Why can our world be fair? We have to claim gains but not the losses?

1. Unhedged positions in foreign equity markets has two advantages: lower cost and reduced volatility of the overall portfolio. Foreign currencies on their own have no expected positive returns over cash but adding them to a portfolio provides valuable diversification benefits. Admittedly, not hedging has not worked so great in the past five years but at some point the cycle will turn.

2. The MER on VTI is 7 basis points. On a $10,000 investment that’s $7 per year. Even if you could replicate the performance of VTI with just 12 stocks (i.e. there is no tracking error, which I doubt can be achieved), the extra commissions would more than eat up any savings in MER.

I just started reading your website, but I’ve gone back and read a fair bit now and am enjoying it. I wonder if you’d be willing to answer two questions (my wording on stuff might be a bit off, being fairly ignorant):

1. If I recall, you say that when having the option you prefer buying the unhedged US market ETFs, figuring the exchange rate will balance out over time. I can see that on average, that’s true, but doesn’t that introduce volatility into your expected return that you’d normally pay (in terms of expected return) to remove. Since you’re Canadian (and paying Canadian prices, etc), doesn’t it make more sense to have everything hedged against changed in the exchange rate. If you want to make up for the loss in MER or whatever, you could go on margin a bit to introduce the corresponding level of volatility and improved returns into your portfolio. Again, sorry if I’ve misworded anything.

2. If you’re concerned about optimizing MER, why not simply replicate the stocks held by an ETF (or whatever). I appreciate it’s more work, but you could probably get a pretty close correspondance just by picking the top dozen or so stocks in a given large-cap ETF – I think that diversifies out most of the possible risk (looking around at various citations). That’s more work, but not crazily more. It does make you pay more for more trades but the lower MER would seem to compensate. Presumably you could just rebalance by buying whatever deviated most from the ETF’s position you were mimicking at your next investment to rebalance.

Anyway, thanks for any help. I’m just thinking about my own financial decisions. Nice blog and cheers.

In general it’s best to err on the side of caution. I’ve had several family members run into problems becuase Revenue Canada (or what ever they called now) didn’t like what they did.

XIN is a bit different. It has a currency hedging feature on top of tracking the EAFE Index, so it could be argued that it is a different fund. Whether the CRA would accept the contention, is a different story.