Archive for May, 2008

Reader Question on How to Reinvest Dividends

May 21, 2008


The following query is from JU (slightly edited):

I presently have all my investments in mutual funds (locked-in and regular RRSP) and would like to switch to ETFs. I don’t believe there are any DSCs or fees payable if I sell these funds. My question is this: What is your strategy for ETFs as far as what to do with interest or dividends that are generated by the portfolio? For the time being, I won’t be putting any “fresh money” in to my RRSP but would like to re-invest the money that is generated by the ETF.

There are two ways of reinvesting dividends and income generated by a portfolio:

  1. Sign up for a synthetic dividend reinvestment plan offered by many discount brokers that allows you to reinvest dividends into full shares without incurring commission costs. For example, say you hold 1000 shares of XSB which made a distribution of $0.31465 shares in March 2008. If your broker offers a synthetic DRIP for XSB, you would receive 11 shares of XSB (at $28.45) and $1.70 in cash will be deposited into your account. You may find Canadian Financial DIY’s post on DRIPing ETFs to be useful.
  2. You can let the dividends accumulate and reinvest it once every year when rebalancing the portfolio.

I personally opt for (2) because I usually invest regularly and just combine distributions with savings. I suppose you can’t go wrong with either choice because how you do it matters little compared to the importance of reinvesting dividends. So, when it comes to reinvesting dividends, investors should adopt a simple motto: just do it.

A Tour of ETFs: Vanguard FTSE All-World Ex-US ETF (VEU)

May 19, 2008


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.

This and That

May 15, 2008

  1. Globe and Mail columnist Fabrice Taylor points out the games that income trusts play when it comes to distributable cash.
  2. With the long weekend coming up, here’s some fuel saving tips from Shell. Except that Money magazine says some of those tips are myths.
  3. The Star says that Canadian banks are expected to take a break this year from their habit of regularly boosting their dividends.
  4. James Daw writes in The Star that TFSA will benefit low-wage earners.
  5. Jon Chevreau bemoans the lack of thrift in our society and finds that it appears to be a global problem.
  6. Michael James writes that market average is a misnomer.
  7. Million Dollar Journey does a cross-border comparison of retirement accounts.
  8. Preet discusses portfolio insurance using a double inverse ETFs.
  9. The Dividend Guy says that dividend growth is more important than initial yield.
  10. I got a chuckle out of Larry MacDonald’s take on the battle of the financial blogs.

Have a nice long weekend everyone!