Author Topic: CDN investor question - VXC vs XAW  (Read 9939 times)

wwilberforce

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CDN investor question - VXC vs XAW
« on: November 10, 2016, 09:37:28 AM »
Hi Everyone,

This question is directed at my fellow Canuck investors.  I got into index investing just under a year ago.  DW and I are on track to retire with DB pensions in a few years with 2/3 of our pensions having 100% guaranteed indexation, and the other 1/3 not guaranteed--we will only receive that indexation if the plan is fully funded at the time.

So while we have a few years left in our peak earning years with no debt before retiring we've decided to get serious about investing to have an inflation buffer for that 1/3 of our pensions where indexation is not guaranteed.

So I've spent the last year maxing out our registered accounts (I do the investing).  We don't have a lot of room for RRSPs because of the DB pensions.  We have maxed out the TFSAs.  I recently opened non-registered accounts for both of us to continue building the stache until we get more room to invest in the registered accounts next year.

I kept it really simple in terms of what I invested in for the registered accounts: VCN, VXC and VAB--about 90% equities since we have the DB pensions.  I considered going with XAW instead of VXC because of the lower MER, and the fact that it is a bit more tax efficient in terms of foreign withholding taxes. However, there was no DRIP for XAW with the discount broker I am with, so I went with VXC instead.

So for the taxable accounts, I went with XAW instead of VXC because I don't really care about DRIP in these accounts -- I'll be investing regularly and will just get distributions on the market the next time I buy.

Anyways, I'm starting to wonder if I made the  right choice going with XAW for the taxable accounts.  I'm about $25 k into investing in XAW in these accounts. So here's what I weighed when making this decision:

  • Lower MER for XAW, more tax efficient, so overall less costly than VXC
  • XAW has exposure to mid- and small-cap US stocks whereas VXC only has exposure to large-cap US stocks
  • distributions - about 2% for XAW versus around 2.6% for VXC
  • distributions for XAW are twice a year versus 4 times a year for VXC
  • for profit (iShares) versus non-profit (Vanguard)

What swayed my decision towards XAW was the lower costs and greater exposure to mid and small cap stocks in the US, which should result in better returns.

What's giving me pause now? Well I really like distributions! VXC has a higher return that way--not sure why--and distributions happen 4 times a year as opposed to twice. With my registered accounts I really look forward to the 4 times a year when distributions and DRIP happen.  This motivates me. Also, I'm in this for the long-haul--don't plan on touching these investments for at least 10-15 years, and I have more confidence in Vanguard to have my best interests at heart over the long term than iShares in terms of keeping costs down.

What do you think?  I'm considering just starting to invest in VXC in these taxable accounts and leaving the $25K in XAW alone so I don't trigger capital gains....

Any thoughts or advice would be much appreciated MMM community!

WWilberforce
« Last Edit: November 10, 2016, 10:17:19 AM by wwilberforce »

drewdeezee

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Re: CDN investor question - VXC vs XAW
« Reply #1 on: November 10, 2016, 11:52:00 PM »
I'd expect the difference in performance between the two ETFs would be negligible. The bigger impact would be your motivation. If VXC motivates you and brings more excitement in accumulating your money muSTASH, go full throttle on VXC.

mgarf

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Re: CDN investor question - VXC vs XAW
« Reply #2 on: November 11, 2016, 12:18:32 AM »
I prefer VXC because yes, while it does only have large cap US, it makes up for this (and then some) by its broader exposure to the international market (8000 vs 5000 holdings)

GreatLaker

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Re: CDN investor question - VXC vs XAW
« Reply #3 on: November 11, 2016, 07:41:44 AM »
You might be getting into over-analysis. I don't hold either one of these since my portfolio was designed before they were available, so I am not that familiar with them. The performance differential is likely to be small over time and hard to predict in advance.

