Author Topic: Canadian investor - Choosing Canadian eligible divivend ETF  (Read 12465 times)

max9505672

  • Bristles
  • ***
  • Posts: 336
Canadian investor - Choosing Canadian eligible divivend ETF
« on: April 09, 2017, 08:29:21 AM »
Hi everybody!

As my investing strategy goes, I'm now at a point where I'll begin investing in a taxable account (unregistered). I don't want to get in too much details of this strategy here (would be glad to discuss in PM though), but basically TFSA is maxed out and I plan on contributing and deducting to RRSP just enough in order to get me to the lower tax bracket every year (until not possible anymore 7 years from now according to my prediction). And since this is achieved for next year, that's why I want to start investing in non-registered account.

Obviously, I want to take advantage as much as possible of tax laws when I FIRE, and one great way to do this is having Canadian eligible dividend stocks/ETF's in a non-registered account since they get preferential tax treatment.

The thing is, in my AA, I'm aiming at 20% Canadian and I already have about 20% of my AA in Canadian equities in combined TFSA and RRSP accounts.

So I'm wondering what I should do from here?
 - Should I temporarily deviate from my AA and buy more Canadian equities and then rebalance next with new TFSA and RRSP contribution?
 - Are there any ETF's that include US and rest of the world equities but are still considered Canadian eligible?. I don't think such a thing exists, but I might be wrong.
 - I have a buy and hold strategy, so I don't want sell anything, but I guess selling some Canadian equities in TFSA to make room in non-registered could be an option...?
 - Any other suggestion?

Thank you!

Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3898
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #1 on: April 09, 2017, 08:52:40 AM »
Why dividends specifically? They would increase your tax owing right away, while capital gains are only taken when you sell.

scottish

  • Magnum Stache
  • ******
  • Posts: 2716
  • Location: Ottawa
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #2 on: April 09, 2017, 08:56:47 AM »
This is a good question.

I keep fixed income holdings in the RRSP because of their unfavourable tax treatment.

The TFSA and cash accounts are equities only.    Aside from the fixed income, I try to keep the asset allocation balanced in each of these accounts individually.   Our cash accounts are mostly individual blue chip dividend stocks with some index funds.    (I purchased the dividend stocks before becoming an index fund convert & the unrealized gains are too large to justify switching).     

Both the TSX composite and S&P 500 pay dividends, although not on the scale of a dividend ETF.   On the other hand, dividend ETFs often contain some companies that pay very high dividends because their financial position is poor and the dividend payout hasn't adjusted yet.   (Look up Transalta and Yellow Pages for examples) They don't have the same diversification as an index fund either, typically around 50 stocks.   If you haven't thought about this carefully, you should.

For your specific questions:

- It sounds like you want to try and balance globally.   In this case, i'd do what you suggest & rebalance with your next TFSA/RSP contribution.

- Only Canadian companies produce eligible dividends.

- In terms of adjusting your TFSA asset allocation, I think this depends on how many years it would take to adjust without selling.   Rebalancing doesn't need to happen very often, maybe once a year?   So if you can rebalance without selling in a year or two, I'd go that route.

I'm interested to hear what other people have to say as our situations are similar.

scottish

  • Magnum Stache
  • ******
  • Posts: 2716
  • Location: Ottawa
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #3 on: April 09, 2017, 08:59:29 AM »
Why dividends specifically? They would increase your tax owing right away, while capital gains are only taken when you sell.

Eligible Canadian dividends get very favourable (i.e. negative) tax treatment at low income levels.

Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3898
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #4 on: April 09, 2017, 09:06:56 AM »
Why dividends specifically? They would increase your tax owing right away, while capital gains are only taken when you sell.

Eligible Canadian dividends get very favourable (i.e. negative) tax treatment at low income levels.

Which province is the OP in?

Playing with the simple tax calculator, I don't see much different between claiming 2K in dividends a year and claiming 2k in capital gains for a salary at 45k. (And since OP would only claim capital gains after retiring, it would be lower taxes, and avoid having to increase his Canadian allotment (as only Can eligible dividends are favorable)

OP - Have you checked out Le Barbu's post on asking advice on his asset allocation? There's a lot of common areas.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8683
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #5 on: April 09, 2017, 09:28:08 AM »
The thing is, in my AA, I'm aiming at 20% Canadian and I already have about 20% of my AA in Canadian equities in combined TFSA and RRSP accounts.

So I'm wondering what I should do from here?
 - Should I temporarily deviate from my AA and buy more Canadian equities and then rebalance next with new TFSA and RRSP contribution?
 - Are there any ETF's that include US and rest of the world equities but are still considered Canadian eligible?. I don't think such a thing exists, but I might be wrong.
 - I have a buy and hold strategy, so I don't want sell anything, but I guess selling some Canadian equities in TFSA to make room in non-registered could be an option...?
 - Any other suggestion?

Thank you!

If you start buying CDN stocks in your Non-Reg accounts and your portfolio drifts away from the desired asset allocation I would firstly use dividends in the RRSP/TFSA to invest in the under represented asset classes [say US and Int'l stocks]. If that doesn't move the needle fast enough sell some of the CDN stocks in your RRSP/TFSA to get you to the correct AA. I don't think temporarily having too much CDN stocks is a problem as long as you have a plan to get back to the planned AA in a reasonable amount of time...say 1 year.

