Author Topic: Canadian Index Investors Help Me - Large Lump Sum to Invest.  (Read 2215 times)

FIRE_at_45

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Canadian Index Investors Help Me - Large Lump Sum to Invest.
« on: September 29, 2016, 09:48:54 PM »
After learning more about retirement planning through this process and looking towards an early retirement I re-evaluated my plan.  I am lucky to have a very good DB pension from my former spouse.  When we split I was offered a payout.  I declined at the time.  I recently asked again for the payout amount.  Lucky me they calculate the payout on bond rates and bonds are at an all time low right now so my payout went up a lot.  I've done the math comparing the DB payout at 60 to what I can do with the money now and I like my chances...a lot.  So, my timing is good to get out....although I may be buying indexes high I've been reading Jim Collins and my focus is just having the money working and not trying to time things. 

So, this lump sum I'm going to invest over the next couple of months is all going into index ETFs (equity/bond).  My current asset mix is as follows (open to feedback on this too).  I plan to keep to this asset mix but not necessarily the same ETFs unless they are my best choice. 

45% US Equity - VTI (Vanguard U.S. Total Market Index), VUN (Vanguard U.S. Total Market Index), XUS (iShares Core S&P 500 Index)

20% Canadian Equity ZCN (BMO S&P/TSX Capped Composite Index), ZLB (BMO Low Volatility Canadian Equity)

20% International Equity XEF (iShares Core MSCI EAFE IMI Index), XEC (iShares Core MSCI Emerging Markets)

15% Canadian Bonds ZAG (BMO Aggregate Bond Index)

My portfolio is bit complicated because I own ETFs in Canadian and US dollars (not sure if this makes sense either).   I selected my ETFs based on the Canadian Couch Potato recommendations.  I tried to keep my MER as low as possible but all this talk about Vanguard (I do own some Vanguard just not all of it) and I'm wondering if paying 0.30 MER for ZLB for example is a mistake?  Of course I just moved some money into this fund.  I'm reminded of things I've read.  It more about your allocation than trying to pick the best funds.  Nonetheless, I feel like I'm still learning and maybe somebody on here is "Super Badass Canadian Index Investor Ninja".   

At the end of the day, I want the simplest and best performing portfolio.  So, my questions.

1. Have you found ETFs within these asset classes that you love and have a low MER and performing well.
2. I reference the Morningstar ratings available in TD Waterhouse.  Is there a better method to evaluate ETFs?  Should I even bother trying to evaluate ETF performance?
3. Thoughts on the ETFs I have now?  For the most part they are 4-5 star performance according to Morningstar. 

My plan (which is not yet solidified in my head) is to retire in less than 3 years.  This asset allocation is distributed across RSP, TFSA and Cash investments.

Thanks in advance for your thoughts.
« Last Edit: September 29, 2016, 10:06:18 PM by FIRE_at_45 »

erp

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #1 on: September 30, 2016, 04:45:32 PM »
Sounds like you're on more or less the same track as I am. I've opted for:
25% VAB, VCN, VXC and VUN (in theory anyways, I'm still accumulating enough to top up VAB)
I rebalance annually if it's out of whack.

I also have an indexed employer fund with an MER ~ 0.5% which I'm willing to leave for now because it makes things really easy as far as matching and payroll deduction.

From what I've read, VTI is superior to VUN in an RRSP because of the U.S. withholding tax on dividends (I hold VUN in my TFSA, where the difference doesn't matter as much according to the guys at CCP) - but to hold VTI you need to deal with american dollars and do Norbert's Gambit (or otherwise get a decent exchange rate). You can judge whether the extra hassle of different currencies is worth the greater efficiency, but that will depend on how much you have invested and how willing you are to do some legwork.

I wouldn't bother with holding a bunch of different ETFs in the same class unless you've got a reason to do so (eg. VTI and VUN might make sense because of slightly different tax consequences, but I can't imagine it ever making sense to hold both ETFs in a single account). The same applies to the other funds, if you have a reason to hold two different canadian equity indexes then go for it, but you aren't gaining any additional diversification by holding two ETFs of canadian equities if both of them hold the same underlying companies (mostly the same argument applies to holding VUN and an S&P 500 index, since a lot of VUN is just S&P 500). Also, if an indexed ETF is actually doing what it's supposed to, then the performance should be basically the same as whatever market it follows so the 'performing well' criteria you list shouldn't really vary much between Vanguard, BMO, Blackrock, etc.

A lot of the discussion on Canadian topics and which ETF to buy depend on whether the investment is held in your RRSP, TFSA or non-registered. This gets pretty confusing, especially since dividends seem to be more favorably taxed in Canada than in the US. Mostly I figure that I have years and years to let my stach grow and not sweat it too much. I'm not really worried about an extra 0.1% or 0.2% MER (my 'I'm willing to accept this' threshold is currently about 0.5%), there are lots of people who are absolutely unwilling to accept a fee that high - so bear in mind that I'm not really an optimizer, I'm a high savings rate brute forcer :)

Best of luck and let us know how it works out.


