Comments on: Reader Query on Asset Allocation http://www.canadiancapitalist.com/reader-query-on-asset-allocation/ Helping you invest and prosper Sat, 11 Feb 2012 19:27:54 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-64077 WhereDoesAllMyMoneyGo.com Tue, 28 Aug 2007 14:29:50 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-64077 No problem - I had the same reaction when I first spoke to the reps at Barclay's! :) No problem – I had the same reaction when I first spoke to the reps at Barclay’s! :)

]]> By: Thomas http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-64069 Thomas Tue, 28 Aug 2007 12:43:57 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-64069 CC: Thanks. WDAMMG: Sorry for the confusion. CC: Thanks.
WDAMMG: Sorry for the confusion.

]]> By: Canadian Capitalist http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-64068 Canadian Capitalist Tue, 28 Aug 2007 12:40:26 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-64068 Thomas: WDAMMG is right. If you buy VEA which trades in US dollars but holds unhedged positions in global equities, you are affected by the CAD exchange rate with those global currencies, not against the USD. In your example, you are affected only by the AUD-CAD exchange rate, not the fluctuation between USD-CAD. Here's an excellent post on this topic from Canadian Financial DIY: <a href="http://canadianfinancialdiy.blogspot.com/2007/05/clarification-of-foreign-exchange-risk.html" rel="nofollow">Link</a> Thomas: WDAMMG is right. If you buy VEA which trades in US dollars but holds unhedged positions in global equities, you are affected by the CAD exchange rate with those global currencies, not against the USD.

In your example, you are affected only by the AUD-CAD exchange rate, not the fluctuation between USD-CAD. Here’s an excellent post on this topic from Canadian Financial DIY:

Link

]]> By: Thomas http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-64066 Thomas Tue, 28 Aug 2007 12:25:09 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-64066 WDAMMG: How can you say, "you would not necessarily have those same CAD/USD currency effects"?? If you're buying it in USD of course there's currency effects. Your mark on Macquarie bank is going to be AUD -> USD -> CAD every day. So you're not just taking the AUD/CAD exposure you're taking the AUD/USD compounded by the USD/CAD. WDAMMG: How can you say, “you would not necessarily have those same CAD/USD currency effects”?? If you’re buying it in USD of course there’s currency effects. Your mark on Macquarie bank is going to be AUD -> USD -> CAD every day. So you’re not just taking the AUD/CAD exposure you’re taking the AUD/USD compounded by the USD/CAD.

]]> By: Canadian Capitalist http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63979 Canadian Capitalist Tue, 28 Aug 2007 00:04:23 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63979 Thomas: Like WDAMMG says, you could buy IVV, which is 0.15% cheaper to own if you don't want currency hedging. Even better, you could buy VTI and get exposure to the entire US market including small caps. I'll suggest VEA over EFA. They track the same index but VEA is 0.20% cheaper to own. Thomas: Like WDAMMG says, you could buy IVV, which is 0.15% cheaper to own if you don’t want currency hedging. Even better, you could buy VTI and get exposure to the entire US market including small caps.

I’ll suggest VEA over EFA. They track the same index but VEA is 0.20% cheaper to own.

]]> By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63964 WhereDoesAllMyMoneyGo.com Mon, 27 Aug 2007 22:01:33 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63964 Sorry, amend XIN in the first paragraph to XSP. Sorry, amend XIN in the first paragraph to XSP.

]]> By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63963 WhereDoesAllMyMoneyGo.com Mon, 27 Aug 2007 21:58:26 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63963 Thomas, I do believe if you buy IVV (S&P500 denominated in USD traded on AMEX) you are right there are currency effects, and if you bought the XIN version on the TSX you have the product hedged - however for international exposure if you bought EFA on the AMEX you would not necessarily have those same CAD/USD currency effects. What happens is that you buy the basket of securities today and your Canadian dollars are converted to USD to purchase the shares because they are on the AMEX. Once the money is with Barclays, it is converted to the underlying currencies of the investments. So for EFA, there are 21 countries and 11 currencies. If we isolate out just Australia for example, you are converting from CAD -> USD -> AUD over the course of a few seconds. Your exposure to USD/CAD fluctuations is, according to Barclays, 1 bp (virtually nothing). Once you have purchased the shares the CAD/USD currency effect becomes nil. The basket of international stocks has no tie to fluctuations between CAD and USD. The tie is between the international currencies and the CAD - if you are reclaiming your funds ultimately in CAD dollars. At that point (if you redeem), you would go from AUD -> USD -> CAD. Again, only an instantaneous exposure to CAD/USD fluctuations. So if the part of your EFA in Australia goes up in value in terms of the equity AND the AUD goes up relative to CAD, you win twice and get the currency exposure. In other words, Thomas if you are looking to currency exposure internationally, feel free to buy EFA without worrying what the USD does - it will have no bearing on your investment. The international currencies relation to CAD WILL HAVE the currency effect. Thomas, I do believe if you buy IVV (S&P500 denominated in USD traded on AMEX) you are right there are currency effects, and if you bought the XIN version on the TSX you have the product hedged – however for international exposure if you bought EFA on the AMEX you would not necessarily have those same CAD/USD currency effects.

