions, even as their RRSP values continue to grow. Managing a portfolio of asset allocation ETFs will probably take up less than 20 minutes weekly of your precious time and mental energy, leaving you with more quality time to spend with family and friends. I think you’ll agree, it’s hard to put a price on that convenience. And, as I’ll show you in my more detailed take, even if you switch to and perfectly execute a two-ETF portfolio, there’s no guarantee you’ll be in a better financial position down the road.
That said, there is a point at which you’re likely to end up leaving some money on the table by opting for simplicity. If that just doesn’t sit right with you, and you’d still like to know when the numbers might start penciling out in your favor, I feel that an annual cost-savings buffer of at least $500 – or once your RRSP exceeds $160,000 – seems reasonable to offset some of the strategy’s risks. Since your RRSP value has already passed this theoretical threshold, a lower-cost two-ticket portfolio could be worth the hassle, at least if you’re accounting for it in dollar amounts.
The Mathematical Answer
Now, as promised, let’s take a closer look at the math that has inspired my rapid-read buffer. As you already know from your own readings, swapping out VEQT for a Canadian equity and U.S.-listed global equity ETF combo can save you about 0.31% per year in product costs and foreign withholding taxes (0.50% – 0.19%). On a $200,000 RRSP, this amounts to around $620 of savings each year. That’s certainly not chump change.
| Security | Weight (%) | Market Value | Total Costs (%) |
|---|---|---|---|
| Vanguard FTSE Canada All Cap Index ETF (VCN) | 27.8% | $55,600 | 0.06% |
| Vanguard Total World Stock ETF (VT) | 72.2% | $144,400 | 0.24% |
| Total | 100.0% | $200,000 | 0.19% |
| Security | Weight (%) | Market Value | Total Costs (%) |
|---|---|---|---|
| Vanguard All-Equity ETF Portfolio (VEQT) | 100.0% | $200,000 | 0.50% |
Sources: FTSE Russell index fact sheets as of July 31, 2019. CPM Foreign Withholding Tax Calculator
Sounds like a pretty sweet deal, but the grass is not always as “greener” as it may seem. Before you start trading, let’s review some of the potential implementation costs of this strategy, along with tips to help you avoid any huge mistakes. I’ll refer to TD Direct Investing throughout these discussions, as I understand this is the brokerage you currently use. To keep things simple, I’ll also assume your new two-ETF portfolio would consist of the Vanguard FTSE Canada All Cap Index ETF (VCN) and the U.S.-listed Vanguard Total World Stock ETF (VT).
1. Currency Conversion Costs
First, if you’re purchasing U.S.-listed ETFs, you’ll need U.S. dollars. A DIY brokerage like TD Direct Investing will be more than happy to exchange your loonies for dollars, but they will insist on getting a piece of the action. How much, you may ask? Well, that depends on how much you’re converting. In your case, you would be converting a large amount, so you should be able to get a decent rate.
When I recently called TD to inquire, they offered to convert $144,400 Canadian dollars to $109,022 U.S. dollars. This figure is basically meaningless until we compare it to the benchmark spot rate at the time, which would have yielded about $491 more U.S. dollars (or about $647 CAD). If you went with TD’s rate, it would take slightly over a year for your annual savings to offset this upfront currency conversion cost ($647 ÷ $620 = 1.04 years). Still, that’s not a bad deal, since you’ll presumably be reaping big cost savings over an investing lifetime.
| Rate | Amount to convert (CAD) | Proceeds of conversion (USD) | |
|---|---|---|---|
| TD Direct Investing | 0.7550 | $144,400 | $109,022 |
| Spot (Benchmark) | 0.7584 | $144,400 | $109,513 |
| Difference | -$491 USD |
Sources: TD Direct Investing and Quotestream, as of July 31, 2019
Some savvy investors will correctly note that using Norbert’s gambit, a strategy that allows you to cheaply convert your loonies to dollars, would significantly reduce your conversion costs and breakeven period. Converting $144,400 Canadian dollars to U.S. dollars using the gambit would have cost about $306 CAD ($232 USD ÷ 0.7584 spot rate), or less than half the cost of accepting TD’s FX rate. Please refer to my YouTube tutorial for step-by-step instructions on how to use the Horizons US Dollar Currency ETFs (DLR and DLR.U) to perform the Norbert’s gambit at TD Direct Investing.
| Rate | Amount to convert (CAD) | Proceeds of conversion (USD) | |
|---|---|---|---|
| Norbert's Gambit | 0.7568 | $144,400 | $109,281* |
| Spot (Benchmark) | 0.7584 | $144,400 | $109,513 |
| -$232 USD |
*Assumes an ask price of $13.37 CAD for DLR, a bid price of $10.12 USD for DLR.U, and $9.99 trading commissions
Sources: Quotestream, as of July 31, 2019
Unfortunately, at TD Direct Investing, they take a few days to process your RRSP gambit transactions. This leaves you underexposed to global equities (as you haven’t purchased VT with your U.S. dollars yet) and overexposed to the U.S. dollar (as you now hold DLR, which holds U.S. dollar cash and equivalents). If global stocks go down during this holding period, you win. If they go up, you lose. You also win/lose if the U.S. dollar appreciates/depreciates against the Canadian dollar during the same time period.
