# Rebalance Time



## cynbad (Feb 20, 2012)

Hi folks, It's rebalancing time for me and I'm a little confused as how to rebalance efficiently. I have just added $25,000 to my RRSPs and have topped up my TFSA. Here's my allocation so far:

*RRSP*
XIU: 20%
XRB: 10%
XBB: 20%
VTI: 15%
VXUS: 15%
***looking for one more ETF and not sure what category

*TFSA*
CDZ
ZRE
***looking for more ETFs, perhaps a bond and/or US dividend (considering VGG) fund.

I'm 40 years old and investing for retirement purposes, although I would like to see my TFSA grow a little faster. Any advice would be appreciated. Thank you.


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## andrewf (Mar 1, 2010)

Many would suggest treating all your retirement savings accounts as one portfolio, rather than treating the TFSA and RRSPs (and any non-registered savings) as distinct.

Also, you mention that you want to hold more ETFs and are not sure what asset class you want to invest in. I think you have it backwards. You should pick the asset classes you want to invest in, then determine which ETFs help you implement that asset allocation.


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## Canadian (Sep 19, 2013)

If you start buying several ETFs on one index you will end up [inefficiently] buying the same companies. I'm pretty sure there's company overlap between XIU and CDZ. I agree with andrewf that it's a good idea to treat the accounts as a single portfolio. If you insist on another ETF I suggest increasing your US or international exposure, considering you already have Canadian exposure through XIU and CDZ. BMO offers an equal-weight US bank ETF [ZUB], if you're bullish on the US economy. You also don't have any exposure to emerging markets - I'm not saying whether you should or not, but it's an idea.

Best tip I can offer is to look at the ETF holdings before you purchase. The purpose of investing via ETFs is to gain access to a "basket" of stocks efficiently [low maintenance, low cost]. If you clutter your portfolio with redundant ETFs you are increasing your costs and not effectively diversifying.


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## mike06 (Aug 4, 2011)

I agree that owning both CDZ and XIU is very much inefficient as they are redundant holdings, as would be adding VGG when you already hold VTI. I dont think that you need to add any more ETFs, just continue to put more money into the ones that you have in order to rebalance. but if you must, then id probably look to either utilities (ZUT) or telecoms (IXP) as a small holding (maybe 5% max) since they are the only other 2 poorly represented sectors in the global mix besides REITs which you already have covered.


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## dubmac (Jan 9, 2011)

I was hoping to see a thread like this one at this point in the year! Great idea. I am also rebalancing/assessing a few accounts.

I currently own (in my equity portion)

CDZ - cdn div etf
ZRE - BMO reit etf
VWO - emerging market etf
CYH - global div etf

I need to round out my investment pf with a US equity etf fund. I am wondering whether to add either VUS (Vanguard US Equity ETF) or ZDY (BMO US Dividend etf), or a mutual fund that was suggested in the Couch Potato pf - TD US INDEX I - (TDB078) or any other. Does anyone have any ideas - I'm looking to DRIP any distributions from the fund and my investment broker has arranged a synthetic drip with selected vanguard, ishares and BMO and Horizon etf's. The best performer on the US index was TDB078 - but that was last year, not necessarily an indication of what will be a good fund looking ahead.

Thoughts on a good US equity fund to round out our pf for 2014?


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## Canadian (Sep 19, 2013)

How much $ do you plan to invest initially in the US fund and increments thereafter? You don't have to answer that question. But use it to guide your decision between MF and ETF. Over the long term, I would recommend ETF, but I suggest keeping your commissions <1% of your investment to make it viable.

I don't follow any mutual funds and only look at a few ETFs. At a glance, though, I would prefer a S&P500 ETF over a US dividend one. I compared BMO's US dividend ETF (ZDY) to its S&P500 ETF (ZSP) and noted a few things:

1) ZDY has a much heavier utilities weighting (~20% vs ~3%). While good for income, most utilities are currently lagging in growth.
2) ZSP has a much heavier financials weighting (~21% vs ~4%). US financial companies look to be poised for some decent growth as the economy improves IMO.
3) The remaining allocations are pretty similar.
4) ZDY started in late March, 2013 and has since returned ~17% (including distributions). ZSP has returned ~24% (including distributions) over the same time period.
5) The MER on ZDY is 0.3% and ZSP is 0.15%.
6) Both are available in US funds or hedged to CAD.

If income is your primary goal then ZDY may be a better alternative. However, for total return, I see more potential in ZSP.

iShares offers a similar ETF to ZSP (XUS). XUS is a bit lighter on financial than ZSP and the remaining allocations a tad % higher than ZSP. Its MER is 0.14%. Its distributions are comparable for the most part but ZSP looks to be more liquid. Average daily volume on XUS is ~17M shares and ZSP is ~43M. Of course, this can and likely will change in the future, as both funds haven't been around for a very long time.

I didn't look at Vanguard, Horizons, or other companies, so there could be better ETFs that I'm unaware of.


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## My Own Advisor (Sep 24, 2012)

Like andrewf wrote, I would treat all your retirement accounts as one large portfolio. 

