Author Topic: Canadian Investor - Need Margin account RoW ETF  (Read 2784 times)

max9505672

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Canadian Investor - Need Margin account RoW ETF
« on: November 16, 2017, 06:26:14 AM »
My AA% is 50% US / 25% CAN / 25% Rest of World (RoW)

I currently only hold RoW ETF (XAW.TO) in my TFSA account I would need to buy RoW in my Margin account in order to re-balance my AA%. I can't buy in TFSA for the moment because it's maxed out.

So I'm looking for suggestion on which ETF I should buy in my margin account?
I know some ETF's pay Canadian preferred dividends (such as VCN.TO for example) which is preferable in a margin account, but since I'm looking for RoW shares, it wouldn't apply, so should I just buy XAW in this account too?
Or would it be preferable to buy a comparable one in order to diversify?

I'm open to every idea and discussion.

thanks!

RichMoose

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #1 on: November 16, 2017, 01:08:05 PM »
Diversification in index ETFs is pointless unless you suspect fraud risk in the trust/manager.

What about taxes? If you're still working a swap ETF might be better for tax efficiency. Otherwise XAW is good.

GreatLaker

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #2 on: November 16, 2017, 03:52:12 PM »
When you say RoW do you realize that XAW holds global equities including USA? If you are holding 50% US ETF + 25% Can ETF + 25% XAW you would be over-weighted in USA. Or maybe I am misinterpreting what you meant.

Anyway for an all-world ex-Canada ETF both XAW and VXC are good. Here's a comparison although it's a couple of years old:
http://www.canadianportfoliomanagerblog.com/war-of-the-worlds-ex-canada/

If you want the equity market outside Can/US then XEF+XEC or VIU+VEE work.

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #3 on: November 16, 2017, 04:18:12 PM »
Diversification in index ETFs is pointless unless you suspect fraud risk in the trust/manager.

What about taxes? If you're still working a swap ETF might be better for tax efficiency. Otherwise XAW is good.
I am still working, what do you mean a swap ETF?

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #4 on: November 16, 2017, 04:20:45 PM »
When you say RoW do you realize that XAW holds global equities including USA? If you are holding 50% US ETF + 25% Can ETF + 25% XAW you would be over-weighted in USA. Or maybe I am misinterpreting what you meant.
No you are right, basically everytime I want to buy RoW I have to buy US. Maybe a RoW only (equity market outside Can/US) ETF would give more flexibility.

If you want the equity market outside Can/US then XEF+XEC or VIU+VEE work.
I'll look into those, thanks!

Retire-Canada

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #5 on: November 16, 2017, 04:53:49 PM »
Do have an RRSP? What is in there?

RichMoose

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #6 on: November 16, 2017, 04:59:42 PM »
Diversification in index ETFs is pointless unless you suspect fraud risk in the trust/manager.

What about taxes? If you're still working a swap ETF might be better for tax efficiency. Otherwise XAW is good.
I am still working, what do you mean a swap ETF?
Swap ETFs are funds which are structured to convert distributions into capital gains so they can be deferred for tax purposes. Basically the ETF provider has a contract with a partner. When the partner's investments (often a standard ETF or similar basket of stocks) pay a distribution, that distribution is added as an increase in the NAV of the unit rather than being paid out.

To simplify, let's say the NAV of a certain swap ETF tracking the MSCI EAFE Index is $20.00 per unit. The EAFE Index pays a 1% dividend on November 17. Instead of you getting $0.20 tomorrow and having to claim it as income and pay tax on that, the NAV of the swap ETF simply rises to $20.20 per unit. You technically still benefit from the full dividend, but it's just booked differently so you don't have to claim it as income until you sell the unit. Then you only pay tax as a capital gain instead of a foreign dividend. It cuts the tax rate nearly in half.

HXDM.TO would be the international choice for this type of structure. It's brand new so total assets are still a little light. Trading volume is decent though and it trades pretty tight to its NAV.

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #7 on: November 17, 2017, 05:24:59 AM »
Do have an RRSP? What is in there?
I do:
  • VTI
  • VCN
  • VUN

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #8 on: November 17, 2017, 05:29:38 AM »
Diversification in index ETFs is pointless unless you suspect fraud risk in the trust/manager.

What about taxes? If you're still working a swap ETF might be better for tax efficiency. Otherwise XAW is good.
I am still working, what do you mean a swap ETF?
Swap ETFs are funds which are structured to convert distributions into capital gains so they can be deferred for tax purposes. Basically the ETF provider has a contract with a partner. When the partner's investments (often a standard ETF or similar basket of stocks) pay a distribution, that distribution is added as an increase in the NAV of the unit rather than being paid out.