The potential opportunity costs can be substantial. For example, imagine you sold $200,000 of VEQT on August 14, 2019 and purchased $55,600 of VCN and $144,400 of DLR on the same day. If you were then forced to wait until August 19 to sell DLR.U and purchase VT, you’d miss out on gains of $5,020 CAD on VEQT.
Your VCN holdings would have gained by around $915, and your DLR holdings would have inched up by around $214, but this still would have left you with an opportunity cost of $3,891. The future savings from switching from VEQT to VCN and VT will take over six years to offset the cost from this unlucky Norbert’s gambit transaction ($3,891 ÷ $620 = 6.28 years).
If you’re seriously considering breaking up with VEQT, you may want to also consider breaking up with TD beforehand. There are other discount brokerages, such as RBC Direct Investing, which allow you to implement the entire Norbert’s gambit process in your RRSP on the same trading day, leaving you less vulnerable to these market-timing issues.
| Security | Exposure ($) | NAV Aug. 14, 2019 | NAV Aug. 19, 2019 | Gain/Loss (%) | Gain/Loss ($) |
|---|---|---|---|---|---|
| Vanguard All-Equity ETF Portfolio (VEQT) | ($200,000) | $26.0317 | $26.6851 | 2.51% | ($5,020) |
| Vanguard FTSE Canada All Cap Index ETF (VCN) | $55,600 | $32.4045 | $32.9377 | 1.65% | $915 |
| Horizons US Dollar Currency ETF (DLR) | $144,600 | $13.49 | $13.51 | 0.15% | $214 |
| Total Opportunity Cost of Norbert’s Gambit | ($3,891) |
Sources: Vanguard Investments Canada Inc., Horizons ETFs
2. Bid-Ask Spreads
A second cost to this strategy results from the bid-ask spreads on the ETF prices. When trading ETFs, you buy at the ask price and sell at the bid price. The difference in the two prices is another hidden cost of switching from a one-fund to a two-fund solution. Think of your ETF as a bar of soap – the more you touch it, the smaller it gets.
Although this exact cost is impossible to calculate, you can get a ballpark idea by multiplying the number of VEQT shares you own by about two cents. So, if you hold 7,392 shares of VEQT at the end of July 2019, the estimated bid-ask spread cost to sell these shares and repurchase VCN and VT would be around $148 CAD (7,392 shares × $0.02).
3. Trading Commissions
Third, there’s trading commission costs, both during the initial implementation, and on an ongoing basis (as you attempt to keep your two-ETF portfolio in balance). On such a large RRSP, these $10 trading commissions are hardly worth mentioning, but for more modest-sized RRSPs, investors should certainly pay attention to this cost.
4. Future Tracking Error Relative to VEQT
And finally, there’s the unknown cost of your new portfolio’s tracking error relative to VEQT. This “cost” can actually be either positive or negative. You would expect your new portfolio to have positive tracking error, due to lower product fees and foreign withholding taxes. However, this could be offset by a number of factors, such as timing differences in portfolio rebalancing.
Vanguard plans to run a tight ship, rebalancing whenever any underlying ETF becomes overweight or underweight by more than 2% of its target. As their asset allocation ETFs are extremely popular with investors, they also have plenty of new daily cash flows they can use to rebalance the portfolio more frequently.
The frequency of your portfolio rebalancing will no doubt differ from Vanguard’s, so expect slight differences in returns going forward. You’ll also experience different performance between your and VEQT’s foreign equity stock holdings. While they’re very close, VT’s and VEQT’s underlying foreign equity exposures are not identical.
Final Thoughts
So which answer has inspired you: the easy one or the deeper dive? I don’t think either is universally right or wrong. If you’ve made it this far, I hope I’ve given you a good sense of which one is right for you.
Hi Justin. Thanks for this article. It really helped. I’m new to this as I am in my early 20s and always did investing via Robo Advisors. Now I’m taking it slow learning about AIY/DIY. My question is, how did you get 0.46% for the total? Shouldn’t the total cost % be 0.67% for both ETFs? What’s the approach or formula used to get to the 0.46?
P.S. My background is in Engineering so I’m sorry if I’m going above the scope of the content.
@Pris: The 0.46% figure is a weighted-average (i.e. 27.8% x 0.06% + 72.2% x 0.61% = 0.46%)
Hello Justin,
Very Interesting article. Is there a reason why DLR/ DLR.U is always used for Norbert’s gambit? I wold have tough that HSX/HSX.U wold be better because while you wait a few days for the broker to journal the shares at least you follow the market (or at least the S&P 500). Would that be a bad idea?
@Philippe: You can process the gambit with many different securities. I like DLR/DLR.U because it makes intuitive sense, so I can easily explain it to a DIY investor. I also tend to only gambit on large amounts and at brokerages that allow me to process everything same day (like RBC DI), so there’s no real tracking risk.