Here are a couple of links in case you have not seen them.
http://www.canadianportfoliomanagerblog.com/war-of-the-worlds-ex-canada/
http://canadiancouchpotato.com/2015/06/16/vanguards-vxc-gets-a-facelift/
http://canadiancouchpotato.com/2014/07/10/under-the-hood-vanguard-ftse-all-world-ex-canada-vxc/
http://canadiancouchpotato.com/2016/06/20/cost-versus-convenience-in-ex-canada-etfs/

One thing I like about iShares is they clearly indicate if international funds hold stocks directly or indirectly through iShares US ETFs, which affects withholding taxes. Vanguard is vague, using phrases like "It invests directly or indirectly primarily in large-, mid-, and small-capitalization stocks of companies located in developed and emerging markets, excluding Canada." for VXC.

As an example of over-analysis, for my fixed income ETF I hold VAB and a 5-year GIC ladder. I used to hold a custom mix of VAB, VSB and VSC, to achieve a specific target of duration and government/corporate allocation, plus a GIC ladder. I realized I was making more work for myself and complicating my portfolio, without any real data to support that my FI allocation would give superior long term results. So I sold VSB and VSC and consolidated the funds into VAB. Simplicity in a portfolio can have benefits.

You mentioned that VXC's distributions are higher. Where did you get that data? Vanguard's website shows 12-month trailing yield of 1.9% for VXC. iShares shows 2.04% for XAW. Be careful using distribution yield, since it is only the last distribution and can fluctuate a lot. And do you need the distributions? If you are not spending the cash then less frequent distributions is better since the money stays invested, and you don't have to reinvest it.

There is a huge thread on the Three Fund Portfolio over at Bogleheads. It borders on fanaticism, but it's worth a read:
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=88005

wwilberforce

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Re: CDN investor question - VXC vs XAW
« Reply #4 on: November 11, 2016, 11:17:45 AM »
Thanks for the replies!

I suspect that I am over-analyzing this as suggested by @GreatLaker... and you are correct about the distributions on the two funds.  Not sure where I got the idea that returns were higher for VXC.  Thanks for the links as well!

I think I will stay put with XAW in the taxable accounts....  After all, I will still have VXC in the registered accounts so if it does do better because of greater international exposure I will benefit there.

@mgarf - I'm guessing you're placing more emphasis on the greater # of holdings in VXC as opposed to the lower MER for XAW, and it's greater tax efficiency?


mgarf

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Re: CDN investor question - VXC vs XAW
« Reply #5 on: November 11, 2016, 02:32:08 PM »
Yes, I believe the extra holdings trumps the slightly better MER.

What I know is that over a 12 year period from 1994 to 2016, the MSCI USA IMI index (2,494 large, medium and small companies) outperformed the MSCI USA index (922 large and medium companies) by ~0.4% per year. Therefore, although it's not exactly the same (as we are talking US and international stocks)... I believe the extra holdings will trump the 0.06% you save in MER.
« Last Edit: November 11, 2016, 02:33:57 PM by mgarf »

human

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Re: CDN investor question - VXC vs XAW
« Reply #6 on: November 12, 2016, 09:16:00 AM »
I'm not the op but wanted to thank great laker and mgaf for their posts, so thanks! Very informative, for what it's worth I went VXC for the simple reason that it had more assets.

MMMdude

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Re: CDN investor question - VXC vs XAW
« Reply #7 on: November 21, 2016, 09:11:14 PM »
Good discussion.  I recently started investing in XAW versus VXC i had accumulated over many years due to the lower MER and higher distribution.  The point about VXC being more diversified given the higher holdings is food for thought.  I think I will stick with abit of both and see how it shakes out the next few years.