What happens is that you buy the basket of securities today and your Canadian dollars are converted to USD to purchase the shares because they are on the AMEX. Once the money is with Barclays, it is converted to the underlying currencies of the investments. So for EFA, there are 21 countries and 11 currencies. If we isolate out just Australia for example, you are converting from CAD -> USD -> AUD over the course of a few seconds. Your exposure to USD/CAD fluctuations is, according to Barclays, 1 bp (virtually nothing).

Once you have purchased the shares the CAD/USD currency effect becomes nil. The basket of international stocks has no tie to fluctuations between CAD and USD. The tie is between the international currencies and the CAD – if you are reclaiming your funds ultimately in CAD dollars.

At that point (if you redeem), you would go from AUD -> USD -> CAD. Again, only an instantaneous exposure to CAD/USD fluctuations.

So if the part of your EFA in Australia goes up in value in terms of the equity AND the AUD goes up relative to CAD, you win twice and get the currency exposure.

In other words, Thomas if you are looking to currency exposure internationally, feel free to buy EFA without worrying what the USD does – it will have no bearing on your investment. The international currencies relation to CAD WILL HAVE the currency effect.

]]> By: Thomas http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63961 Thomas Mon, 27 Aug 2007 20:32:18 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63961 A few comments... (1) A colleague of mine once said something like, "we need money but we don't need cash!" I think it's a matter of personal style. (2) Home country bias means you have no currency risk. This could be a good thing or a bad thing depending what you want. (3) Many foreign indices are only available through USD denominated ETFs and many are hedged (so if you DO want the currency exposure you lose out). For example, I have XIN, which is in CAD but it's 100% hedged to CAD :( A few comments…
(1) A colleague of mine once said something like, “we need money but we don’t need cash!” I think it’s a matter of personal style.
(2) Home country bias means you have no currency risk. This could be a good thing or a bad thing depending what you want.
(3) Many foreign indices are only available through USD denominated ETFs and many are hedged (so if you DO want the currency exposure you lose out). For example, I have XIN, which is in CAD but it’s 100% hedged to CAD :(

]]> By: WhereDoesAllMyMoneyGo.com http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63949 WhereDoesAllMyMoneyGo.com Mon, 27 Aug 2007 17:34:43 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63949 Agreed on the comments on holding cash. Theory is one thing, but in practice I don't see any benefit to a long term investor in holding cash in an RRSP or in a taxable account because of the tax treatment and the non-need for liquidity long term. In a taxable account I would rather hold a portfolio of preferred shares, and in sheltered accounts bonds and debentures. The pref's will be more or less as stable as corporate bonds and will have the preferential tax treatment. By the time you start withdrawing funds though, cash plays a more important part of asset allocation as liquidity is more important at this stage. Agreed on the comments on holding cash. Theory is one thing, but in practice I don’t see any benefit to a long term investor in holding cash in an RRSP or in a taxable account because of the tax treatment and the non-need for liquidity long term. In a taxable account I would rather hold a portfolio of preferred shares, and in sheltered accounts bonds and debentures. The pref’s will be more or less as stable as corporate bonds and will have the preferential tax treatment.

By the time you start withdrawing funds though, cash plays a more important part of asset allocation as liquidity is more important at this stage.

]]> By: FinancialJungle http://www.canadiancapitalist.com/reader-query-on-asset-allocation/#comment-63940 FinancialJungle Mon, 27 Aug 2007 16:38:22 +0000 http://www.canadiancapitalist.com/2007/08/26/reader-query-on-asset-allocation#comment-63940 Personally I have 70% in Canada, because many of our business have international presense. For instance, IGM, Great West, Manulife, Scotia bank, TD, Talisman and the pipelines. And if no direct presense, at least strong correlation such as with the railways. And as already mentioned, dividend tax credit. Personally I have 70% in Canada, because many of our business have international presense. For instance, IGM, Great West, Manulife, Scotia bank, TD, Talisman and the pipelines. And if no direct presense, at least strong correlation such as with the railways.

And as already mentioned, dividend tax credit.

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