“so there’s no real tracking risk” Sorry Justin, can you explain what you mean by tracking risk?
I understand they why behind RBC DI with NG, but do you mean tracking as in changes in currency fluctuations with other brokerages by the time trades settle?
@Vito: Let’s say you were converting CAD to USD in your RRSP to buy ITOT/IEFA/IEMG. If the gambit transactions took a few days to process before you could buy your ETFs, and foreign equity markets significantly increased in value during this waiting period, you have a large opportunity cost (or tracking error to what you normally would have). Fluctuations between your USD exposure and other foreign currencies (other than the U.S.) could also have an impact, but usually not as large.
Does that also apply when going from USD to CAD via NG?
@Vito: If you were selling U.S.-based foreign equity ETFs to rebalance the portfolio, there could be an opportunity cost, depending on what you were planning to purchase with your CAD (i.e. bond ETFs? Canadian equity ETFs?).
There would also be some difference in returns for holding U.S. dollars in the form of DLR.U for a few days.
Hi, I had a quick question about VT – according to Vanguard’s page (https://advisors.vanguard.com/investments/products/vt/vanguard-total-world-stock-etf), the MER is 0.08%. What components are in the total cost that make is 0.61% in a TFSA? Is it only the withholding tax?
@SK: Correct – the total cost of VT in a TFSA would include the Foreign Withholding Tax Ratio (FWTR), as well as the MER.
Feel free to download the FWTR Calculator to learn more: https://www.canadianportfoliomanagerblog.com/calculators/
Hi Justin, I’m considering dabbling in the ETF markets for my RSP. I have built my own mutual fund 100% equity portfolio that is 27% CDN, 33% USD and 29% INTL (the rest fluctuates in cash within the funds). It has a 10 yr annualized return of 11.64% with an average MER of 1.48%. I’d like to try ETFs due to the lower fees and from what I’ve read that indexes tend to outperform actively managed funds and compare against my MF portfolio.
I was going to split off about $20,000 to try ETFs with. In your opinion, could I do a multiple ETF portfolio like your “ridiculous” 100% equity ETF mix or should I stick with VEQT? I don’t think $20,000 is enough that I can make using US listed ETFs cost-effective due to trade commissions and timing risk using NG (Questrade still costs $5-10 on the sell plus the timing risk from the delay time). I don’t think using RBC DI makes sense in my case either since I would be paying trade commissions on buys and sells. If I went with CAD only ETFs I was going to try out WealthSimple.
Would I be best off using only CAD listed ETFs to get started? I don’t mind investing in VEQT but I also don’t mind re-balancing, I already do it on my MF portfolio, and if I can cut some of the MER or withholding tax down doing so then great!
Thanks for any guidance or tips! Tons of helpful information on your site to get me going!
@Michael: If you’re just getting started with ETFs and have $20,000 to invest, it makes sense to keep it simple with a one-fund solution (like VEQT). Any percentage savings from implementing the gambit and buying U.S.-listed foreign equity ETFs on a $20,000 portfolio is going to be modest from a $ perspective (and that’s if everything works out perfectly).
Thank you for the quick response! That makes sense to me. What kind of situation would warrant investing in the individual ETFs within the AAFs vs the actual AAF itself? (Or is there one now)? Just having a larger portfolio so that the savings are more impactful from a $ perspective? Appreciate the response!
Looking forward to more podcast episodes too! Thanks,
@Michael: For very experienced investors (who don’t mind complexity) with larger RRSP accounts (i.e. well over $100,000), it could start to make sense to break up the asset allocation ETF into various individual ETFs (like in my “Ridiculous” model ETF portfolios). As the name suggests, this option shouldn’t be the default – many investors will instantly regret making the switch. I’ll be releasing more blogs/podcasts/videos on these concepts, so stay tuned.
But for now, I wouldn’t bother complicating your portfolio at this level of assets (especially if you’re just getting started with ETFs).
Sounds good! Looking forward to more posts from you. Lots to learn about the intricacies of ETFs! Thank you,
Like Charlie, I also regret jumping into a dual currency portfolio and wish it was all in VEQT. The hassle of repeatedly Norberting funds every time I need to rebalance is a hassle, and I too struggle with re-balancing calculations across two currencies.
I wonder if a solution would be to sell all ETFs, put the CAD into VEQT and put the greenbacks in a US-listed asset allocation ETF? No more rebalancing, so no more currency conversions. Any new investments could go into VEQT.
a) Do you see any problems with this?
b) Do you recommend any US-listed asset allocation ETFs? (I’ve located AOK, AOR and AOA, and note their slightly higher MER than VEQT.)
c) Would holding a US-listed asset allocation ETF retain any of the foreign withholding tax benefits as holding ITOT/IEFA/ IEMG?