Given the paucity of contribution room I have in my RRSP/TFSA vs. my planned annual contributions I face this issue myself. I only buy US & Int'l stocks in my RRSP & TFSA since I know I will be buying a lot of CDN stocks in my  Non-Reg account. I have already sold CDN in my RRSP and bought US stocks once to get back to balance. I'll likely have to do that again later this year.

The benefit of getting essentially tax free dividends in my Non-Reg account in FIRE is too compelling to avoid keeping all my CDN stocks there despite the occasional hassles keeping my portfolio in line with my planned AA.

GreatLaker

  • Stubble
  • **
  • Posts: 150
  • Location: Canada
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #6 on: April 09, 2017, 10:09:34 AM »
I also ask why dividends? It's a good investing strategy when done right. When done wrong the investor risks concentrating their portfolio in a few segments, and chasing risky high yield stocks. And dividend ETFs have higher fees than broad market ETFs. But yeah, keeping your Canadian dividend paying investments in non-registered is a good policy from a tax perspective. 'nuff said.

Re asset allocation: You don't have to perfectly track your asset allocation. Stocks tend to move somewhat randomly in the short term, so rebalancing too frequently just manipulates your portfolio in response to random market movements. I use a 5% rule, so if my target is 20% I would not explicitly rebalance unless the allocation got down to 15% or up to 25%. (Note without going into too much detail the rebalancing policy I use is actually the 5/25 rule as described here: http://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/)

US and foreign dividends are considered foreign income and taxed as other income at your highest marginal rate. The dividend tax credit only applies to Canadian dividends.

Selling an asset in one account and rebuying in another account for better tax efficiency is still buy and hold.

Overall I would try to get back in balance with new contributions as long as you foresee getting back to your target allocation in 6-12 months.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #7 on: April 09, 2017, 10:47:37 AM »
Don't let the tail wag the dog - keep to your AA. Unless you specifically want divis (ie, you are retired or nearly), you should probably just take VCN rather than ZDV (as examples).

I would sell the Canadian inside the TFSA/RRSP and buy outside. So you end up with US-domiciled in your RRSP, International (... as if the US isn't) in your TFSA, and Canadian outside *if possible* but it's perfectly fine to have US and Intl unregistered as well. You're talking about marginal rate tax on 2-3% dividends for those.

Don't over-think it. You can always sell the broad index and buy divi stuff when you retire.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #8 on: April 09, 2017, 11:15:57 AM »
Which province is the OP in?

Playing with the simple tax calculator, I don't see much different between claiming 2K in dividends a year and claiming 2k in capital gains for a salary at 45k. (And since OP would only claim capital gains after retiring, it would be lower taxes, and avoid having to increase his Canadian allotment (as only Can eligible dividends are favorable)

OP - Have you checked out Le Barbu's post on asking advice on his asset allocation? There's a lot of common areas.
I'm from Quebec.

I haven't checked Le Barbu's post, do you have a link to it?

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #9 on: April 09, 2017, 11:30:46 AM »
Selling an asset in one account and rebuying in another account for better tax efficiency is still buy and hold.
You are right, I didn't see it that way first, but that's totally true assuming that you sell in an account and buy in the other one at the same time (ie same price), you'll only pay the sell fees (+ low buying fees).

Don't let the tail wag the dog - keep to your AA. Unless you specifically want divis (ie, you are retired or nearly), you should probably just take VCN rather than ZDV (as examples).

I would sell the Canadian inside the TFSA/RRSP and buy outside. So you end up with US-domiciled in your RRSP, International (... as if the US isn't) in your TFSA, and Canadian outside *if possible* but it's perfectly fine to have US and Intl unregistered as well. You're talking about marginal rate tax on 2-3% dividends for those.

Don't over-think it. You can always sell the broad index and buy divi stuff when you retire.
As Greatlaker and you said, I think selling in an account (TFSA/RRSP) and buying Canadian in non-registered is the best idea.

Can you please explain : You're talking about marginal rate tax on 2-3% dividends for those (US and Intl is non-registered)? Not sure on fully understanding what you meant. With my income that is between $45,282 and $84,780, non eligible dividend would be taxed at 24.90% vs 17.49% for Canadian.

Also didn't think about selling broad market index and buying dividend stuff when I retire instead of buying dividend stuff right now...That way I'd be avoiding higher taxes on dividends now (since income is higher than it's going to be in retirement), but if I'd have to sell and buy at retirement and then take the tax hit on capital gains. Not sure about the best strategy here.

Maybe I overthink all of this also, but I find it interesting :)

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #10 on: April 09, 2017, 11:58:19 AM »
For information, here's an example of my situation (the % are right but the amounts have been multiplied by a random factor just for discretion).