Now....another question....at what point does one switch to US listed equivalents for the much lower MER's, however with more hassle?

human

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Re: CDN investor question - VXC vs XAW
« Reply #8 on: November 24, 2016, 05:50:15 PM »
I don't have any insight on that since I have a pittance for holdings rightnow. However in case there are lurkers or those wondering how Norbert's Gambit works. I think Million dollar journey recently posted the best explanation of how it works. I have no affiliation with the blog :http://www.milliondollarjourney.com/real-life-example-of-norberts-gambit-and-foreign-exchange-w-bmo-investorline.htm

Heckler

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Re: CDN investor question - VXC vs XAW
« Reply #9 on: November 27, 2016, 08:21:31 AM »
My understanding is that VCN should be held in taxable due to Canadian dividend tax credits.  Im a few years away from a taxable account so haven't researched deeply, but that's my plan.  Sell my VCN from RSP and keep bonds first, then International holdings in RSP. 
http://www.finiki.org/wiki/Tax-efficient_investing
« Last Edit: November 27, 2016, 08:23:17 AM by Heckler »

daverobev

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Re: CDN investor question - VXC vs XAW
« Reply #10 on: November 27, 2016, 03:47:15 PM »
My understanding is that VCN should be held in taxable due to Canadian dividend tax credits.  Im a few years away from a taxable account so haven't researched deeply, but that's my plan.  Sell my VCN from RSP and keep bonds first, then International holdings in RSP. 
http://www.finiki.org/wiki/Tax-efficient_investing

There's good reason to put bonds outside, due to their low rate of return, while keeping high growth stuff sheltered. If not that, then yes, anything that gives Canadian Eligible dividends.

MMMdude

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Re: CDN investor question - VXC vs XAW
« Reply #11 on: November 27, 2016, 07:43:15 PM »
You have to think down the road, what setup will yield the lowest marginal tax rate given the expected annual income

For me, I anticipate having 50K in income via Cdn div stocks, bond funds and US ETF holdings

I am lucky in that my 40% bond allocation of approximately $500,000 will fit in either TFSA and RRSP leaving the 60% equities in taxable accounts.  Much of this will be in Cdn div payers.  In Alberta one can earn approx 60K and not pay a dime in tax if it is all Canadian dividend payers.

Unfortunately since my bonds will take 100% of my non taxable accounts, I am left with some negative tax consequences in having foreign equity in my taxable accounts.  The good news in that is that they generally yield under 2% and I would get to use the foreign tax credit against any tax withheld.

I disagree that bonds should ever be held in taxable accounts given that interest income has the worst tax treatment as treated like regular income.

Anyways on this 50K income I would be paying approximately 4K per year in taxes or 8% marginal tax rate which I can live with.

daverobev

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Re: CDN investor question - VXC vs XAW
« Reply #12 on: November 28, 2016, 06:40:36 AM »
You have to think down the road, what setup will yield the lowest marginal tax rate given the expected annual income

For me, I anticipate having 50K in income via Cdn div stocks, bond funds and US ETF holdings

I am lucky in that my 40% bond allocation of approximately $500,000 will fit in either TFSA and RRSP leaving the 60% equities in taxable accounts.  Much of this will be in Cdn div payers.  In Alberta one can earn approx 60K and not pay a dime in tax if it is all Canadian dividend payers.

Unfortunately since my bonds will take 100% of my non taxable accounts, I am left with some negative tax consequences in having foreign equity in my taxable accounts.  The good news in that is that they generally yield under 2% and I would get to use the foreign tax credit against any tax withheld.

I disagree that bonds should ever be held in taxable accounts given that interest income has the worst tax treatment as treated like regular income.

Anyways on this 50K income I would be paying approximately 4K per year in taxes or 8% marginal tax rate which I can live with.

$100k of bonds yielding 2%; you're in the lowest tax bracket; you're shielding yourself from 20% tax on $2k.

$100k of stocks yielding 3% and 4% capital gains; you're shielding yourself from 20% tax on $3k a year and 10% tax on $4k a year.

If bonds were yielding 10%, or 15%, it'd be a different story.

Retire-Canada

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Re: CDN investor question - VXC vs XAW
« Reply #13 on: November 28, 2016, 12:07:43 PM »
My understanding is that VCN should be held in taxable due to Canadian dividend tax credits.  Im a few years away from a taxable account so haven't researched deeply, but that's my plan.  Sell my VCN from RSP and keep bonds first, then International holdings in RSP. 
http://www.finiki.org/wiki/Tax-efficient_investing

There's good reason to put bonds outside, due to their low rate of return, while keeping high growth stuff sheltered. If not that, then yes, anything that gives Canadian Eligible dividends.