@David: You could always hold onto your existing ETFs (I’m assuming VCN, ITOT, IEFA and IEMG) and start a new holding of VEQT, which you can add to over time. There shouldn’t be too much rebalancing required on your existing U.S.-listed ETFs (you could also consider switching ITOT, IEFA and IEMG to something like VT to reduce the complexity further):
https://www.canadianportfoliomanagerblog.com/more-alternatives-to-vanguards-asset-allocation-etfs/
I don’t recommend any of the U.S.-listed asset allocation ETFs, as there are better options for Canadians.
Hi Justin,
Thanks for maintaining this awesome resource.
This is a question from a regretful Norbert Gambiteer who wants the simplicity of 100% VEQT.
My and my wife’s RRSPs follow your June 2019 model portfolio with Canadian-listed (VCN) and US-listed (ITOT IEFA IEMG) ETFs. The the latter were purchased through Norbert’s Gambit at Questrade. About $350,000 is invested, which grows by about $10K monthly. We are in our early 30s.
I am glad you’ve renamed the updated portfolio “Ridiculous”, because I may be too stupid to manage its complexity.
My obstacles are: (1) re-balancing with two currencies involved; (2) worrying about whether I’m even saving money compared to investing everything in VEQT; (3) not really knowing how to calculate this (I understand how to perform Norbert’s Gambit but don’t understand what’s happening); and (4) wondering if I’ll lose money when I eventually convert a lifetime of RRSP savings back to CAD because Norbert’s Gambit only locks in currency one way.
Do you have any guidance or tools to help with:
(1) Re-balancing with two currencies involved;
(2) Calculating the cost of converting your dual-currency model portfolio to an all in one assert allocation ETF.
(3) Understanding how smart Canadians with significant savings in USD convert back to CAD in retirement without risking a big hit.
Thanks so much,
Charlie
@Charlie: The ridiculous portfolios can be a bit of a hassle to manage (which is why I have started pointing investors to the light portfolios first).
1) I would use the rebalancing calculator I have posted, and adjust the ITOT, IEFA and IEMG over or underweights by the current FX rate.
2) The cost would include trading commissions, bid-ask spreads, and currency conversion costs. Trading commissions are easy enough to estimate. For a bid-ask spread estimate, multiply $0.02 by the number of shares of VEQT you plan to buy. And for the cost of the currency conversion using Norbert’s gambit, multiply $0.02 by the number of shares of DLR.U you plan to buy with your U.S. dollars.
3) Remember that the currency exposure of ITOT/IEFA/IEMG will be the same as the currency exposure in the foreign equity holdings of VEQT (just because your ETF transacts in U.S. dollars, doesn’t mean that is your only currency exposure). If you use Norbert’s gambit to convert the USD proceeds from the sale of your U.S.-listed ETFs to CAD in retirement, you don’t “risk a big hit” (not any more so than selling some VEQT shares in retirement).
Hello Justin,
Love your articles, THANK YOU for keeping up with this important work!
I am 23 years old and I feel like the VEQT alone would be a great, easy solution for me.
I came to Canada only in 2015 so my TFSA cont cap is at 32.5k so that is already maxed out.
I am holding some money in Tangerine as their “Balanced Growth Portfolio” and want to make a full change to VEQT and simply have all of my money which I invest go to VEQT to keep it simple.
Do you think this a good way to go? or should I work on fixing my portfolio?
Thank you!
@Ofir: VEQT is cheaper and more diversified than the Tangerine portfolios. If you’re comfortable with a 100% equity portfolio (and you don’t need this money for the next 20 years or so), it could be appropriate.
If you haven’t read the following article or listened to episode 1 of the CPM podcast, they may help you make a decision:
https://www.canadianportfoliomanagerblog.com/choosing-your-ideal-vanguard-asset-allocation-etf/
https://www.canadianportfoliomanagerblog.com/podcast-1-plain-and-simple-vanguards-asset-allocation-etfs/
I wonder if investors should limit how much they should keep in the stockmarket? Apparently the 1929 crash took 25 years to recover and that is an awfully long time even as a young investor, if it were to happen again. Would an index investor back then have been better off investing in GICs/bonds?
@Sd: Most investors have a portion of their portfolio invested in bonds or GICs. You should generally just take as much risk with your portfolio as you need to take (in most cases, investors do not require a 100% equity allocation – they just need to save more and spend less).
Based on new studies it looks like the 25 year estimate was majorly wrong. New study is saying more like about 5 years.
This is because previous measures didn’t take into account deflation, income from dividends and it mostly measured the DJ which is only the top 30 stocks.
https://www.nytimes.com/2009/04/26/your-money/stocks-and-bonds/26stra.html
Justin, great info as always.
The all-in-one ETFs certainly make things very simple, but if I were to go with an all equity ETF (e.g. VEQT) plus a bond ETF, such as ZAG (ZDB in a taxable account) I can easily adjust the risk profile, such as buying more bonds as I get closer to retirement. I could also choose to only sell the bonds during a major market crash. I’ve seen very little discussion about such a two-ETF portfolio, is there a reason for this that I’m missing – two ETFs is certainly not complex, it’s more flexible, and may even be lower cost. Your thoughts would be greatly appreciated.