So, as of today, I have about 1/3 of my total Canadian funds held in TFSA available to invest in non-registered. If I buy Canadian only with this available cash, the AA will look like this:


Which is getting close to the +/-5% rule Greatlaker talked about. AND, I'll more to invest in non-registered along the year. So yeah, will probably have to sell some VCN in my TFSA quite soon.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #11 on: April 09, 2017, 02:22:09 PM »
Selling an asset in one account and rebuying in another account for better tax efficiency is still buy and hold.
You are right, I didn't see it that way first, but that's totally true assuming that you sell in an account and buy in the other one at the same time (ie same price), you'll only pay the sell fees (+ low buying fees).

Don't let the tail wag the dog - keep to your AA. Unless you specifically want divis (ie, you are retired or nearly), you should probably just take VCN rather than ZDV (as examples).

I would sell the Canadian inside the TFSA/RRSP and buy outside. So you end up with US-domiciled in your RRSP, International (... as if the US isn't) in your TFSA, and Canadian outside *if possible* but it's perfectly fine to have US and Intl unregistered as well. You're talking about marginal rate tax on 2-3% dividends for those.

Don't over-think it. You can always sell the broad index and buy divi stuff when you retire.
As Greatlaker and you said, I think selling in an account (TFSA/RRSP) and buying Canadian in non-registered is the best idea.

Can you please explain : You're talking about marginal rate tax on 2-3% dividends for those (US and Intl is non-registered)? Not sure on fully understanding what you meant. With my income that is between $45,282 and $84,780, non eligible dividend would be taxed at 24.90% vs 17.49% for Canadian.

Also didn't think about selling broad market index and buying dividend stuff when I retire instead of buying dividend stuff right now...That way I'd be avoiding higher taxes on dividends now (since income is higher than it's going to be in retirement), but if I'd have to sell and buy at retirement and then take the tax hit on capital gains. Not sure about the best strategy here.

Maybe I overthink all of this also, but I find it interesting :)

I'm talking about the actual amount you lose.

If you have $100k invested and get $3k in dividends, you will lose (your marginal rate) x $3k. It's not the end of the world.

In terms of cap gains... you don't have to do everything all in one year. One thing is that you have to manage RRSP withdrawals (ideally before CPP/OAS kicks in), too. But if you're going to RE, that's a good time.

The other thing is divi funds just don't tend to be all that great (again, as someone that has some), vs just selling for cap gains.

Say you have $100k unreg and you need to take $4k a year from it (4% SWR); if you get 2% divis, you sell 2k and take cap gains on any growth. If it yields 4%, you sell none. Cap gains on 2k is not likely to be much.

In hindsight, I should've gone 100% passive - three funds or something. No REITs, no divi stuff, etc.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #12 on: April 09, 2017, 05:10:37 PM »
I'm talking about the actual amount you lose.

If you have $100k invested and get $3k in dividends, you will lose (your marginal rate) x $3k. It's not the end of the world.

In terms of cap gains... you don't have to do everything all in one year. One thing is that you have to manage RRSP withdrawals (ideally before CPP/OAS kicks in), too. But if you're going to RE, that's a good time.

The other thing is divi funds just don't tend to be all that great (again, as someone that has some), vs just selling for cap gains.

Say you have $100k unreg and you need to take $4k a year from it (4% SWR); if you get 2% divis, you sell 2k and take cap gains on any growth. If it yields 4%, you sell none. Cap gains on 2k is not likely to be much.

In hindsight, I should've gone 100% passive - three funds or something. No REITs, no divi stuff, etc.
Ok, makes sense. The tax

I think I will just go with VCN in non-registered and sell VCN in TFSA when I need to clear more ''room".

Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3898
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #14 on: April 10, 2017, 05:49:07 AM »
Max, unless you changed your numbers by a 10x factor, there is what I think at first sigth.

You have not enough $ to trade ETFs, especially do Norbert-Gambit to buy VTI!

Selling 200$ of shares for 10$ mean 5% fees for trade only!!!

What are your index funds option? (What bank or broker?)

Just invest in a plain Canadian index fund for your taxable and DO NOT MAKE ANY MOVES IN RRSP AND TFSA!!!

You can ask  for a "transfer in nature" when you want to move stuff around from an account to another.

Do not overthink your AA and ask yourself what is the bonds purpose in your situation...
« Last Edit: April 10, 2017, 07:16:45 AM by Le Barbu »

Lews Therin

  • CMTO 2023 Attendees
  • Magnum Stache
  • *
  • Posts: 3898
  • Age: 34
  • Location: Gatineau
  • Fee-only Financial Planner
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #15 on: April 10, 2017, 06:54:57 AM »
I guess his ears were burning.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #16 on: April 10, 2017, 07:18:10 AM »
I guess his ears were burning.

Haha! Been there, done that!

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #17 on: April 10, 2017, 09:45:05 AM »
Thanks for your answer Le Barbu! I understand that my table could been a little confusing without actual real numbers, so here are some clarifications.

Max, unless you changed your numbers by a 10x factor, there is what I think at first sigth.
The factor is not 10, but it's not 2 either.

You have not enough $ to trade ETFs, especially do Norbert-Gambit to buy VTI!
Maybe it wasn't clear, but the ETFs and % I have in the spreadsheet are my actual investments (ie I have enough $ to trade ETFs and have already done Norbert-Gambit).

