Newbie Self Directed ETF
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Thread: Newbie Self Directed ETF

  1. #1
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    Newbie Self Directed ETF

    Good day,

    I am sick and tired of my portfolio being depleted by fees from my fund management company. I have decided to look into a self directed RRSP, TFSA, and RESP. I have a couple questions that I apologize if they are answered a million times over in the forum, my brief look didn't uncover them.

    1. How can I tell what ETF's are RRSP eligible?
    2. Why would I choose a CAD hedged fund over a non hedged fund? (S&P 500 for instance)
    3. Are ETF's and RESP for my children compatible?


    Basically I am not sure if I am on the right track or not here. I have only spent a couple days looking into this new world of self directed investing. My thoughts are I would open an account with someone like RBC direct Investing and self direct. I would buy into something like Vanguard CAD hedged S&P (SYMBOL VSP) minimally and familiarize myself with the processes. Eventually I would like to fire my families financial advisor and firm and manage my current portfolios myself. Sound like I'm moving forward correctly? Please be easy on me...


  2. #2
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    1. I don't know which aren't, but essentially all of your basic, index tracking ETFs are suitable and eligible for your RRSP. Since ETFs provide more diversification as they have many underlying holdings they are generally considered less risky than holding a couple of individual stocks. I haven't come across an ETF not eligible, but then again haven't been specifically looking.
    2. If you are betting on the currency change. For instance, if you think CAD will do poorly compared to USD then you'd by a non-hedged and vice-versa. A good example is VUN vs VUS and then compare to how the CAD has done compared to USD. General recommendation seems to be non-hedged as no one knows which way the currency will go and they are generally lower fees.
    3. Yuppers!

    Take a look at Canadian Couch Potato and the Model Portfolios there - specifically the ETF one. This is a great starting point, simple to implement, and flexible for what you want to achieve.

    http://canadiancouchpotato.com/model-portfolios-2/

  3. #3
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    If you go on the website of the ETF provider you are interested in, almost all of them list the eligibility under each ETF. For instance, VCN by Vanguard:

    FTSE Canada All Cap Index ETF (VCN)
    BENCHMARK: FTSE Canada All Cap Index
    Management fee 0.05%
    MER 0.06%
    KEY FUND FACTS
    Inception date : 02-08-2013
    Benchmark : FTSE Canada All Cap Index
    Net assets : $718.2 million
    12 month trailing yield : 2.34%
    Distribution yield: 2.30%
    Dividend schedule : Quarterly
    Distribution per unit : $0.17896
    Eligibility : RRSP, RRIF, RESP, TFSA, DPSP, RDSP


    I would avoid hedged products. You are gambling on exchange rates then, pure and simple.
    "That's what I do, I drink and I know things" - Tyrion Lannister

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  5. #4
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    Be advised, your advisor based funds may have early redemption (B/E or DSC) fees attached to them.

    And you may be charged account transfer fees, though depending on the size of your account, most receiving institutions can/will pick those transfer fees up for you. Ask first...hebs

  6. #5
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    Good responses, more questions

    Thanks for the replies.

    I clearly need to educate myself. My understanding is that "hedged CAD" products were made to avoid the currency rate fluctuations. I am sure I was reading that somewhere... I am confused. If I want to buy a US stock index like S&P 500 in CAD$, I would then need to invest in non-hedged products? Please clarify...

    One big concept we obviously strive for is compounded interest. If I am to invest into a ETF through a venue like RBC direct investing they charge a trade flat fee of $9.95. If I want to make regular bi-weekly contributions these fees add up fast. Is it better to wait for a larger amount to make the transactions (like a quarterly contribution) or pay the fees so I do not miss out on invested time and compounding interest?

    I am currently with IG and remember my advisor telling me that I could not move my funds from their management for 3 years or face penalty. That 3 years is almost now up. I have contacted my advisor at IG and asked him to clarify what it would cost me to leave their clasp now, although I plan to wait it out but start contributing to my self directed path as soon as I figure out how to do it, and where to put my funds.