@Bob Lin: A 2-ETF (VEQT/ZAG) or 3-ETF (VEQT/ZAG/ZDB) are also decent options, but now you’re back to a portfolio that requires rebalancing (so it’s not much easier to manage than the original CPM or CCP portfolios (VCN/XAW/ZAG).
Holding VEQT (instead of VCN/XAW) does cut down on the portfolio rebalancing and ACB tracking slightly though. As you also mentioned, a VEQT/ZAG combo may be easier to start transitioning to a more conservative portfolio as retirement approaches (i.e. you would just start adding the dividends and new portfolio contributions to ZAG). This is also true of the CPM/CCP portfolios.
“I could also choose to only sell the bonds during a major market crash..”
Keep in mind that in that scenario, if you were holding VBAL you sell it all for VGRO it sell all of VGRO for VEQT, and it would do exactly the same thing you’re proposing with the same number of trades.
Hi Justin,
Can one tax loss harvest by selling VBAL and buying VGRO instead? And followed all the other rules with not holding VBAL in any of the other accounts.
Maybe during a major downturn one wants to take advantage of the sale in equities.
I know this is completely hypothetical but was just wondering.
@Cameron: I don’t see any reason you couldn’t. VBAL and VGRO are different securities (even though they hold the same underlying ETF holdings…just in different weights).
If you wanted to play it safer with CRA, you could sell VBAL and buy XGRO or ZGRO.
Hi Justin,
Thanks for this article. I was thinking between one fund solution vs 2/3 ETF, and in the end have chosen to have VCN & XAW for my TFSA. If I’m taking the same allocation to Canada for VEQT – I have 0.07% savings for choosing VCN & XAW. Was able to increase the cost saving to 0.08% (or just $45 for every $50,000) as my allocation to VCN is 33% – thanks Justin for the white paper. Although $45/year might not be significant – if you are looking for an investing period of 20-30 years – is adding up. In addition is taking me 5 min/month to rebalance the portfolio (love the calculator Justin) with the new savings. I will probably have another ETF (bond), close to my retirement, but don’t think that will take too much time.
Looking forward for podcast!
@Ale: Sounds like a good plan, if you’re willing to roll up your sleeves a bit ;)
Very similar to my TFSA. I have 50% XAW, 30% VSB and 20% VCN. I spend about 5-10min/month using my rebalance spreadsheet, really not that much work.
When I first started index investing, I wanted to analyze everything, which preventing me from getting started (paralysis by analysis) but eventually bit the bullet and dived in. Chose the above allocation ETFs and haven’t looked back since. Then started wondering about what time during the trading day I should do my trades, contacted Justin and he had written about a while back that there really isn’t any good timing, as long as you avoid trading within the first 30min and the last 30min of the market being open.
Thanks Justin! I had no idea about you starting a podcast, which is great since Dan is closing up shop in that dept. so I can now rely on your podcasts to get me through my gruelling one hour treadmill/bike rides so THANK YOU!
@Vito: When I’m feeling lucky, I can be known to place a trade at 3:50 pm ;)
The podcast will definitely be shorter than your one hour treadmill/bike ride, so it looks like you’re off the hook for the remainder of your workout :)
When using Norbert’s Gambit why is the example always with DLR versus an inter-listed stock like RY? Maybe I just got extremely lucky, but I converted roughly 60k in my TFSA and 30k in my RRSP at BMO (placing the trades within seconds of each other and doing it all automatically online). After everything settled my total costs including commissions was 60$. The first NG I actually came out out ahead slightly ahead, but after the second NG I had some what I take to be negligeable total costs. Is there more risk taking the approach I did?
@Adonis: Using inter-listed stocks at BMO InvestorLine is certainly efficient, as long as the stock doesn’t decrease after you buy it (but before you sell it).
I personally feel more comfortable recommending DLR/DLR.U to DIY investors, as you only have currency risk for a short period of time (so there’s no market risk).
Would you please comment on when and where your podcast starts. Thanks.
@Al N: Likely at the end of this month or beginning of next month. I’ll post an announcement on the CPM blog when it launches with all the details on where to listen in.
When there is a 2 days delay, what about NG with HXS/HXS.U instead of DLR/DLR.U? This stock follows the S&P500, so is therefore highly correlated to the global market on a daily basis. The correlation is .75 between XAW (global market) and HXS (compared to .13 for XAW/DLR). The potential opportunity costs is then greatly reduced.
@Taofr: By using HXS/HXS.U to perform the gambit, the U.S. equity portion’s opportunity cost is certainly reduced. However, there still could be opportunity costs from the international and emerging markets equities vs. the U.S. equities (they will not behave the exact same over short-term time periods). Instead of taking this risk, I would consider switching to another brokerage instead (or just accept the bank’s higher foreign exchange rates).
Hello Justin,
Thank you for this post.
I have realized that I worry more about myself making mistakes.
Thus I have instituted VGRO and ZDB in my CCPC and using VAB in my RRSP. This ends up giving me about a roughly 60/40 portfolio which is good enough.