I hold 100% VCN in my Non-Registered account for the favourable tax rates on dividends. I don't hold any bonds so that's not a problem for me.

MMMdude

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Re: CDN investor question - VXC vs XAW
« Reply #14 on: November 28, 2016, 07:04:32 PM »
You have to think down the road, what setup will yield the lowest marginal tax rate given the expected annual income

For me, I anticipate having 50K in income via Cdn div stocks, bond funds and US ETF holdings

I am lucky in that my 40% bond allocation of approximately $500,000 will fit in either TFSA and RRSP leaving the 60% equities in taxable accounts.  Much of this will be in Cdn div payers.  In Alberta one can earn approx 60K and not pay a dime in tax if it is all Canadian dividend payers.

Unfortunately since my bonds will take 100% of my non taxable accounts, I am left with some negative tax consequences in having foreign equity in my taxable accounts.  The good news in that is that they generally yield under 2% and I would get to use the foreign tax credit against any tax withheld.

I disagree that bonds should ever be held in taxable accounts given that interest income has the worst tax treatment as treated like regular income.

Anyways on this 50K income I would be paying approximately 4K per year in taxes or 8% marginal tax rate which I can live with.

$100k of bonds yielding 2%; you're in the lowest tax bracket; you're shielding yourself from 20% tax on $2k.

$100k of stocks yielding 3% and 4% capital gains; you're shielding yourself from 20% tax on $3k a year and 10% tax on $4k a year.

If bonds were yielding 10%, or 15%, it'd be a different story.

On stocks, do you mean 3-4% dividends....if so, dividends = 0% tax rate unless you are fortunate to have over say 60K in dividend income or a bunch of other income.  As for capital gains you note, remember that only 50% of taxable gains are taxable assuming you have zero loss carryforwards, which with proper tax loss harvesting should never happen in a portfolio. 

The actual raw numbers don't matter - you have to think about marginal tax rates

daverobev

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Re: CDN investor question - VXC vs XAW
« Reply #15 on: November 28, 2016, 08:40:21 PM »
You have to think down the road, what setup will yield the lowest marginal tax rate given the expected annual income

For me, I anticipate having 50K in income via Cdn div stocks, bond funds and US ETF holdings

I am lucky in that my 40% bond allocation of approximately $500,000 will fit in either TFSA and RRSP leaving the 60% equities in taxable accounts.  Much of this will be in Cdn div payers.  In Alberta one can earn approx 60K and not pay a dime in tax if it is all Canadian dividend payers.

Unfortunately since my bonds will take 100% of my non taxable accounts, I am left with some negative tax consequences in having foreign equity in my taxable accounts.  The good news in that is that they generally yield under 2% and I would get to use the foreign tax credit against any tax withheld.

I disagree that bonds should ever be held in taxable accounts given that interest income has the worst tax treatment as treated like regular income.

Anyways on this 50K income I would be paying approximately 4K per year in taxes or 8% marginal tax rate which I can live with.

$100k of bonds yielding 2%; you're in the lowest tax bracket; you're shielding yourself from 20% tax on $2k.

$100k of stocks yielding 3% and 4% capital gains; you're shielding yourself from 20% tax on $3k a year and 10% tax on $4k a year.

If bonds were yielding 10%, or 15%, it'd be a different story.

On stocks, do you mean 3-4% dividends....if so, dividends = 0% tax rate unless you are fortunate to have over say 60K in dividend income or a bunch of other income.  As for capital gains you note, remember that only 50% of taxable gains are taxable assuming you have zero loss carryforwards, which with proper tax loss harvesting should never happen in a portfolio. 

The actual raw numbers don't matter - you have to think about marginal tax rates

I was talking about income above the tax free allowance, but bottom bracket; stocks other than qualified Canadian. The ten percent rate was half the twenty percent bracket, for cap gains.