ETFs

Why ETF Distributions Fluctuate

September 24, 2013

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Investors often wonder why Exchange-Traded Fund (ETF) distributions fluctuate even when the securities held by the fund and the distributions of the holdings change very little. To better understand the issue, let us take a look at the cash distributions from the iShares S&P/TSX Capped REIT ETF (TSX: XRE) in the table below.

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Making a low cost portfolio even cheaper

July 10, 2013

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The Sleepy Portfolio was designed to be an ultra low-cost portfolio and the exchange-traded funds (ETFs) used in the portfolio were the cheapest available at that time. As you can see in the following table, the Sleepy Portfolio currently costs just 20 basis points (0.20 percent) per year. In other words, if you invest in a portfolio like the Sleepy Portfolio, you’ll incur a cost of just $200 per $100K of portfolio balance. If the portfolio were assembled with mutual funds that carry an average cost of 2.5 percent instead, the same portfolio would cost $2,500 per $100K. Costs matter a great deal in investing.

Product Cost Weight
TD Investment Savings Account (TDB8150) 0.25% 5.00%
iShares DEX Short Term Bond ETF (TSX: XSB) 0.28% 15.00%
iShares DEX Real Return Bond ETF (TSX: XRB) 0.39% 5.00%
iShares S&P/TSX Capped Composite ETF (TSX: XIC) 0.27% 20.00%
iShares S&P/TSX Capped REIT ETF (TSX: XRE) 0.60% 5.00%
Vanguard Total Stock Market ETF (VTI) 0.05% 22.50%
Vanguard FTSE Developed Markets ETF (VEA) 0.10% 22.50%
Vanguard FTSE Emerging Markets ETF (VWO) 0.18% 5.00%
Weighted Average 0.20%

It is interesting to note the contrast in fees between US ETFs and Canadian ETFs in the Sleepy Portfolio. Half the portfolio is made up of US ETFs, which cost a weighted average of 8.4 basis points. The other half, which is made up of Canadian ETFs, cost a weighted average of 31.6 basis points. In other words, Canadian ETFs, even though they are cheap compared to traditional products, still cost as much as 4 times that of US ETFs!

Thankfully the advent of Vanguard and the launch of ETFs by BMO offer us the opportunity to cut the costs of the Sleepy Portfolio even further. By replacing some of iShares ETFs with lower cost products (see table below), the weighted average fees of the Sleepy Portfolio will drop to 14 basis points or 30 percent lower. It works out to a saving of $60 per $100K. An investor would incur trading commissions in making the switch, which can be reduced by making the switch when adding new money or rebalancing the portfolio. Caution must be exercised in taxable accounts because a switch to lower cost products might result in a taxable event.

Product Cost Weight
TD Investment Savings Account (TDB8150) 0.25% 5.00%
Vanguard Canadian Short Bond ETF (TSX: VSB) 0.19% 15.00%
BMO Real Return Bond ETF (TSX: ZRR) 0.25% 5.00%
Vanguard FTSE Canada ETF (TSX: VCE) 0.11% 20.00%
Vanguard FTSE Canada Capped REIT ETF (TSX: VRE) 0.40% 5.00%
Vanguard Total Stock Market ETF (VTI) 0.05% 22.50%
Vanguard FTSE Developed Markets ETF (VEA) 0.10% 22.50%
Vanguard FTSE Emerging Markets ETF (VWO) 0.18% 5.00%
Weighted Average 0.14%

New Currency Unhedged ETFs from iShares

April 16, 2013

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ETF investors have long clamoured for Currency unhedged funds traded on the TSX for reasons outlined here, here and here. While it is true that Canadian investors can get direct access to foreign stocks through a long list of ETFs that trade in the US exchanges, these funds have one drawback that cannot be overcome — US-listed ETFs are considered in situ property and could be subject to US Estate Taxes. Granted, US Estate Taxes have become less problematic for most Canadian investors since the passing of last-minute legislation to avert the fiscal cliff. Essentially, Canadians with less than $5 million (US) in total assets will be able to avoid US Estate taxes entirely.

Still, Canadian-listed ETFs that do not hedge currency will be valuable for investors who do not want to look for cheaper methods of converting Canadian dollars into US dollars and who do not want to pay the usurious foreign exchange fees charged by most discount brokers. Last year, Vanguard Canada introduced the S&P 500 Index ETF (TSX: VFV, MER 0.18 percent), a fund that tracks the S&P 500 index. Now, iShares has launched three new ETFs that started trading on the TSX yesterday. They are:

iShares S&P 500 Index ETF (XUS): Track the S&P 500 index, a market-cap weighted index of 500 large US corporations. MER is 0.14 percent. Note that the ETF is essentially a wrapper around the iShares Core S&P 500 ETF (IVV) that trades on the NYSE Arca exchange.

iShares MSCI EAFE Index ETF (XEF): Track the MSCI EAFE index, a market-cap weighted index that tracks stocks from Europe, Australasia and the Far East (essentially an index of developed market stock markets excluding the US and Canada). MER is 0.30 percent. The ETF is a wrapper around the iShares Core MSCI EAFE ETF (IEFA).

iShares MSCI Emerging Markets ETF (XEC): Track the MSCI Emerging Markets Index, a market-cap weighted index that tracks stock market performance of emerging markets. MER is 0.35 percent. The ETF is a wrapper around the iShares Core MSCI Emerging Markets ETF (IEMG).

Take-away for Investors

  • These ETFs are great news for Canadian investors wanting Developed Markets ex North America and Emerging Markets exposure from securities listed in Canada but do not want currency hedging because the new ETFs are far cheaper than existing alternatives.
  • Investors should keep in mind that owning a Canadian-listed ETF that holds foreign securities in their RRSPs means incurring a 15 percent withholding tax hit on dividends. i.e. an investor who holds $1,000 worth of XUS in a RRSP will incur a tax hit of $3 per year compared to holding $1,000 worth of IVV. Note that the withholding tax hit is only for RRSPs and RRIFs.