I took a hybrid strategy in that I could avoid the NG by keeping most of my bonds in my RRSP. And I still get some automation with VGRO in my CCPC.
I don’t think there are any perfect strategies. I am just looking for one I can actually pull off.
Looking forward to your podcast and my recording debut. 🙂
@Emily: You’ve definitely got the right attitude – the best investment strategy is the one you can stick with over the long term ;)
The listeners are going to enjoy your podcast question (although it is planned for episode 2 of the podcast).
Hi Justin, I am a contractor with a corporation as well and a bit confused by the strategy noted above by Emily. Would it make more sense for me to invest in VEQT and ZDB to get a 60/40 portfolio? Is there additional rebalancing bonus by using VGRO+ZDB or just VBAL since they include bonds?
Thanks (and you blog is appreciated)!
@Matt: A combination of VEQT/ZDB may be easier for an investor to visualize (i.e. they can easily eyeball their account and know what they overall asset mix is without doing any math).
Some investors will not rebalance their portfolios in an extreme market downturn (kind of a “deer in the headlights” sort of response). I believe Emily has decided to use VGRO, as it will automatically sell bonds and buy more equities in the event of a market crash.
Hello Justin,
I have a question similar to Rob Engen’s. But mine is wth respect to investments in a CCPC.
Is there an amount where you would seriously tell a DIY investor to use 60% VEQT & 40%ZDB/ GIC versus my current 75% VGRO and 25% ZDB?
That is, where the behavioural benefit of an autorebalancing would be severely negated by tax drag of the premium bonds?
Is there a general tipping point portfolio value of sorts?
@Emily: There’s no point that I would seriously tell a DIY investor to manage their portfolio a certain way. I like the AA ETFs for more modest-sized TFSAs and RRSPs, but that doesn’t mean a DIY investor can’t use them in taxable accounts as well (acknowledging that there might be some small inefficiencies).
If you don’t trust yourself from a behavioural perspective to rebalance your portfolio, you may want to go a step further and just hold VBAL in your CCPC. I’ve estimated the tax drag from the premium bond issue to be around 0.10% for VBAL, which seems like a small price to pay for simplicity:
https://www.canadianportfoliomanagerblog.com/tax-efficiency-of-vanguards-asset-allocation-etfs/
Hey Justin, this article is very timely so thanks for posting and jumping into the comments. You mentioned above that someone decided to go with VGRO “as it will automatically sell bonds and buy more equities in the event of a market crash.” Wouldn’t VGRO have to stick close to the 80/20 asset allocation therefor it can’t take the full advantage of a downtown like someone with a VEQT/ZAB or more complex EFT portfolio could do?
@Martin: Not sure I follow. Let’s suppose VGRO has AUM of $1,000 (to keep the numbers simple). It would have $800 in stocks and $200 in bonds). If equities went down by 40%, the $800 of stocks would drop to $480 (let’s assume bonds stay at $200).
To rebalance the portfolio, Vanguard would need to sell $64 of bonds and buy $64 of equities. This would now give them $544 of stocks and $136 of bonds (or 80% stocks, 20% bonds).
@Justin: That completely makes sense. I was looking at the share amounts and not the value. I’m still ramping up my knowledge on ETF’s and trying to figure them out. We currently have mutual funds with a 4.5% return last year, but I’m considering moving to ETF’s for potentially higher returns and less fees and more control with Questrade. So in a downturn if it was big enough, VGRO would be buying up stocks again and again as the numbers tumble and at the same time it would be selling bonds. And on a rebound it would do the opposite. If someone had VEQT and ZAG separately you could basically do the same thing. Then again as the market rebounds you could hold more VEQT and less ZAG for longer until you’re satisfied that the market has recovered and then rebalance when you decide since you don’t have to follow a strict ratio. Then again you could just take advantage of VGRO always rebalancing for you and then during a big downturn you could always sell VGRO and buy VEQT and then once everything seems to have rebounded you could sell the VEQT with a hopefully nice increase and buy back VGRO and let it continue doing its thing.
@Martin: I wouldn’t recommend trusting your gut to determine when to overweight or underweight VEQT. Just pick as asset allocation that you’re comfortable with (i.e. 80% equity / 20% fixed income, select a rebalancing threshold rule (i.e. rebalance when equities become over or underweight by an absolute 5%), and stick with your plan.
Hello Matt,
I know myself.
I will have no issue with massive market moves. It is the chronic tinkering that I would stress myself out with by using VEQT during the mini and moderate market moves.
It saves me mental bandwidth by having some part of my portfolio automated.
Hi Justin, thanks for this article. I’ve been considering VBAL lately so for me this is timely!
In my TFSA and RRSP, I currently hold VCN, VUN, VAB, VDU, and VEE. I set this up before Vanguard came out with their asset allocation ETFs. My strategy has been to put low growth ETFs like VAB in my RRSP and 100% equities in my TFSA with VUN and some VCN. (I understand there’s foreign withholding taxes for VUN but I’m hoping its strong tax-free growth more than makes up for that.) I rebalance annually.