Selling 200$ of shares for 10$ mean 5% fees for trade only!!!
I'm aware of that.

What are your index funds option? (What bank or broker?)
All my investments are currently with Questrade.

Just invest in a plain Canadian index fund for your taxable and DO NOT MAKE ANY MOVES IN RRSP AND TFSA!!!
I'm probably going to go with VCN for now but, as Daverobev suggested, will most probably stick to my AA and sell some VCN in my TFSA in order to make ''room'' for Canadian in my un-registered unless proven why I shouldn't.

Do not overthink your AA and ask yourself what is the bonds purpose in your situation...
Yes good point, I want to go 100% stocks. Still not sure if I should sell the bonds and just let them dilute with future investments in stocks.

Go Habs Go

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8683
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #18 on: April 10, 2017, 10:02:57 AM »
Le Barbu has a good point at ~$30K total investment value I would not sell a few $K of stocks to keep your AA aligned with a specific %. It's just too little money to make any appreciable difference and the costs for the trades are too high. If you had $300K+ I think that would make more sense.

I would just buy VCN in taxable and rebalance over time as you get more RRSP/TFSA room.

As far as your bonds go it really doesn't matter. If you don't want any bonds for many years selling now and paying a fee to have a simpler portfolio is reasonable.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #19 on: April 10, 2017, 10:33:00 AM »
Now, I do not Norbert-Gambit for less than 50k$/ trade, the MER of US and Intl ETFs are to low to bother trading USD for small amounts.

Your AA is ok, just watch the trading fees and keep your taxes low investing the taxable money through Canadian stocks.

How many games to get rid of the Blue Shirts?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #20 on: April 10, 2017, 11:22:29 AM »
Max, this also depends on your income and province.

Regardless I would first dump VCN and VAB in your RRSP and TFSA and replace with VTI or XAW as you see fit. I would then purchase HBB for your bond allocation in your non-reg. If you're not comfortable with the structure of HBB, then choose ZBD instead. Both are more tax efficient than VAB with similar overall returns and still low fees.

For your Canadian allocation, if you earn more than $90,000 a year, you are likely to be better off using swap based products (HXT). If you're under that, choose VCN/XIC/ZCN etc.

Once your non-reg gets so full that you must purchase international there to maintain your AA, you can use swap-based products for better tax efficiency. HXS (US stocks) and HXX (European) for example.

I would be very hesitant myself to get heavy on Canadian stocks just for tax reasons. Taxes are not a good reason to overinvest in exposure to oil, real estate, and mining companies.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #21 on: April 10, 2017, 11:29:53 AM »
Max, this also depends on your income and province.

Regardless I would first dump VCN and VAB in your RRSP and TFSA and replace with VTI or XAW as you see fit. I would then purchase HBB for your bond allocation in your non-reg. If you're not comfortable with the structure of HBB, then choose ZBD instead. Both are more tax efficient than VAB with similar overall returns and still low fees.

For your Canadian allocation, if you earn more than $90,000 a year, you are likely to be better off using swap based products (HXT). If you're under that, choose VCN/XIC/ZCN etc.

Once your non-reg gets so full that you must purchase international there to maintain your AA, you can use swap-based products for better tax efficiency. HXS (US stocks) and HXX (European) for example.

I would be very hesitant myself to get heavy on Canadian stocks just for tax reasons. Taxes are not a good reason to overinvest in exposure to oil, real estate, and mining companies.

Very good post Moose!

but I think you meant financials, not real estate?

RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #22 on: April 10, 2017, 12:00:00 PM »
Max, this also depends on your income and province.

Regardless I would first dump VCN and VAB in your RRSP and TFSA and replace with VTI or XAW as you see fit. I would then purchase HBB for your bond allocation in your non-reg. If you're not comfortable with the structure of HBB, then choose ZBD instead. Both are more tax efficient than VAB with similar overall returns and still low fees.

For your Canadian allocation, if you earn more than $90,000 a year, you are likely to be better off using swap based products (HXT). If you're under that, choose VCN/XIC/ZCN etc.

Once your non-reg gets so full that you must purchase international there to maintain your AA, you can use swap-based products for better tax efficiency. HXS (US stocks) and HXX (European) for example.

I would be very hesitant myself to get heavy on Canadian stocks just for tax reasons. Taxes are not a good reason to overinvest in exposure to oil, real estate, and mining companies.

Very good post Moose!

but I think you meant financials, not real estate?

Yes, mostly financials in the form of big banks which are backed by underlying real estate value. Residential mortgages make up a large portion of bank assets and revenue.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #23 on: April 11, 2017, 04:55:58 AM »
Now, I do not Norbert-Gambit for less than 50k$/ trade, the MER of US and Intl ETFs are to low to bother trading USD for small amounts.

Your AA is ok, just watch the trading fees and keep your taxes low investing the taxable money through Canadian stocks.

How many games to get rid of the Blue Shirts?
I must admit I Norbert-Gambit(ed) for less than 50K$.. I'll probably go with VUN (or similar - still need to research this) in the near future for smaller US investments since Norbert Gambit isn't worth it for small amounts.