FIRE_at_45

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #2 on: September 30, 2016, 07:27:21 PM »
From what I've read, VTI is superior to VUN in an RRSP because of the U.S. withholding tax on dividends (I hold VUN in my TFSA, where the difference doesn't matter as much according to the guys at CCP) - but to hold VTI you need to deal with american dollars and do Norbert's Gambit (or otherwise get a decent exchange rate). You can judge whether the extra hassle of different currencies is worth the greater efficiency, but that will depend on how much you have invested and how willing you are to do some legwork.

I wouldn't bother with holding a bunch of different ETFs in the same class unless you've got a reason to do so (eg. VTI and VUN might make sense because of slightly different tax consequences, but I can't imagine it ever making sense to hold both ETFs in a single account). The same applies to the other funds, if you have a reason to hold two different canadian equity indexes then go for it, but you aren't gaining any additional diversification by holding two ETFs of canadian equities if both of them hold the same underlying companies (mostly the same argument applies to holding VUN and an S&P 500 index, since a lot of VUN is just S&P 500). Also, if an indexed ETF is actually doing what it's supposed to, then the performance should be basically the same as whatever market it follows so the 'performing well' criteria you list shouldn't really vary much between Vanguard, BMO, Blackrock, etc.

A lot of the discussion on Canadian topics and which ETF to buy depend on whether the investment is held in your RRSP, TFSA or non-registered. This gets pretty confusing, especially since dividends seem to be more favorably taxed in Canada than in the US. Mostly I figure that I have years and years to let my stach grow and not sweat it too much. I'm not really worried about an extra 0.1% or 0.2% MER (my 'I'm willing to accept this' threshold is currently about 0.5%), there are lots of people who are absolutely unwilling to accept a fee that high - so bear in mind that I'm not really an optimizer, I'm a high savings rate brute forcer :)

Best of luck and let us know how it works out.

Thanks and welcome to the forum!  I hold VUN and VTI in different accounts and the one with VTI is a USD account so that's why I hold the 2 different versions of the same thing. 

I agree I am holding multiple ETFs that are virtually doing the same thing.  I think I'll continue to tweak my holdings as time goes on to make things simpler for balancing.  I also agree that the performance should be a moot point.  If the index buys the Canadian index how can one from BMO do better than Vanguard or anywhere else for that matter.  I get confused with buying a large or small cap is better and would rather just own the all cap....like VTSAX that the gurus on here seem to recommend. 

I'm not sure if I have optimized my taxation.  I hold bonds only in my TFSA because they are taxed higher but then I've heard it's better to just make the most money here.  It's a whole new world to learn about trying to minimize your taxes.  I'm still trying to figure out index investing although I have to say I love it!  I am down to only 2 individual stocks from my past life of having a financial adviser and I sleep better not living and dying with individual stock performance.

GreatLaker

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #3 on: October 02, 2016, 10:05:12 AM »
Some good fund choices there. Similar to you, where I have multiple funds in the same asset class, they are in different accounts. In my case VUN & XUS track slightly different indexes, and ZCN & VCN also track different indexes. Who know what the future results will be and probably insignificant differences, but nonetheless a little more diversification.

I have avoided and segment funds and smart beta type funds. I used to hold ZRE (REIT) but recognize that TSX composite funds contain a market-weighted allocation of REITs. Over the past 5 years the MER of basic cap-weighted ETFs has dropped dramatically whereas segment funds MERs have remained about the same, to the point that I sold ZRE because I did not think it could overcome the additional 0.55% MER. I feel the same way about ZLB and other smart-beta or factor type funds.

I don't think using Morningstar ratings for ETFs is very useful - they are better at pointing out differences in past performance among actively managed mutual funds. The difference among ZCN, VCN & XIC over the long haul probably won't be  much. If anything, squinting at tracking error, volume, bid-ask spreads & yield might lead you to prefer one over the others, but not that significant.

I have never used US-domiciled ETFs like VTI. If you use Norbert's Gambit for getting US currency please share your experience if you don't mind. When I was setting up my portfolio I believed the quest for the perfect portfolio is the enemy of a good portfolio, and US domiciled funds & Norbert's Gambit were ignored in favour of getting my money invested.

I find investment taxes really difficult to optimize. The Finiki section on tax efficient investing is good, and Canadian Couch Potato has some in-depth articles that will make your brain hurt.
http://www.finiki.org/wiki/Tax-efficient_investing

My main question on your portfolio is you have double the exposure to US compared to international. Most index portfolios like those on CCP and finiki.org allocate roughly equal % to US and international. US has performed great recently, but there have been times in the past (about a decade ago) where international significantly outperformed US. Do you have a specific theory that leads to over-weighting US compared to its global market cap?