  7. #6
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    Quarterly or bi-annual contributions is fine, depending on the amounts. With commissions take care to calculate the percentage of the cost compared to the investment. For example, a $10 commission with a $5,000 investment is a one-time cost of 0.2% which is not bad. The important thing with compounding is to do it, not necessarily to do it more frequently. For instance, if you do the math, continuous compounding doesn't work out to be that much more than quarterly compounding.

    Hedging may be difficult to explain, but once you get it you get it. If you bought a CAD-hedged S&P 500 fund it would more or less mirror the movement of the S&P 500. So if the S&P went up 1%, your investment would also go up by 1%. In Canadian dollars though. Currency hedging is generally discouraged, as with diversification you may also want the benefits of currency diversification.

  8. #7
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    Quote Originally Posted by kungfuthug View Post
    ... I clearly need to educate myself. My understanding is that "hedged CAD" products were made to avoid the currency rate fluctuations. I am sure I was reading that somewhere... I am confused.
    Not as much as you think ... to stay on top of the currency fluctuations, actions have to be taken by the manager ... which adds to what the annual cost. Some figure it is worth it and as per the above posts, some don't think it is worth it as no one really knows when the fluctuations will happen or how big.

    For example, if one put a bunch of CAD into an S&P500 non-hedged product with another twenty years of investing to do ... does one really care that the current retail exchange rates are bad when one had a good rate on buying plus the economy of scale the pros managing it would have used?


    Quote Originally Posted by kungfuthug View Post
    ... If I want to buy a US stock index like S&P 500 in CAD$, I would then need to invest in non-hedged products?
    I think the point was more that with a long time invested as well as not knowing what the exchange rate will be down the road .... is it worth the annual extra fees of a hedged product?

    The lead in point was that if there was a thought an immediate change was in the offing - then a hedged product might make sense ... or at least, that's the way I read post # 2.


    Quote Originally Posted by kungfuthug View Post
    ... One big concept we obviously strive for is compounded interest. If I am to invest into a ETF through a venue like RBC direct investing they charge a trade flat fee of $9.95. If I want to make regular bi-weekly contributions these fees add up fast. Is it better to wait for a larger amount to make the transactions (like a quarterly contribution) or pay the fees so I do not miss out on invested time and compounding interest?
    I'd park it in a HISA MF then redeploy it as the fees become more manageable. Or what some ETF types do is signup with a brokerage that has most of their ETFs where the buys are commission free and only the selling has a commission.


    Quote Originally Posted by kungfuthug View Post
    ... I have contacted my advisor at IG and asked him to clarify what it would cost me to leave their clasp now, although I plan to wait it out but start contributing to my self directed path as soon as I figure out how to do it, and where to put my funds.
    Sounds like you want to get moving with small amounts, not matter what the timing of the rest. You might want to look into the TD eSeries MFs ... if it is good enough to start, you can make smaller buys without fees. Then depending on when it makes sense, one can move to an ETF. If the investments are in a registered account - redeploying may not have tax consequences.


    Cheers

  9. #8
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    Good info, thanks

    Quote Originally Posted by Eclectic12 View Post
    Not as much as you think ... to stay on top of the currency fluctuations, actions have to be taken by the manager ... which adds to what the annual cost. Some figure it is worth it and as per the above posts, some don't think it is worth it as no one really knows when the fluctuations will happen or how big.

    For example, if one put a bunch of CAD into an S&P500 non-hedged product with another twenty years of investing to do ... does one really care that the current retail exchange rates are bad when one had a good rate on buying plus the economy of scale the pros managing it would have used?
    I am 37 years old. I plan on leaving it untouched for 20+ years. If I buy the shares in a non hedged fund than I am paying CAD and then it is converted to USD and then purchased?

    Also is there any tax implications that I need to be versed on buying shares in this manner for an RRSP?