I’m fortunate to have had a pretty good run in my TFSA, but lately I’m wondering if I would be better to trade the 5 ETFs for VBAL for both the RRSP and TFSA to make the TFSA a little less volatile. Assuming my RRSP’s value is around $200k, and my TFSA about $100k, I’m wondering if it makes any sense to make the switch, and if there are risks (i.e price changes) to making the trades other than the spread and transaction costs that you mention above?
Looking forward to the podcast as well!
@Brian: Switching to a one-fund solution (like VBAL) would definitely be easier than managing a 5-ETF portfolio. Here’s a number of other considerations:
– VDU is less tax-efficient than VIU (which VBAL holds), so switching to VBAL would slightly decrease the foreign withholding tax drag in your portfolio
– VBAL includes currency-hedged foreign bond ETFs, so switching to VBAL would increase the foreign withholding tax drag in your portfolio
– VBAL would be more expensive than a combination of VAB/VCN/VUN/VDU/VEE
– Holding VBAL in your TFSA (instead of 100% equity ETFs) would decrease the expected after-tax return of your portfolio, but only because you are taking less after-tax risk:
https://www.canadianportfoliomanagerblog.com/asset-location-in-a-post-tax-world-tfsas-vs-rrsps/
Hi Justin! Thanks again for this great explanation as always. I’m slowly converting to this one solution asset allocation. My question is: why VEQT over XEQT?
Are the factors only about the home bias exposure and the MER? E.G. if I want less home bias and less MER I should choose XEQT? Thanks again!
@Max: I discuss the differences between the Vanguard and iShares Asset Allocation ETFs in great detail here:
https://www.canadianportfoliomanagerblog.com/canadian-portfolio-manager-introducing-the-light-etf-portfolios/
I just read the entire article twice. It’s exactly what I was looking for, super enlightening. Thank you so much for your great work Justin. I keep recommending you and CPM to friends and family.
@Max: I’m glad you enjoyed the article. And thank you for recommending the CPM blog to your family and friends :)
I think TD permits same day Norbert’s Gambit if you phone in and ask a trader to do the journal and sell, no? You have to pay the $43 phone fee, but that’s better the risk of markets moving against you.
@Grant: I tried this recently (while I was writing the post), and various TD reps refused to do so in my RRSP (but they would allow it in a non-registered account).
Whether all of these reps were just mistaken, or it is in fact a TD policy, I wasn’t able to gambit DLR over to the U.S. side, sell DLR.U, and purchase VT on the same day in this particular instance (even after offering to pay the ~$43 cost).
The last time I tried that at TD in my RRSP I got the same response, it was allowed for non registered accounts but not for RRSPs.
@Jason: Thank you for confirming your experience with Norbert’s gambit at TD as well!
Hi Justin,
Just transferred out of BMO IVL to consolidate at TD DI. Over the years I have done multiple NG transactions at both brokerages, in both directions, and have never waited for settlement to reapply the exchanged funds. On questioning the agent assisting on the second ETF’s journaling to the opposite side of the account, I have been reassured every time that I can immediately use the funds without delay for trade settlement. In every case the ETFs show on both sides for a few days then the bookkeeping cleans them up.
AT BMO you cannot buy the DLR.U online so a trader must do so, but it’s done at $9.95 not broker-assisted, and every time, the trader asked if I’d like him to assist in calculating units and identifying proceeds of the buy/sell. BMO will automatically apply interest on the one-day duplicate funds on the 21st of the month, but will 100% remove the cost with a simple call. An agent has told me that I could ask the trader to look at the account after settlement, and monitor the impending interest charge for automatic reversal on a no-touch basis.
Not sure if I can start with an online DLR.U purchase at TD DI, but senior manager involved suggested I call in for full trader handling of both sides, once the funds are ready to be converted with a sale, if necessary, to generate the cash. Fewer trades at TD DI over the years, but have NEVER needed to wait for settlement before finishing the whole process with a buy on the other side.
At RBC DI, when I was there, I could indeed do all online with no contact, but that generated a (reversible) interest charge, where the agent later asked me why I didn’t call them to prevent that charge beforehand.
That’s been my NG experience, done on accounts where we had premium service levels, so lesser value accounts may not enjoy the same benefits we received.
@Davie215: Norbert’s gambit can be completed on the same day in a TD Direct Investing non-registered account with rep assistance, but not in an RRSP (from my experience).
Have you recently completed the gambit successfully in a TD Direct Investing RRSP on the same day?
Justin,
Because TD DI were very late to the party, I had my RRSPs at RBC and BMO. When I had to move to RRIFs, TD did not offer USD side until late Nov 2018 and it was done without fanfare. So never had NG there and have not asked if it was allowed.
Glad you confirmed immediate journal with agent assistance, but just wanted to say that I got $9 99 commission on both ETFs without paying a $43 trader-assisted rate.
I will check and report.