My ''money'' is on MTL in 6.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #24 on: April 11, 2017, 05:00:43 AM »
I would bet the same!

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #25 on: April 11, 2017, 05:46:23 AM »
Thanks for your answer, lots of great/new information here.
Max, this also depends on your income and province.
I am from Quebec and actually in the over $45,282 to $84,780 year income, and plan to be there for around 10 years.

Regardless I would first dump VCN and VAB in your RRSP and TFSA and replace with VTI or XAW as you see fit. I would then purchase HBB for your bond allocation in your non-reg. If you're not comfortable with the structure of HBB, then choose ZBD instead. Both are more tax efficient than VAB with similar overall returns and still low fees.
I'm actually planning to completely eliminate bonds from my AA. I still don't know if I want to sell or keep them dilute with upcoming investments.

As for dumping VCN in my TFSA, I agree and plan to do it. I basically want to get all of my Canadian AA% in my non-registered.

What would you suggest in TFSA? As much as possible US and Intl such as XAW? I like VTI too, but I currently make smaller periodic investments so I can't justify the fees of doing Norbert Gambit to buy USD ETF..

For your Canadian allocation, if you earn more than $90,000 a year, you are likely to be better off using swap based products (HXT). If you're under that, choose VCN/XIC/ZCN etc.

Once your non-reg gets so full that you must purchase international there to maintain your AA, you can use swap-based products for better tax efficiency. HXS (US stocks) and HXX (European) for example.
I had to research a bit on swap-based products, first time hearing about those.

In the tax bracket I actually am, Canadian eligible dividends are taxed at 17.49% (and Non eligible at 24.90%) and the capital gains when I plan to retire (lowest tax bracket) are taxed at 14.26% so the difference between paying taxes today on dividends and paying taxes later on cap. gains is around 3.23% (and around 10% for non-eligible) which is not negligible.

So those swap-based products seem very interesting, but why aren't they more popular around here? Are people not comfortable with the structure of swap-based products (derivates)?

I would be very hesitant myself to get heavy on Canadian stocks just for tax reasons. Taxes are not a good reason to overinvest in exposure to oil, real estate, and mining companies.
I just want to stick to my AA (20% CAN), while getting the best tax treatment as possible, not trying to get heavy on Canadian stocks.





Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #26 on: April 11, 2017, 08:48:25 AM »
If you absolutely want to have no more than 20% Canadian stocks, then, keeping a 10% allocation to Canadian bonds would not be a bad choice. I cannot imagine investing more than 70% outside Canada, but, thats me.

RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #27 on: April 11, 2017, 09:26:20 AM »
So those swap-based products seem very interesting, but why aren't they more popular around here? Are people not comfortable with the structure of swap-based products (derivates)?

I lot of people are fearful of derivatives and don't understand them. The whole 2008-2009 Financial Crisis was in large part blamed on derivatives which naturally doesn't help.

Truth is derivatives are a huge subset of the market and vary substantially in their content and purpose. The only unifying factor is they derive their value from another asset. Everything from index swap products to options to credit default swaps are derivatives. However, of these, only options and credit default swaps are realistically exposed to massive leverage, risk, and the prospect of your investment going to $0.

HXT and HXS derive their value from the total return of the TSX 60 and S&P 500 indices. They are not leveraged products and are backed approximately 100% by a cash fund. (The true amount varies slightly from day to day). If the provider or counterparty goes broke for whatever reason, the cash is still in the account as required by OSC.

Historically HXT and HXS have done a fantastic job of tracking the index. Better than many of their regular ETF comparables. All this while potentially providing a nice tax advantage.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #28 on: April 11, 2017, 11:21:43 AM »
If you absolutely want to have no more than 20% Canadian stocks, then, keeping a 10% allocation to Canadian bonds would not be a bad choice. I cannot imagine investing more than 70% outside Canada, but, thats me.
I'm interested to know what you'd suggest? 

I think I've read from another one of your post, that you'd like to drag below 30%, around 20%, your Canadian stocks.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #29 on: April 11, 2017, 11:23:11 AM »
So those swap-based products seem very interesting, but why aren't they more popular around here? Are people not comfortable with the structure of swap-based products (derivates)?

I lot of people are fearful of derivatives and don't understand them. The whole 2008-2009 Financial Crisis was in large part blamed on derivatives which naturally doesn't help.

Truth is derivatives are a huge subset of the market and vary substantially in their content and purpose. The only unifying factor is they derive their value from another asset. Everything from index swap products to options to credit default swaps are derivatives. However, of these, only options and credit default swaps are realistically exposed to massive leverage, risk, and the prospect of your investment going to $0.

HXT and HXS derive their value from the total return of the TSX 60 and S&P 500 indices. They are not leveraged products and are backed approximately 100% by a cash fund. (The true amount varies slightly from day to day). If the provider or counterparty goes broke for whatever reason, the cash is still in the account as required by OSC.