Regarding your RRSP, I like the holdings myself and the allocations although I would own more U.S. there (VTI) at some point. Why do you feel you need any more ETFs there?

Regarding the TFSA, you could always go with more XIU there and add some ZUT for spice. You could always add some low cost VUN in the TFSA.

Overall, pretty solid stuff.


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## dubmac (Jan 9, 2011)

Canadian said:


> If income is your primary goal then ZDY may be a better alternative. However, for total return, I see more potential in ZSP.
> 
> iShares offers a similar ETF to ZSP (XUS). XUS is a bit lighter on financial than ZSP and the remaining allocations a tad % higher than ZSP. Its MER is 0.14%. Its distributions are comparable for the most part but ZSP looks to be more liquid. Average daily volume on XUS is ~17M shares and ZSP is ~43M. Of course, this can and likely will change in the future, as both funds haven't been around for a very long time.
> .


Thanks the this analysis Cdn - I plan on looking more into XUS and ZSP
:encouragement:


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## leeder (Jan 28, 2012)

@ dubmac: Just to add on to Canadian's sound advice, consider what accounts you're adding the US equity. There may be certain tax implications (e.g., withholding tax, etc.).

In terms of US ETFs trading on the TSX, if you have new funds to contribute, you can't go wrong with VUN. It's essentially VUS, except it's not hedged. It's about as cheap as any US ETFs trading in Canada as you can get, and definitely broadest. Unlike the Canadian market where three sectors make up majority of the index, I find the US market quite a bit more balanced in terms of sector allocation. So I find it pointless to own either low volatility US ETFs or US dividend ETFs.


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## leeder (Jan 28, 2012)

cynbad said:


> Hi folks, It's rebalancing time for me and I'm a little confused as how to rebalance efficiently. I have just added $25,000 to my RRSPs and have topped up my TFSA. Here's my allocation so far:
> 
> *RRSP*
> XIU: 20%
> ...


What you have here is pretty good, in my opinion. My personal opinion would be to reduce XIU to 0% in the RRSP and bump up VTI and VXUS. In your TFSA, you can replace CDZ with a mixture of VCN and some fixed income (e.g., VSC or laddered GICs).


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## cynbad (Feb 20, 2012)

Thank you for the helpful advice. I realized that I was straying away from my couch potato ways. I ended up dividing my Canadian equity between my RRSP and TFSA and added 5% of ZUN in the TFSA. I feel good about what I've done. Thanks again.


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## dubmac (Jan 9, 2011)

Thanks leeder & Cdn for your help. I am considering VUN as well as VUS, but have discovered two other funds that I'd like help with understanding - 
I have been looking at VFV (Vanguard US Equity S&P Index) and VSP (Vanguard US Equity S&P Index - Cdn $ hedged). Both trade on the TSX.
Do I understand correctly that since VFV is not C$ hedged, that it's assets, and any distributions are valued in US$? whereas the VSP fund is valued in C$? What exactly does "hedged" mean? 
Which fund is preferable in a non-reg account pf that is being (gradually) used for retirement purposes at this point?


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## richard (Jun 20, 2013)

dubmac said:


> I have been looking at VFV (Vanguard US Equity S&P Index) and VSP (Vanguard US Equity S&P Index - Cdn $ hedged). Both trade on the TSX.
> Do I understand correctly that since VFV is not C$ hedged, that it's assets, and any distributions are valued in US$? whereas the VSP fund is valued in C$? What exactly does "hedged" mean?
> Which fund is preferable in a non-reg account pf that is being (gradually) used for retirement purposes at this point?


Both funds are valued in CAD so that's what you use to buy and sell them. The only difference is the returns you get.

For example someone in the US would buy VOO with USD. If they held it for one year and sold it today they would get a return of 32.3% in USD. Of course you can't do the same thing since you need to use CAD.

If you buy VFV Vanguard will convert your money into USD and buy the same stocks that VOO holds. Then when you sell it Vanguard will convert your money back to CAD. Your return over the last year would be 41% in CAD. You bought stocks and USD at the same time and both of them have increased in value. Since VFV is not hedged you get the gains from both.

If you bought VSP instead and sold it today you would have a return of 32.7% in CAD over the last year. That's almost the same as the return that the person in the US gets from holding VOO. Vanguard still does the conversion to USD to buy the stocks. But they also buy a hedging contract with a bank where one side has to pay the other an amount based on the difference in the exchange rate so that does not affect you. The result is that you get the same returns as someone using USD while you are using CAD.

Last year the return on VSP was slightly higher than VOO but usually it will be lower. The hedging contract comes at a cost and it's hard to adjust it to continual changes in the fund, so most funds with hedging lose about 1%/year to this. The return on VFV was much higher than VSP and that also won't happen all the time. Any time the USD loses value it will be the reverse.

If you use the unhedged fund you will gain or lose a little each year based on the currency exchange rate. Over several decades this is likely to cancel out and not affect the long-term returns by much. On the other hand if you use the hedged version you can expect it to cost you about 1% every year. If it costs more and it isn't giving you any benefit it's not worth it. The exposure to other currencies that you get with the unhedged version also helps to diversify your portfolio.


