Many readers are interested in learning more about the possibility of capturing exposure to most world markets in one fund through the Vanguard FTSE All-World Ex-US ETF, which trades on the AMEX under the ticker symbol VEU. The Vanguard website says that the FTSE All-World Ex-US Index tracks the performance of approximately 2,200 stocks in developed and emerging markets excluding the U.S. The VEU is a perfect holding for a U.S. investor as it allows them to get exposure to every major world market instead of buying three ETFs separately - Vanguard Europe Pacific ETF (VEA), Vanguard Emerging Markets ETF (VWO) and iShares MSCI Canada Index Fund (EWC).
The advantage of VEU for a Canadian investor is readily apparent - savings on trading commissions compared to the alternative of buying VEA and VWO. However, Canadians already have significant holdings in local markets through index funds, ETFs, mutual funds or direct stock holdings and need to calibrate their allocation to Canadian equities to account for the additional exposure through VEU, which at present is 5.5%. In addition, VEU’s MER of 0.25% is almost twice as expensive as a combined holding in VEA and VWO. A Canadian investor splitting the international (excluding U.S.) holdings at roughly 80% in VEA (MER of 0.12%) and 20% in VWO (MER of 0.25%) pays a blended MER of approx. 0.15%.
Bottomline: VEU is interesting for Canadian investors but the two disadvantages (the complication in asset allocation to account for the extra Canadian holdings through VEU and the higher expense) should be carefully weighed against the one obvious advantage of buying one less ETF when compared to the alternative of buying VEA and VWO.
Bookmark: del.icio.us Digg StumbleUpon
11 responses so far ↓
1 Cash Instinct // May 19, 2008 at 10:09 pm
Thanks for covering this subject, I was looking at this particular ETF recently.
Also, a Canadian investor would lose the Canadian dividends tax credit by investing his Canadian % in equities by using this outside-Canada ETF if I understand the issue correctly. This seems to me as a 3rd disavantage.
2 asdfasdf // May 20, 2008 at 2:22 am
Another minor negative, as a Canadian you have to pay currency conversion costs on buy and sell, and on distributions. That being said VEU is about 1/8 of my portfolio right now. I hold XIC as well to overweight Canada (I know Canada is only ~3% of the world but I live here so I figure it makes sense to have more domestic equity exposure). Also I hold this inside my RRSP so I’m not losing the dividend tax credit on this. I went with this over VWO/VEA mostly because it was simpler and I didn’t want to fuss with weighting emerging markets — easier to have it all appopriately weighted by the index.
3 Canadian Capitalist // May 20, 2008 at 10:37 am
cash instinct: You’re right about the dividend tax credit. In fact, a withholding tax will be charged by Canada on the dividends as VEU is domiciled in the US. If we assume a total tax loss of 25% on the Canadian dividends portion, it adds another .0275% (5.5% in Canadian stocks * 2% dividend yield * 25% tax leakage) to the expenses. Thanks for pointing this out.
asd: I didn’t initially understand your comment as VEA+VWO is the alternative to VEU. But thinking it over, I think you meant that a Canadian investor pays for the currency conversion for the Canadian portion of VEU. Good point. That’s another 1% on the 5.5% Canadian portion when buying and 1% when selling.
4 asdfasdf // May 20, 2008 at 12:56 pm
That’s a fair point too however I was trying to get at something else. I was implicitly comparing VEU to something like XIN or say the TD e-series international fund which are in CAD and just pointing out that there are extra costs in buying USD ETFs for Canadians. Unfortunately we don’t seem to have anything quite like VEU in CAD and so it is one of our best choices, though it could be better. I didn’t realize until just looking it up that XIN doesn’t have the emerging markets component, so it’s all a bit of a moot point (plus XIN has a 0.49% MER every year which doesn’t take long to become more expensive than VEU).
5 Canadian Capitalist // May 20, 2008 at 1:29 pm
asdfasdf: You can find plenty of discussion of XIN and XSP elsewhere on the blog.
http://www.canadiancapitalist.com/?s=xin
http://www.canadiancapitalist.com/?s=xsp
6 Another Giveaway, Cheap Books and Weekend Reading - May 30, 2008 | Million Dollar Journey // May 30, 2008 at 5:31 am
[...] Capitalist describes and explains the Vanguard ETF VEU. I’m showing more interest in ETF’s these days as it’s a great way to diversify [...]
7 Books and Magazines Blog » Archive » Comment on A Tour of ETFs: Vanguard FTSE All-World Ex-US ETF (VEU … // May 30, 2008 at 5:59 am
[...] Original post by Another Giveaway, Cheap Books and Weekend Reading - May 30, 2008 | Million Dollar Journey [...]
8 Hippopottoman // Jun 5, 2008 at 4:12 pm
Mr. Capitalist, I enjoyed this post very much - thank-you.
Unfortunately, I think there’s a typo. I think the sentence
“In addition, VEU’s MER of 0.25% is almost twice as expensive as a combined holding in VEU and VWO.” should end with “holding in VEA and VWO. ” - darn those similar ticker symbols.
9 Canadian Capitalist // Jun 5, 2008 at 4:38 pm
Hippopottoman: Thanks for the catch. You’re right, of course. I’ll correct it right away.
10 A Lap Of The Blogs : WhereDoesAllMyMoneyGo.com // Jun 12, 2008 at 2:52 pm
[...] Canadian Capitalist takes a small tour of some ETFs from Vanguard that can be used for global [...]
11 A Tour of ETFs: Vanguard Total World Stock ETF (VT) // Jun 30, 2008 at 2:01 pm
[...] Like VEU, VT includes Canadian equities: Canadian investors would want to allocate more to our local market than the roughly 3% weighting in VT and this fund faces all the same issues that make VEU unattractive for Canadian residents. [...]
Leave a Comment