Historically HXT and HXS have done a fantastic job of tracking the index. Better than many of their regular ETF comparables. All this while potentially providing a nice tax advantage.
Very interesting indeed. I'd have to do a little more research before buying, but you really proposed something I never thought of.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #30 on: April 11, 2017, 02:04:35 PM »
If you absolutely want to have no more than 20% Canadian stocks, then, keeping a 10% allocation to Canadian bonds would not be a bad choice. I cannot imagine investing more than 70% outside Canada, but, thats me.
I'm interested to know what you'd suggest? 

I think I've read from another one of your post, that you'd like to drag below 30%, around 20%, your Canadian stocks.

What I mean is 70% outside Canada is enough for me. Actually, I am 30%ZCN, 0%bonds. If someday I own bonds, I could decrease my ZCN% ex. 25-5 or 20-10 but always for a total of 30% minimum in Canada.

max9505672

  • Bristles
  • ***
  • Posts: 336
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #31 on: April 11, 2017, 03:33:31 PM »
What I mean is 70% outside Canada is enough for me. Actually, I am 30%ZCN, 0%bonds. If someday I own bonds, I could decrease my ZCN% ex. 25-5 or 20-10 but always for a total of 30% minimum in Canada.
Ok ,get it!

And what's the reasoning behind this choice?

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #32 on: April 11, 2017, 05:36:13 PM »
What I mean is 70% outside Canada is enough for me. Actually, I am 30%ZCN, 0%bonds. If someday I own bonds, I could decrease my ZCN% ex. 25-5 or 20-10 but always for a total of 30% minimum in Canada.
Ok ,get it!

And what's the reasoning behind this choice?

I just decided that for me, 70% of my investments outside the country is enough. For someone else, it could be more or less. It's not rocket science!

meghan88

  • Pencil Stache
  • ****
  • Posts: 834
  • Location: Montreal
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #33 on: April 11, 2017, 05:55:29 PM »
What I mean is 70% outside Canada is enough for me. Actually, I am 30%ZCN, 0%bonds. If someday I own bonds, I could decrease my ZCN% ex. 25-5 or 20-10 but always for a total of 30% minimum in Canada.
Ok ,get it!

And what's the reasoning behind this choice?

I just decided that for me, 70% of my investments outside the country is enough. For someone else, it could be more or less. It's not rocket science!

General question for those who are following this thread:  what about for someone who's about to retire within 5 years ... if that was you, would you still keep the same Canadian/non-Canadian ratio?

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #34 on: April 11, 2017, 06:21:02 PM »
What I mean is 70% outside Canada is enough for me. Actually, I am 30%ZCN, 0%bonds. If someday I own bonds, I could decrease my ZCN% ex. 25-5 or 20-10 but always for a total of 30% minimum in Canada.
Ok ,get it!

And what's the reasoning behind this choice?

I just decided that for me, 70% of my investments outside the country is enough. For someone else, it could be more or less. It's not rocket science!

General question for those who are following this thread:  what about for someone who's about to retire within 5 years ... if that was you, would you still keep the same Canadian/non-Canadian ratio?

Your question is usually more related to the stock/bond ratio. Many here are in the "retire within 5 years" situation as you and me. This would not change my AA. I know some Canadian who are more inclined to spend time in USA in retirement and tilt their AA toward US stocks...I dont know if it's rational or not?...

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #35 on: April 12, 2017, 07:23:39 AM »
If you need US$ stability, you should be buying some US bonds I guess. Your stock allocation (within whatever percentage you have chosen of your total AA to be stocks) shouldn't change.

I still don't get why Canadians think it a good idea to have so much Canadian equity. CPP, OAS, rent or house prices, everything else is all going to rise and fall in tandem with Canadian stock prices. Isn't that pretty much enough over-allocation to Canada already?

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #36 on: April 12, 2017, 08:52:43 AM »
If you need US$ stability, you should be buying some US bonds I guess. Your stock allocation (within whatever percentage you have chosen of your total AA to be stocks) shouldn't change.

I still don't get why Canadians think it a good idea to have so much Canadian equity. CPP, OAS, rent or house prices, everything else is all going to rise and fall in tandem with Canadian stock prices. Isn't that pretty much enough over-allocation to Canada already?

100% agree with the bolded paragraph!

What do you think is the best AA for a 100% stock for Canadian?

100% VT ?
50% VTI 50% VXUS ?
10% VCN 45 % VTI 45% VXUS ?

Overweighting Canadian stock may not seem rational but I did a lot of backtesting and anything between 10-30% with the balance splitted between US and Intl did +/- the same (CGAR and stdev) so no harmful at all. Maybe the future will be different?

Why so many US investors do not dare to invest more than 20-30% ex-US?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #37 on: April 12, 2017, 09:21:40 AM »
If you need US$ stability, you should be buying some US bonds I guess. Your stock allocation (within whatever percentage you have chosen of your total AA to be stocks) shouldn't change.

I still don't get why Canadians think it a good idea to have so much Canadian equity. CPP, OAS, rent or house prices, everything else is all going to rise and fall in tandem with Canadian stock prices. Isn't that pretty much enough over-allocation to Canada already?

100% agree with the bolded paragraph!

What do you think is the best AA for a 100% stock for Canadian?