@Davie215: Thank you for confirming – so as far as I can tell, investors can’t complete the Norbert’s gambit on the same day in an RRSP or RRIF account at TD Direct Investing (which is why the market timing issues in my article above are an important consideration when deciding whether to switch from VEQT to VCN/VT in an RRSP at TD Direct Investing).
Justin,
Have a wealth of info on NG which you may wish to share with your followers:
TD does allow NG in registered accounts, and if agent tells you otherwise, Michael told me today to just ask for supervisor as agent experience varies, and refusing NG is not their policy.
Here’s what he told me.
You may buy DLR or DLR.U online, and avoid trader-assisted $43 commission on the first step. On registered accounts you must wait for settlement before applying proceeds to reinvest, as they claim it would represent a short to do so immediately, and that is not allowed on non-margin accounts.
On non-registered accounts at TD DI, you must call a trader to journal the units immediately, and pay the $43 rate on the second trade if you wish to avoid waiting for settlement.
I believe you can assume the currency risk by waiting for settlement before selling the opposite ETF with online commission rate, but I may not have asked the right question as it applies to trades in registered accounts.
My experience of getting online commissions on both sides in my RRIF at BMO because they don’t allow DLR.U purchase online is not applicable at TD DI. I could make buys on the proceeds there without waiting for settlement on both NR and registered, but cannot do the same at TD.
This process does not depend on special treatment as a high-value client, but applies to all,
Hope this is useful to you.
@Davie215: Thank you for confirming that TD Direct Investing does not allow the gambit to be completed in an RRSP on the same trading day (even if you offer to pay the $43). This was my experience as well.
Thanks for the article, Justin. Looking forward to your first podcast!
@Paul McAllister: Thanks, Paul – we’re excited to launch it :)
Great article Justin, I love how you’ve used email conversations/questions in your blog, so that everyone can learn from them, thank you!
I do have one question that had me thinking. I am currently invested in VGRO in my RRSP and my brokerage is Questrade, since you mentioned if using the Norbert’s Gambit approach by breaking up VEQT (or VGRO in my case) to US listed ETFs, there may be an opportunity cost because of the delay to journal DLR to DLR.U, and you recommended breaking up with TD and an option would be to go with RBC DI since they journal the security the same day.
Would you recommend the same for me?
Just FYI, I’ve used NG before, however in my margin account and I’m quite comfortable doing so, and indeed there was a 3-4 day wait to journal DLR to DLR.U. If memory serves, your brokerage is also Questrade, so is that something you are planning on implementing with your RRSP at some point?
@Vito: Glad you like it! Robb was also kind enough to record his voice, so I’m planning to feature his question on the first CPM podcast as well.
The opportunity cost of performing Norbert’s gambit at Questrade (in order to switch VEQT to VCN/VT in your RRSP) shouldn’t be ignored. This could wipe out the product cost and foreign withholding tax savings for years. I don’t feel comfortable recommending that any investor take this timing risk, which is why I suggested to Robb that he should consider switching to a brokerage which allows a same day gambit, like RBC Direct Investing (Robb could also ask RBC to reimburse his TD transfer-out fees, or at the very least, provide him with some free trades).
RBC Direct Investing may incorrectly charge debit interest on a gambit transaction, but investors can call them to have this rectified.
I have brokerages at RBC, TD, BMO, Scotia, CIBC and Questrade (in order to better serve DIY investors). I currently hold a mix of U.S.-listed foreign equity ETFs, Canadian equity ETFs, bond ETFs, plus Vanguard Asset Allocation ETFs across most accounts (I use these accounts for filming many of the tutorials, so they end up unfortunately resembling a Frankenstein’s monster of ETFs ;)
If you do a NG (loonies to dollars – CAD to USD) for years and years, and then when you are ready to begin withdrawing from the account (ie. retirement) is there any literature you’ve written about (or elsewhere) that I can read as to the best way to exchange back to loonies (ie. USD to CAD)? Is NG simply done (buy DLR.U.TO, then journal to DLR.TO, then sell for CAD cash) or is there a better way to minimize cost and maximize exchange rate?
@Vito: You got it – just reverse the gambit process (i.e. buy DLR.U with your U.S. dollars and sell DLR to get Canadian dollars).
If you’re considering a more advanced strategy you may want to consider using Interactive Brokers for their FX – it’s about 100x cheaper than Norbert Gambit’s at 0.2bp vs the 21bp in the example above ($306/$144,400).
You minimize the FX conversion fees and eliminate the journal delay, and you can send a free monthly wire from IB to Questrade afterwards. For a one-time transaction using Norbert’s may be an option, but if you hold non-registered investments IB is hard to beat especially when paired with Questrade for your RRSP/TFSA.
@Simon/@Vito: The opportunity cost of using IB could also be larger than using Norbert’s gambit or accepting the bank’s rate. You would need to sell VEQT, wait for settlement, wire the Canadian funds to IB, convert them to U.S. dollars, wire them back to your brokerage, and purchase VT. A lot can happen in global stock markets during this time period.