    Thanks

  10. #9
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    To become a successful self-directed investor, you need a little depth that I am not sure you will get simply by asking questions in this thread. I am not questioning the advice you've been given here (it is good), but to be successful, you really need to understand why actively managed funds tend to underperform, what asset allocation works for you, why a specific portfolio design makes sense, how to minimize costs (like transaction fees and taxes), how to trade, etc.

    Someone already pointed you to the Canadian Couch Potato model portfolios. I would recommend taking the time to read The Money Sense Guide to the Perfect Portfolio, written by the CCP blog author. It is a quick read that explains the basics of the Couch Potato strategy, from a Canadian perspective. The model portfolios in the book may be out of date, so refer to the website instead. But the pillars of the strategy remain the same. Note that the book does cover currency hedging.

    One big concept we obviously strive for is compounded interest. If I am to invest into a ETF through a venue like RBC direct investing they charge a trade flat fee of $9.95. If I want to make regular bi-weekly contributions these fees add up fast. Is it better to wait for a larger amount to make the transactions (like a quarterly contribution) or pay the fees so I do not miss out on invested time and compounding interest?
    Unless you have large amounts (e.g. $5,000+) of money to contribute every two weeks, you probably don't want to make bi-weekly contributions to ETF funds, as the transactions costs would be a drag on your return. I tend to park the cash in my account, until the commission fee is 0.5% or less than the amount of cash held in the account. The cash is parked in an investment savings account, like TDB8150, until I decide that I want to buy. YMMV.

    You may also want to consider starting out with TD e-Series funds first, and then transition to ETFs after.
    Last edited by rebel_ins; 2017-03-14 at 07:52 PM.

  11. #10
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    Quote Originally Posted by kungfuthug View Post
    I am 37 years old. I plan on leaving it untouched for 20+ years. If I buy the shares in a non hedged fund than I am paying CAD and then it is converted to USD and then purchased?
    The most common way is to buy a Canadian domiciled ETF that holds for example, the S&P500 index. You buy the Canadian ETF in CAD which the ETF manager converts to USD, at a much larger economy of scale than you would personally get. The ETF then buys in USD. I'd have to dig into the details to be sure but I believe the reports as well as the performance graphs will be in CAD. As long as you hold - almost everything should be in USD, tracking the US performance minus the MER expense. The key here is that currency conversions will mainly matter when one buys/sells with the added bonus that the proceeds will be CAD. In a taxable account, the capital gain has to be reported in CAD so at times, a USD capital loss ends up as a CAD capital gain.

    Some investors have US sources of income or have an efficient way to convert CAD to USD or prefer to avoid the loss of the US withholding tax in a registered account. They will convert the CAD to USD themselves then buy the US ETF. (I believe one's broker has to support a USD account to go this route.) They know what the conversion rates are but may be paying more than what would have been paid ... though this is likely made up for by a lower US ETF MER as well as US dividends not being taxed by the IRS without a way to recover them. http://canadiancouchpotato.com/2012/...nd-goes-where/

    Quote Originally Posted by kungfuthug View Post
    .. Also is there any tax implications that I need to be versed on buying shares in this manner for an RRSP?
    No Canadian tax implications.

    The US tax implication is that certain types of ETFs will still have to pay the US withholding tax despite being held in an RRSP. For example, buy McDonald's stock in one's RRSP - there's no US withholding tax on dividends (but potentially an expensive broker currency conversion, if one does not have a USD RRSP). Buy a Canadian MF or ETF that holds US stock directly ... they have to pay the US withholding tax on dividends. As this is an RRSP, there's no Canadian taxes which means no ability to recover some/all of these taxes through the foreign tax credit (FTC) as one would in a taxable account.

    Note that where one is comfortable with the underlying structure, one can buy the Horizons S&P500 Index ETF. It uses a special swap structure to avoid receiving US dividends so that there is no US withholding tax to be paid then not recovered. They have a lot of leveraged products to make short term bets so make sure you are looking at the long term hold version. http://www.horizonsetfs.com/ETF/HXS-U


    Cheers


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