100% VT ?
50% VTI 50% VXUS ?
10% VCN 45 % VTI 45% VXUS ?

Overweighting Canadian stock may not seem rational but I did a lot of backtesting and anything between 10-30% with the balance splitted between US and Intl did +/- the same (CGAR and stdev) so no harmful at all. Maybe the future will be different?

Why so many US investors do not dare to invest more than 20-30% ex-US?

The ginormous difference between investing in the S&P 500 and the TSX Composite is that the S&P 500 holds a large number of multi-nationals, and a broad spread of sectors.

While intentional or not, Americans who choose to buy 'American' only, are really getting a globally and sector diverse investment. You cannot in any way, shape, or form say the same is true of the TSX!

Past performance does not mean much, honestly. Canada's done well out of oil and raw materials. Oil and raw materials will still be needed, no doubt.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #38 on: April 12, 2017, 09:34:15 AM »
If you need US$ stability, you should be buying some US bonds I guess. Your stock allocation (within whatever percentage you have chosen of your total AA to be stocks) shouldn't change.

I still don't get why Canadians think it a good idea to have so much Canadian equity. CPP, OAS, rent or house prices, everything else is all going to rise and fall in tandem with Canadian stock prices. Isn't that pretty much enough over-allocation to Canada already?

100% agree with the bolded paragraph!

What do you think is the best AA for a 100% stock for Canadian?

100% VT ?
50% VTI 50% VXUS ?
10% VCN 45 % VTI 45% VXUS ?

Overweighting Canadian stock may not seem rational but I did a lot of backtesting and anything between 10-30% with the balance splitted between US and Intl did +/- the same (CGAR and stdev) so no harmful at all. Maybe the future will be different?

Why so many US investors do not dare to invest more than 20-30% ex-US?

The ginormous difference between investing in the S&P 500 and the TSX Composite is that the S&P 500 holds a large number of multi-nationals, and a broad spread of sectors.

While intentional or not, Americans who choose to buy 'American' only, are really getting a globally and sector diverse investment. You cannot in any way, shape, or form say the same is true of the TSX!

Past performance does not mean much, honestly. Canada's done well out of oil and raw materials. Oil and raw materials will still be needed, no doubt.

I agree with all of the above, I never says that TSX is diversified through sectors and most of it is only 60 biggest Co. In Canada

Rebalancing probably did a good job because of the currency changes, oil & gold prices. This will continue for a while for sure.

I do not compare TSX with S&P500. I just assume that a 70/30 VTI/VXUS is better than a 100% VTI for a US investor.

Can you just suggest a sound AA for a 100% stock Canadian portfolio?


RichMoose

  • Pencil Stache
  • ****
  • Posts: 965
  • Location: Alberta
  • RiskManagement
    • The Rich Moose | A Better Canadian Finance Blog
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #40 on: April 12, 2017, 09:53:38 AM »
I agree with all of the above, I never says that TSX is diversified through sectors and most of it is only 60 biggest Co. In Canada

Rebalancing probably did a good job because of the currency changes, oil & gold prices. This will continue for a while for sure.

I do not compare TSX with S&P500. I just assume that a 70/30 VTI/VXUS is better than a 100% VTI for a US investor.

Can you just suggest a sound AA for a 100% stock Canadian portfolio?

I think it's important to hold a minimum of 50% of your portfolio in currencies other than CAD. This exposure can be achieved using non-hedged ETFs. USD, and to a lesser extent, EUR is a good place to go because they are also reserve currencies and have substantial global power.

That said don't underestimate the importance of having at least some of your portfolio in Canadian stocks (20-30% is good). Most people think we are very tied to the US which is true economically but not when it comes to our stock market. The TSX is actually far less correlated to the S&P 500 than EAFE or ex-US indices. That means it is a good tool for balancing.

US investors who invest in all US stocks are infected with recency bias. History tells us foreign exposure is a good thing in the long run.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #41 on: April 12, 2017, 10:01:16 AM »
Justin Bender's [CCP/PWL] comments about CDN content in portfolios:

- https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/September-2016/Ask-Bender-Why-do-you-overweight-Canadian-stocks

- https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/September-2016/Ask-Bender-Why-do-you-overweight-Canadian-stocks-en

Money Sense - http://www.moneysense.ca/invest/bias-towards-canadian-stocks/

CPP - http://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

I'd argue that he is just flat wrong with this, and he's doing exactly what shouldn't be done - looking at past returns. I mean, the tax credit is worth something, no doubt, but aside from that? Currency volatility is a *good* thing. Equal Cad/US/Intl/... no, not if you get your sector weighting somewhat even. But that's going against passive index investing.

They're saying "passive, market cap weighting is great... except home country bias! That bit's ok!".

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8683
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #42 on: April 12, 2017, 10:11:01 AM »
I'd argue that he is just flat wrong with this, and he's doing exactly what shouldn't be done - looking at past returns. I mean, the tax credit is worth something, no doubt, but aside from that? Currency volatility is a *good* thing. Equal Cad/US/Intl/... no, not if you get your sector weighting somewhat even. But that's going against passive index investing.