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## andrewf (Mar 1, 2010)

^Great post. I would add that CAD and equities are inversely correlated, so when you hedge your currency exposure, you tend to get higher volatility in CAD terms. Often, when equities correct, the USD strengthens (causing CAD to fall in relation). So a 30% equity drawdown in USD terms may only be 20% down in terms of CAD. With hedging, you would get a negative 30% return. Currency hedging can actually be detrimental, even without the drag factored in.


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## leeder (Jan 28, 2012)

The only difference between hedged and non-hedged product is the currency fluctuation. Hypothetically, if the S&P 500 gained 5% and the Canadian dollar went down 5% relative to the US dollar, assuming there is no tracking error with the fund or any dividends, you would get 10% for the non-hedged product. The hedged product would only return you 5%, as hedging means you are purchasing the product in the local currency (USD).

I generally agree with andrewf's post above. However, some people who are close to retirement may choose to reduce that additional risk, in case CAD does strengthen against the USD.

Regarding the distributions to investors, all the hedged and non-hedged products are distributed in Canadian dollar. For tax purposes, they are considered to be foreign income. When investing in the non-registered account with these products, you can claim the withholding tax back.


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## dubmac (Jan 9, 2011)

Wow... thanks guys (I feel like I should pay you or something).
soooo..I'm 53 - not retiring for another 7-8 yrs.
I also expect, at least for this year, that the Cdn dollar will go down.
As for the witholding tax, I already hold VWO (which trades on the NYSE) - but VFV is traded on the TSX - would I still need to complete the withholding tax form - I could always call my broker on this question for further clarification.
It looks more like VFV is the one I want over VSP. Now I'll need to compare the merits of VFV over VUN and VUS.


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## richard (Jun 20, 2013)

andrewf said:


> ^Great post. I would add that CAD and equities are inversely correlated, so when you hedge your currency exposure, you tend to get higher volatility in CAD terms. Often, when equities correct, the USD strengthens (causing CAD to fall in relation). So a 30% equity drawdown in USD terms may only be 20% down in terms of CAD. With hedging, you would get a negative 30% return. Currency hedging can actually be detrimental, even without the drag factored in.


That's a good point. Equities are usually tied to real assets so their value isn't completely based on any currency. If the CAD falls foreign investors should start buying cheap Canadian equities and drive up the price. In the real world there are some obstacles to that and in any case it takes some time to work itself out. It's another reason that hedging might not be useful.



dubmac said:


> soooo..I'm 53 - not retiring for another 7-8 yrs.
> I also expect, at least for this year, that the Cdn dollar will go down.
> As for the witholding tax, I already hold VWO (which trades on the NYSE) - but VFV is traded on the TSX - would I still need to complete the withholding tax form - I could always call my broker on this question for further clarification.
> It looks more like VFV is the one I want over VSP. Now I'll need to compare the merits of VFV over VUN and VUS.


In that case, remember that the exchange rate mostly went in one direction from around 2000 - 2010 which is a pretty long time. That was bad for unhedged holdings (interestingly the Canadian market did great, which might be related to what andrew wrote). It's entirely possible that it will spend the next decade going back in the other direction now. With less than 10 years to go anything could happen. But if you aren't spending your entire portfolio on the day you retire then the time you will stay invested is still longer than that.

I don't believe it's possible to complete a withholding tax form for a Canadian fund since you aren't personally receiving income from a US entity. Can't hurt to check though.


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## leeder (Jan 28, 2012)

dubmac said:


> Wow... thanks guys (I feel like I should pay you or something).
> soooo..I'm 53 - not retiring for another 7-8 yrs.
> I also expect, at least for this year, that the Cdn dollar will go down.
> As for the witholding tax, I already hold VWO (which trades on the NYSE) - but VFV is traded on the TSX - would I still need to complete the withholding tax form - I could always call my broker on this question for further clarification.
> It looks more like VFV is the one I want over VSP. Now I'll need to compare the merits of VFV over VUN and VUS.


I believe you will need to complete the form, since the distributions of the Canadian listed ETFs that hold US listed ETFs pay foreign income. Please see http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/121/frgn-eng.html for guidance.

Alternatively -- and I know I'm potentially opening a can of worms here -- you can consider a product like HXS - Horizons S&P 500 index (non-hedged). This product has a MER of 0.15% and a swap fee of 0.30%. Although the product is more expensive, you do not have to worry about the distributions and withholding tax. In essence, the dividends that the index pays out are automatically reinvested back. Instead of tracking S&P 500 and receiving distributions, you are essentially tracking the S&P 500 total return index (S&P 500+distributions together) less the 0.45% expense. There is no tax liability until you sell the product, at which time it is treated purely as capital gain/loss (i.e., 50%). The downside of this product is that it is a swap-based ETF (unlike other ETFs, which hold the actual stocks or the US ETF that hold the stocks directly). As a result, there may be counterparty risks. There will be people who may disagree with me, but I think this product is very good for taxable accounts. Unless Gov't of Canada and CRA decide to change the tax system, I would take a long look at this product because it is quite tax efficient (currently).


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