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moneysense.ca, 13/08/07
Reader Question: How to Buy Vanguard ETFs?
The following question is from Andre:
In your blog, you mentioned buying VEA ETF. I thought Canadians could not buy Vanguard funds. How do you buy Vanguard ETFs?
It is true that Canadians cannot normally buy the low-cost index mutual funds available directly through Vanguard. Fortunately for us, we can easily buy Vanguard ETFs such as their Total US Stock Market Index Fund (VTI), Europe Pacific Index Fund (VEA) and Emerging Markets Stock Index Fund (VWO), which are even cheaper than the corresponding index mutual funds.
ETFs or Exchange Traded Funds are securities that track an index and are traded on the stock exchange just like individual stocks. If you have a brokerage account, buying an ETF is as simple as entering a buy order with the ETF’s ticker symbol on the appropriate exchange and placing an order.
As you have pay a commission every time you buy or sell an ETF and it is best to keep commissions to 1% of the trade, ETFs are ideal for larger portfolios. For small portfolios and investing small amounts of money regularly, the TD e-Series index mutual funds will be a better choice.
If you have a financial question that you would like answered, feel free to contact me here.
moneysense.ca, 13/08/07
I currently have index funds with RBC (not in a self-directed account). Do you know how I could switch these to the TD funds you mention with minimal cost? I’m guessing the MER difference could make a difference in the long run..
Joe: The TD e-Series US Index fund costs 0.33% compared to RBC US Index fund charge of 0.85%. So, you will save money in the long run by owning TD’s fund compared to RBC’s.
Is your RBC fund in a mutual fund account with RBC? Is it a RRSP account?
I’m not in “self-directed” account, or anything like that. I basically went to the bank and bought the index funds.. so I assume its a mutual fund account..
CC: Beyond having a brokerage account, you didn’t answer how you managed to purchase Vanguard ETFs. Work connection? American citizenship?
“Fortunately for us, we can easily buy Vanguard ETFs”
The ETFs mentioned above trade on the AmEx exchange in the U.S. similar to stocks on NASDAQ or NYSE. Any Canadian discount brokerage will offer you the ability to buy it, but you’ll pay a commission for each purchase or sale. That’s why he mentions ETFs are more feasible in larger lots.
Say you have to pay a $20 commission on a purchase of $1000 of ETF “units”, then that investment cost you 2%, which is pretty close to a Mutual Fund MER.
JonD: Thank you!
CC: BTW, I love your blog. Read it everyday. Cheers.
For purchasing ETF’s on foreign exchanges, I believe you incur a currency conversion which essentially charges a bank rate on the monies transfered. I noticed that in the sleepy profile you purchase the VTI ETF which is listed on the NYSE, and so this currency conversion would apply.
I know that the VTI offers a lower MER than the equivalent iShares ETF, but do you think that the saved MER is worth the currency exchange cost?
I’m just wondering if I should buy all iShares equivalent since they’re tracked against CDN currency. I may also be unclear in this, so please let me know.
Example: US to CDN might be 1.06 but a discount brokerance might charge 1.055 in the buying and then charge when you sell the ETF.
Earl: I believe VTI would be cheaper to own in the long run compared to XSP, if you are willing to accept foreign exchange risk (the risk of C$ appreciating a lot against the USD).
I think buying VEA as opposed to XIN is an easier decision. I’ll make a post on this topic.
I have bought Vanguard funds through my TD Waterhouse Self Directed RRSP account with no problem. They are trade like a stock so the usual commission applies.
The usual commission will still apply. What I’m talking about is the currency conversion cost that brokerages charge you in buying and selling.
When you purchase cdn stocks with cdn currency there’s no currency cost, only the cost in making the trade.
But when you purchase a us stock with cdn currency they first exchange the cdn to us currency and then buy the stock. Let’s say the exchange rate is 1.05, your brokerage might charge you 1.07 for the exchange and so it’s an additional cost on top of the regular rate of (Amount x .02)
If you buy and sell frequently that this is an issue, hence CC’s post on “wash” trades. I actually saw this calculator that I thought was interesting, but haven’t played with yet at http://fxtrade.oanda.com/spreads/SpreadCostCalc.shtml
Earl: When I buy VTI, I plan to hold it for a long time (20 years or more). Yes, I incur a currency conversion charge of 1% when initially buying VTI. But, even if VTI never increased in value, you can break even after roughly six years by choosing VTI over XSP. Since XSP is mostly in large-caps, you would likely want small-cap exposure through another ETF, which you need to buy. With VTI, in a single ETF, you have exposure to the entire US market, including small-caps.
When buying US ETFs for a long term portfolio you are presumably also going to be rebalancing it. At 1% to sell and 1% to buy, this is an additional 2%. If you’re rebalancing 10% of your portfolio per year, this is like adding .2% to your MERs. So is it really cheaper to buy US ETFs?
In terms of selection you are kind of stuck if you only want to buy Canadian. However, have you looked at the long term correlation between the S&P500 (XSP) and the total US market (VTI)? It’s practically identical.
Oh, sorry, I meant to say that this rebalancing cost occurs when you are holding your portfolio inside an RRSP. RRSPs hold Canadian currency only, so as you buy and sell you are switching in and out of Canadian currency. If your portfolio is outside an RRSP then you only pay the one fee up front to convert your money to US funds.
Ryan: I haven’t run into this problem yet because initially most of your portfolio growth will come from contributions and you can simply rebalance when contributing.
Also, if you have an account with a broker that offers wash trades, you pay for the currency conversion only if you switch between currencies. For example, selling XIC to buy VTI or vice-versa.
I prefer VTI over XSP because I can a one-ETF exposure to the entire US market (including small-caps) and I don’t think that over the long run investors need currency hedging.
I wish to buy the Vanguard ETF “VWO”…through my Self Investing Facility with a major bank.
As I am in Canada, would this transaction require me to purchase the ETF in $ USA ? ……and if I proceeded to purchased the ETFs would my Cdn $ be hedged to avoid a foreign Exchange loss when I eventually sold my ETFs ? …..
Thanks in advance for your advice
Art
Do you thing VWO (Vanguard Emerging Markets) is a good buy right now considering the price and the US$ and CAN$ being par. I am planning to hold to long-term (over 10 years). Other than the $30 commission fee I have to pay through my self directed investing account, any other fees do I need to consider; are there currency conversion fees?
@Adrian: VWO owns stocks in emerging markets that are denominated in their local currency. Therefore, a Canadian investor in VWO is affected not by CAD/USD fluctuations but by CAD/emerging market currencies. I have written a detailed explanation of it here:
http://www.canadiancapitalist.com/currency-effects-of-buying-foreign-stocks-or-etfs-on-us-exchanges/
I have the same question as Adrian from March 6, is VWO or any Vanguard fund a good buy at the moment – as Adrian, I am holding for the long term
@J. Gionet: If you have an allocation for emerging markets in your portfolio, the valuations appear fair here — neither very cheap, nor very expensive. p/e right now is 14.5, which is actually higher than many developed markets but it is not entirely out of line either.
My personal exposure to emerging markets is through VWO.
Hello, I am not an avid investor by any means. I have some investments through a financial advisor, but am unsure if I`m doing the right thing with my money. I want to keep as much of my money as I can from fees going to commissions. Every investor I go to, gives me a different answer and I`ve come to the conclusion, all of them are just after the commission and have no idea what they`re talking about.