To simplify, let's say the NAV of a certain swap ETF tracking the MSCI EAFE Index is $20.00 per unit. The EAFE Index pays a 1% dividend on November 17. Instead of you getting $0.20 tomorrow and having to claim it as income and pay tax on that, the NAV of the swap ETF simply rises to $20.20 per unit. You technically still benefit from the full dividend, but it's just booked differently so you don't have to claim it as income until you sell the unit. Then you only pay tax as a capital gain instead of a foreign dividend. It cuts the tax rate nearly in half.

HXDM.TO would be the international choice for this type of structure. It's brand new so total assets are still a little light. Trading volume is decent though and it trades pretty tight to its NAV.
Interesting, first time I hear about this.

What are the disadvantages then?

Retire-Canada

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #9 on: November 17, 2017, 09:50:57 AM »
Do have an RRSP? What is in there?
I do:
  • VTI
  • VCN
  • VUN

Well if you wanted the qualified dividends in your NR account you could sell VCN in the RRSP and buy it in NR and buy the ROW in your RRSP. I've done that once as I only hold VCN in my NR.
« Last Edit: November 17, 2017, 10:56:36 AM by Retire-Canada »

RichMoose

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #10 on: November 17, 2017, 10:40:51 AM »
Swap ETFs are funds which are structured to convert distributions into capital gains so they can be deferred for tax purposes. Basically the ETF provider has a contract with a partner. When the partner's investments (often a standard ETF or similar basket of stocks) pay a distribution, that distribution is added as an increase in the NAV of the unit rather than being paid out.

To simplify, let's say the NAV of a certain swap ETF tracking the MSCI EAFE Index is $20.00 per unit. The EAFE Index pays a 1% dividend on November 17. Instead of you getting $0.20 tomorrow and having to claim it as income and pay tax on that, the NAV of the swap ETF simply rises to $20.20 per unit. You technically still benefit from the full dividend, but it's just booked differently so you don't have to claim it as income until you sell the unit. Then you only pay tax as a capital gain instead of a foreign dividend. It cuts the tax rate nearly in half.

HXDM.TO would be the international choice for this type of structure. It's brand new so total assets are still a little light. Trading volume is decent though and it trades pretty tight to its NAV.
Interesting, first time I hear about this.

What are the disadvantages then?
Mainly counterparty risk and a somewhat higher MER.

Counterparty risk the implied risk if the investment contractor goes bankrupt (the actual investment is held in trust). This varies from day to day, but usually floats between -1.0% and 2.0%.

The Management Fee on HXDM.TO is 0.20%, which is cheap. The counterparty fee is another 0.30%, but this is not necessarily reflected in the return. You will typically find that Horizons swap products track very close to or even better than comparable standard ETFs over extended periods of time.

Before going international in your NR, you might be better to take the first step of optimizing your ETFs by account type as R-C suggests.

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #11 on: November 17, 2017, 11:33:24 AM »
Do have an RRSP? What is in there?
I do:
  • VTI
  • VCN
  • VUN

Well if you wanted the qualified dividends in your NR account you could sell VCN in the RRSP and buy it in NR and buy the ROW in your RRSP. I've done that once as I only hold VCN in my NR.
I will do that, but I don't have a lot of VCN in my RRSP so I won't be able to do this multiple times...

I have a lot more in my TFSA though, I guess the same principle applies for TFSA : Sell VCN and buy XAW

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #12 on: November 17, 2017, 11:34:52 AM »
Before going international in your NR, you might be better to take the first step of optimizing your ETFs by account type as R-C suggests.
Thanks for the info, but yes I'll likely optimize by account first.

Retire-Canada

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #13 on: November 17, 2017, 11:38:50 AM »
I have a lot more in my TFSA though, I guess the same principle applies for TFSA : Sell VCN and buy XAW

Yes. The same applies in TFSA. The way I read your OP you were only holding ROW in the TFSA that's why I didn't suggest doing it there.

max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #14 on: November 17, 2017, 01:22:01 PM »
I have a lot more in my TFSA though, I guess the same principle applies for TFSA : Sell VCN and buy XAW

Yes. The same applies in TFSA. The way I read your OP you were only holding ROW in the TFSA that's why I didn't suggest doing it there.
Great, thank you!

Koogie

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #15 on: November 17, 2017, 01:53:36 PM »
If you are going to be buying RoW in your RRSP and are happy with USD denominated assets (as you seem to be/VTI) then I would also suggest VXUS.         I'm pretty happy with it.


max9505672

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Re: Canadian Investor - Need Margin account RoW ETF
« Reply #16 on: November 18, 2017, 08:33:37 AM »
If you are going to be buying RoW in your RRSP and are happy with USD denominated assets (as you seem to be/VTI) then I would also suggest VXUS.         I'm pretty happy with it.
I don’t have enough right now to justify doing Norbert Gambit for USD, but thanks for thé input.