It sounds like  you are considering how to invest a lump sum from the pension. This article from Vanguard analyzes investing a lump sum all at once vs. dollar-cost averaging. Usually lump sum wins, but DCA can lower the stress level when market valuations seem high.
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

FIRE_at_45

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #4 on: October 02, 2016, 01:33:36 PM »

I have avoided and segment funds and smart beta type funds. I used to hold ZRE (REIT) but recognize that TSX composite funds contain a market-weighted allocation of REITs. Over the past 5 years the MER of basic cap-weighted ETFs has dropped dramatically whereas segment funds MERs have remained about the same, to the point that I sold ZRE because I did not think it could overcome the additional 0.55% MER. I feel the same way about ZLB and other smart-beta or factor type funds.

I don't think using Morningstar ratings for ETFs is very useful - they are better at pointing out differences in past performance among actively managed mutual funds. The difference among ZCN, VCN & XIC over the long haul probably won't be  much. If anything, squinting at tracking error, volume, bid-ask spreads & yield might lead you to prefer one over the others, but not that significant.

I find investment taxes really difficult to optimize. The Finiki section on tax efficient investing is good, and Canadian Couch Potato has some in-depth articles that will make your brain hurt.
http://www.finiki.org/wiki/Tax-efficient_investing

My main question on your portfolio is you have double the exposure to US compared to international. Most index portfolios like those on CCP and finiki.org allocate roughly equal % to US and international. US has performed great recently, but there have been times in the past (about a decade ago) where international significantly outperformed US. Do you have a specific theory that leads to over-weighting US compared to its global market cap?

It sounds like  you are considering how to invest a lump sum from the pension. This article from Vanguard analyzes investing a lump sum all at once vs. dollar-cost averaging. Usually lump sum wins, but DCA can lower the stress level when market valuations seem high.
https://pressroom.vanguard.com/nonindexed/7.23.2012_Dollar-cost_Averaging.pdf

Thanks for the response.  The smart beta fund I hold is a bit of an experiment.  It basically tracks a smaller portion of the Canadian Index but for a premium at 0.30% MER.  Admittedly I may be chasing performance as this fund has totally killed it before I recently bought it. 

The Morningstar ratings are probably better suited to those high MER active funds as you pointed out.  It could actually be really misleading thinking about it because index funds outperform in the long run but in the short run they could be outperformed.  So, maybe I should follow CCP's advice and just set the funds and don't look at them.

The only reason I have the US funds is because long ago when I had an adviser and the dollar was strong I opened a US account and started buying stocks in the US.  Now I still hold the US account so it was simple to buy VTI and that's all I hold in US dollars.  Nothing too technical on my part and I'm not even sure how it will work out for me in the future. 

Regarding the high US content I think it's partly because I've done so well with the US....and yes it is really in the last 3 years.  Also, reading these US based blogs (MMM, Jim Collins) and continually reminded that the US returns 9-10%....well that sounds good to me.  Jim actually recommends not really holding Canadian stuff because we are small on the world stage.  That being said we have our strong banks and our natural resources so it's not a bad play.

I get the DCA stuff because I've read about it.  Buying ETFs I prefer to buy big chunks of $15 K or so minimum so I won't let it sit around and try to play genius...I'm not smart of lucky enough to have that work :)


GreatLaker

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #5 on: October 03, 2016, 08:11:04 AM »
Regarding the high US content I think it's partly because I've done so well with the US....and yes it is really in the last 3 years.  Also, reading these US based blogs (MMM, Jim Collins) and continually reminded that the US returns 9-10%....well that sounds good to me. 
Part of me says the US is a very strong free market that should perform well. Luckily a larger part of me says to watch out for reversion to the mean and avoid falling for recency effect. 

Quote
Jim actually recommends not really holding Canadian stuff because we are small on the world stage.  That being said we have our strong banks and our natural resources so it's not a bad play.
Some good reasons to overweight Canada despite its small global market cap and concentrated market: keep investment funds in the currency you will eventually be spending, and favourable tax treatment through the dividend tax credit.

Kaspian

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #6 on: October 03, 2016, 11:36:07 PM »
...not necessarily the same ETFs unless they are my best choice.
... trying to pick the best funds. 
...I want the simplest and best performing portfolio. 

You know you say "best" three times, right?  Your strategy is cool--there is no "best".  You can pick the lowest MER index fund yet another index fund of the same class will somehow magically outperform it year after year.   Switch to that one and the one you used to have will suddenly be the outperformer.  Every year you'll question your allocations based on what did well and question what account you decided to put it in.

My advice is: your plan rocks, get on it, don't sweat the small stuff, and don't re-evaluate all the time. 

This makes great reading, JD covers it well:  http://moneyboss.com/the-perfect-is-the-enemy-of-the-good/ 

"If you seek and accept only the best, you are a maximizerůMaximizers need to be assured that every purchase or decision was the best that could be made."
« Last Edit: October 03, 2016, 11:40:16 PM by Kaspian »

FIRE_at_45

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Re: Canadian Index Investors Help Me - Large Lump Sum to Invest.
« Reply #7 on: October 04, 2016, 09:12:17 PM »
Thanks @Kaspian, I think I'm just a human being who questions his investments unfortunately like everyone else.  I've gotten pretty good at not looking for months at a time and that will be my strategy going forward.  It does help to have people say things that you should already know.  Somehow the emotional brain takes over the logical one!