They're saying "passive, market cap weighting is great... except home country bias! That bit's ok!".

That's a gross oversimplification of the arguments at those links. I'm just not in the mood to write an essay regurgitating that information so I'd suggest folks read those links and whatever other research you find relevant and decide for yourselves what you are comfortable with.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #43 on: April 12, 2017, 10:17:34 AM »
Justin Bender's [CCP/PWL] comments about CDN content in portfolios:

- https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/September-2016/Ask-Bender-Why-do-you-overweight-Canadian-stocks

- https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/September-2016/Ask-Bender-Why-do-you-overweight-Canadian-stocks-en

Money Sense - http://www.moneysense.ca/invest/bias-towards-canadian-stocks/

CPP - http://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/

I'd argue that he is just flat wrong with this, and he's doing exactly what shouldn't be done - looking at past returns. I mean, the tax credit is worth something, no doubt, but aside from that? Currency volatility is a *good* thing. Equal Cad/US/Intl/... no, not if you get your sector weighting somewhat even. But that's going against passive index investing.

They're saying "passive, market cap weighting is great... except home country bias! That bit's ok!".

So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #44 on: April 12, 2017, 11:34:02 AM »
So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

In a 'do as I say not as I do' world, probably 40 US/40 developed ex-NA/10 Canada/10 developing. Something like that.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #45 on: April 12, 2017, 11:37:10 AM »
I'd argue that he is just flat wrong with this, and he's doing exactly what shouldn't be done - looking at past returns. I mean, the tax credit is worth something, no doubt, but aside from that? Currency volatility is a *good* thing. Equal Cad/US/Intl/... no, not if you get your sector weighting somewhat even. But that's going against passive index investing.

They're saying "passive, market cap weighting is great... except home country bias! That bit's ok!".

That's a gross oversimplification of the arguments at those links. I'm just not in the mood to write an essay regurgitating that information so I'd suggest folks read those links and whatever other research you find relevant and decide for yourselves what you are comfortable with.

Of course - but just to make it clear, all four of those links are from one industry professional, and one person that relies on the research of that industry professional. CCP (= Dan Borlotti), and Justin Bender are from a perspective-point-of-view always going to agree.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #46 on: April 12, 2017, 11:40:45 AM »
So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

In a 'do as I say not as I do' world, probably 40 US/40 developed ex-NA/10 Canada/10 developing. Something like that.

For simplification, cost, taxes, etc, would you agree that a 20VCN/40VTI/40VXUS is not to bad?

daverobev

  • Magnum Stache
  • ******
  • Posts: 3961
  • Location: France
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #47 on: April 12, 2017, 01:59:11 PM »
So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

In a 'do as I say not as I do' world, probably 40 US/40 developed ex-NA/10 Canada/10 developing. Something like that.

For simplification, cost, taxes, etc, would you agree that a 20VCN/40VTI/40VXUS is not to bad?

VXUS is 7% Canada, so you're back to ~23% Canada. And there's barely any developing... but honestly that might be fair, if you're going by market cap.

10% VCN, 45% VXUS, 40% VTI, 5% XEF perhaps. Or drop the XEF, and go 10 VCN, 45 VTI, 45 VXUS.

But that's only my thinking. The more important thing, of course, is to pick an AA and stick with it - even if it IS to have 20% Canada, as long as you rebalance and don't change (esp. when something is relatively down!!) it'll be fine.

This whole thing is somewhat splitting hairs; but I just don't like "follow market cap weighting, but you can break the rules for Canada because it's special" - it just makes no sense - none of the arguments, *tax excepted*, make sense.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1058
  • Age: 52
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #48 on: April 12, 2017, 02:13:46 PM »
So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

In a 'do as I say not as I do' world, probably 40 US/40 developed ex-NA/10 Canada/10 developing. Something like that.

For simplification, cost, taxes, etc, would you agree that a 20VCN/40VTI/40VXUS is not to bad?

VXUS is 7% Canada, so you're back to ~23% Canada. And there's barely any developing... but honestly that might be fair, if you're going by market cap.

10% VCN, 45% VXUS, 40% VTI, 5% XEF perhaps. Or drop the XEF, and go 10 VCN, 45 VTI, 45 VXUS.

But that's only my thinking. The more important thing, of course, is to pick an AA and stick with it - even if it IS to have 20% Canada, as long as you rebalance and don't change (esp. when something is relatively down!!) it'll be fine.

This whole thing is somewhat splitting hairs; but I just don't like "follow market cap weighting, but you can break the rules for Canada because it's special" - it just makes no sense - none of the arguments, *tax excepted*, make sense.

Thanks for sharing, I get what you mean. Sticking to a plan is the way to go in all cases!

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 8683
Re: Canadian investor - Choosing Canadian eligible divivend ETF
« Reply #49 on: April 12, 2017, 02:22:41 PM »
So, what Cad/US/Intl split would you suggest for a 100% stock Canadian portfolio?

In a 'do as I say not as I do' world, probably 40 US/40 developed ex-NA/10 Canada/10 developing. Something like that.

Why would you have 3x the market cap weight for CDN stocks if none of the home basis arguments make sense to you?