Vanguard recently introduced a ETF to capture exposure to the world’s major equity markets weighted by their market capitalization. The ETF, which started trading last week on the NYSE Arca exchange under the ticker symbol VT, charges a MER of 0.25%. While the ETF is an interesting addition to the Vanguard stable, it is hard to get excited about it for the following reasons:

  1. VT is more expensive: Canadian investors can get exposure to the entire world through a combination of VTI, VEA and VWO for a composite MER of 0.12% or so. At 0.25%, VT is almost twice as expensive.
  2. VT has no exposure to small caps: The Vanguard Total Stock Market Index Fund has about 20% weighting in small cap equities giving Canadian investors a 8% weighting in small caps in their foreign allocation. VT is almost solely invested in large-cap and mid-cap stocks.
  3. 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.

You may also want to check out other posts on this topic by Four Pillars.

Regular programming will resume on July 2nd. Happy Canada Day everyone!

This article has 20 comments

  1. Thanks for the link and interesting post!

    Mike

  2. CC, Your link is to the Vanguard mutual fund units, and not the ETF.

    https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

    And maybe in case it isn’t obvious to all, mention it’s a U.S. listed ETF on the NYSE Arca:
    http://biz.yahoo.com/seekingalpha/080630/83171_id.html?.v=1

  3. Canadian Capitalist

    Thanks Jon. I’ll correct the link and update with the exchange information.

  4. Again more news about US based ETF’s on a website that calls itself Canadian, even this time with a Canadian flag displayed next to an article about American ETFs.

  5. Charles in Vancouver

    Joseph, remember that Canadian investors have only a certain number of low-fee options to diversify their holdings beyond Canada. These US ETFs are very relevant because some of them are better alternatives to funds traded in Canada. I opted to get my US and Intl holdings from stateside both to reduce fees and to avoid currency hedging.

  6. Joseph, should CC restrict himself to talking about the loonie and Canada geese? Vanguard ETFs are a great choice for Canadian investors.

    Mike

  7. Canadian Capitalist

    Joseph: Foreign exposure is a very relevant topic for Canadians. The flag is in celebration of Canada Day tomorrow. Also, haven’t you expressed your “not Canadian enough” comment once already?

    http://www.canadiancapitalist.com/2008/04/22/the-dogs-of-the-dow-dont-bark#comment-129659

  8. Dear Gents:
    I appreciate and understand your comments about investing in US ETFs.
    Please excuse my rather sarcastic comments.
    Thank you for replying in a totally civilized and professional manner.
    I realize that I have made these comments because I personally do not see it to be simple to invest in US ETFs.
    I have in the past invested in US ETFs such as QQQ, and remember having to pay a with-holding tax to the US.
    This seemed to me to be a significant reduction in the return of the ETF.
    I think my comments stem out of a paradigm of not seeing investing in US ETFs as being simple for a Canadian investor.
    I would appreciate it if could point me towards how-to articles, or create one, to help me understand how to invest in US ETFs.

  9. Yes, there is a withholding tax, however:
    – You don’t pay the withholding tax in any sheltered account
    – In taxed accounts the withheld amount is added to your income and then you get a tax credit.
    – Canadian ETFs and mutual funds that track exactly the same US/Intl indices pay the withholding tax too. The process, however, is invisible to the investor.

  10. Canadian Capitalist

    Joseph: As you might have deduced from Charles’ comments, US equity ETFs are best held in a tax deferred account like the RRSP. You’ll avoid both the withholding tax (which you can claim as a credit when you file your tax return), but, perhaps more importantly, you won’t have your dividends taxed at your marginal tax rate.

  11. Cash Instinct

    By choosing to have equities in RRSP, it means to pay future marginal rate on a capital gain, instead of paying 0,5 * future marginal rate, right?

    It would seem to be as a good reason to keep equities out of RRSP whether possible (depending on RRSP room, size of portfolio, % of non-canadian equities, etc.).

    I agree that, between Canadian and Non-Canadian equities, Canadian stocks should be outside RRSP (to get dividend tax credit).

  12. Canadian Capitalist

    Cash Instinct: If there is RRSP room, for most people in the middle or top tax brackets, even Canadian equities should be held in a RRSP account. I am unable to find the original article but here is a blog post on that topic:

    http://www.investingintelligently.com/2006/03/26/investing-inside-an-rrsp-vs-outside-an-rrsp/

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  16. I worked in the USA, and have experience with Vanguard from my time there. Vanguard treats its investors well. When assets in a fund increase, the MER goes down. Yes, the VT MER is more expensive. However, as VT assets increase, I would be surprised if Vanguard didn’t decrease the MER. I still own Vanguard mutual funds, and the witholding tax has not been a significant issue.

    However, I have two problems with Vanguard ETFs. Firstly, there are currency exchange costs associated with share purchase and dividend distribution. Any comments about those costs would be appreciated. Secondly, ownership of Vanguard ETFs or mutual funds will result in estate tax when one dies, unlike Canadian based mutual funds. Any comments about this would also be appreciated.

    It is unfortunate that we in Canada don’t have financial products comparable to some of the Vanguard ETFs.

  17. Canadian Capitalist

    Doug: The currency exchange cost of 1% when buying and 1% when selling is amortized over many years for a long-term investor. The MER savings from Vanguard funds (VEA is 0.12% compared to 0.5% for XIN) will make up for the currency conversion costs in a few years.

    I’m not an expert in this but my understanding is that the US estate tax does not apply to Canadians with less than$1.2 million in worldwide assets. I’m not worrying about a US estate tax just yet 🙂

  18. US estate tax is in a state of flux; it is possible that it may not exist after 2009. However, that is not guaranteed.

    If one uses the usual rules of thumb, worldwide assets of $1.2 million would result in an aftertax retirement income of $36,000. Some might consider that adequate. I am confident that twenty years from now, few would consider it adequate.

    My point is that for many (most?) people, US estate tax is relevant. The following is a link on the subject: http://www.bdo.ca/library/publications/tax/documents/USestatetax08-Masthead-Final.PDF

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