Author Topic: Canadian investing: ETF question re: fund with exposure to US stock  (Read 909 times)

WackyTomato

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Hi all,

I am currently looking at rebalancing my portfolio.  I have got about 35k parked in ETF ticker CBO.TO (Corporate bonds - laddered).  This is in an RRSP.  I think this is too much and rising interest rates might negatively affect it in the near to medium term.

I thought about diversifying a bit and ETF VXC (Vanguard FTSE All-World ex Canada Index ETF) came to mind.  Two questions:

a) Markets are at an all time high.  Is it wise to send 35k parked in a slugging bond ETF towards a more aggressive equity based ETF?

b) VXC is a Canadian financial instrument with US holdings that I would hold in a registered account.  Are there any tax implications I should be aware of about the dividends?

Thanks a lot for your help.



Retire-Canada

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Re: Canadian investing: ETF question re: fund with exposure to US stock
« Reply #1 on: December 06, 2016, 11:17:26 AM »
Hi all,

I am currently looking at rebalancing my portfolio.  I have got about 35k parked in ETF ticker CBO.TO (Corporate bonds - laddered).  This is in an RRSP.  I think this is too much and rising interest rates might negatively affect it in the near to medium term.

I thought about diversifying a bit and ETF VXC (Vanguard FTSE All-World ex Canada Index ETF) came to mind.  Two questions:

a) Markets are at an all time high.  Is it wise to send 35k parked in a slugging bond ETF towards a more aggressive equity based ETF?

b) VXC is a Canadian financial instrument with US holdings that I would hold in a registered account.  Are there any tax implications I should be aware of about the dividends?

Thanks a lot for your help.

A. You should follow your investment plan. Nobody knows the future so nobody can tell you if it's better to be in bonds or stocks. The question you need to ask yourself is what asset allocation do you want to hold for the next couple decades and then divide your money accordingly.

B. VXC will have its dividends subject to foreign withholding tax in your RRSP. I want to say to the tune of 15%, but best to confirm that rate.

GreatLaker

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Re: Canadian investing: ETF question re: fund with exposure to US stock
« Reply #2 on: December 06, 2016, 12:52:43 PM »
You think bonds and stocks are both risky, yet you propose shifting your allocation more to stocks and less to bonds. If you really think both are over-valued you should purchase something more secure like GICs, but that would be market timing which very few here will advocate. As Retire-Canada said, stick to your investment plan or investment policy statement. If you don't have those, give it some thought.

CBO has mostly AA and A rated bonds with a duration of 2.99 so it should not be too volatile or risky. Go to iShares.ca and compare the performance chart of CBO to XBB, and you will see how much less volatile CBO is. Remember that as rates go up, bond prices fall, and the longer the duration the more they will fall. CBO's duration is relatively short. But then as bonds mature or are sold off and replaced with new issues, the yield will rise, driving the return back up. See this CCP blog post that explains as long as you hold a bond fund for at least its duration you should not lose money because the yield will offset capital losses.
http://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/

This blog post discusses both VXC and XAW and taxes
http://www.canadianportfoliomanagerblog.com/war-of-the-worlds-ex-canada/

This has more info on taxes
http://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/

You can avoid some withholding taxes by holding US domiciled ETFs like VTI, but that brings other challenges like currency conversion headaches.