# XAW/XIC/ZAG vs XBAL/VBAL or XGRO/VGRO



## afulldeck (Mar 28, 2012)

Currently I have a 3 fund portfolio XAW/XIC/ZAG where the Non-registered is XIC >> XAW, TFSA = XIC and RRSP XAW>ZAG>XIC. The overall portfolio is large. 

Has anyone in this forum looked at the math behind the 3 fund vs the single etf? What would I lose moving a large porfolio over to XGRO. Does making that type of change even make sense?


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## GalacticPineapple (Feb 28, 2013)

afulldeck said:


> What would I lose moving a large porfolio over to XGRO. Does making that type of change even make sense?


You would lose a few basis points a year. This will not meaningfully impact your life.


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## james4beach (Nov 15, 2012)

I think it's worth considering some "management" questions. With your current 3 fund portfolio:

a) are you remembering to rebalance ever 6 or 12 months?
b) are you deploying cash and staying fully invested to avoid cash drag?
c) are you sticking to your target allocations over time?

If you answer Yes to all of these then stick with what you have. However if your current arrangement is causing you difficulty in rebalancing or maintaining target weights, or you experience cash drag, then it might be worth going with the all-in-one fund.


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## Topo (Aug 31, 2019)

If you have a large portfolio, you would also have large distributions. In my opinion, some thought should go into tax efficiency. Keeping the ETFs separate may be more tax efficient than combining them in this setting. 

XIC, having mostly eligible dividends, could be kept in a taxable account. It pays a 3% dividend; about 50k-60k of eligible dividends can be received tax free, if there is no other income. XIC would be tax inefficient if held in the RRSP, since all distributions and the principal will be taxed as income. If you have other income (through work or pension), this could be different and XIC may be tax inefficient, in which case TFSA would be a good place to hold it.

XAW and ZAB throw distributions mostly consisting of interest. RRSP and TFSA are fine places for those type of ETFs.


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## james4beach (Nov 15, 2012)

I do agree with the tax efficiency notes above, but management and rebalancing also shouldn't be overlooked.

I had an experience helping a family member run an ETF based portfolio for 12 years. When I analyzed the performance, I found we ended up underperforming a benchmark mainly due to cash drag and failing to routinely rebalance. The portfolio had been held through the 2008 crash and because we didn't maintain target allocations, we missed the chance to "buy low" after stocks had crashed. The other big problem was cash drag, due to staying in cash & short term bonds instead of regular bonds (mistake was _trying to time the bond market_).

Surprisingly, our performance was worse than a low fee balanced mutual fund (so VBAL would have been better, if it existed back then) by about 1% CAGR.

So while I agree that tax efficiency is important, basic position management is also important. Failing to manage the asset allocation properly cost us 1% CAGR. And I think any time you spread a portfolio around different accounts and try to optimize taxes, you can get into situations where rebalancing and position management becomes difficult.


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## Topo (Aug 31, 2019)

james4beach said:


> I do agree with the tax efficiency notes above, but management and rebalancing also shouldn't be overlooked.
> 
> I had an experience helping a family member run an ETF based portfolio for 12 years. When I analyzed the performance, I found we ended up underperforming a benchmark mainly due to cash drag and failing to routinely rebalance. The portfolio had been held through the 2008 crash and because we didn't maintain target allocations, we missed the chance to "buy low" after stocks had crashed. The other big problem was cash drag, due to staying in cash & short term bonds instead of regular bonds (mistake was _trying to time the bond market_).
> 
> ...


You are definitely correct. It depends on how much complexity the OP is comfortable with.


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## afulldeck (Mar 28, 2012)

I'm finding this thread discussion very interesting.

I would not have thought cash drag would be a significant as taxes. I'm going to have to rethink this one as lately, I've been letting it build. 

another question: "..about 50k-60k of eligible dividends can be received tax free, if there is no other income.." what qualifies as income? If I withdrew dividends from the non-registered account and from an drew some amount 'c' from RRSP/RIFF would the RIFF/RRSP amount 'c' be considered income? 

As the OP, I will say from a behavioural perspective I have these characteristics:

a) I'm patient, and generally a set and forget it type of guy (perhaps I'm just lazy or have better things to do with my time) so leans towards a single solution
b) I have a high tolerance for volitility (which makes my Home basis bigger these days) generally high Equity AA
c) However, when its time to make changes FOMO or AA rethinking/navel gazing kicks (too many choices...and months can go by)
d) Might be a fundamental mistake, but I treat CCP as a 450K bond which 'mentally' I add to ZAG


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## AltaRed (Jun 8, 2009)

In a non-registered account, distributions and dividends are income as received...whether you withdraw them from the account or not. Any withdrawals from an RRSP is taxable income. That plus employment earnings, DB/CPP/OAS payments, etc, etc.

d) I think you mean CPP and in my view 450k is too high a number. Rule of thumb 25 times annual payments. You can treat it like fixed income and go light on ZAG but recognize you may have less risk tolerance than you think when your portfolio drops 30% or so like in 2008/2009, and what if it stayed down for a longer time than the big V of 2008/2009? Would you re-balance by pouring fixed income into beaten down equities?


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## afulldeck (Mar 28, 2012)

@AltaRed Yes you are correct. I did use a higher number than 25, I think I equated it to ZAG distribution of 3%... but if we used 25 would mean CPP would be ~360K instead.. good to know. I am assuming the maximum as I sit at 38M right now, next year will hit the limit of 39M. 

In 08/09 I was 100% equities...didn't make any changes just waited and continued to contribute in all three accounts. If I'm not mistaken I think I dropped closer to 50% at the time and since I was heavy in maple the recovery was long 5-7 years? Yes its a little nerve racking.


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## Topo (Aug 31, 2019)

One approach could be using an asset allocation ETF (such as VBAL or XBAL) in all accounts, supplemented by XIC in the non-registered account, considering that asset allocation ETFs do have a healthy exposure to Canadian equities (IIRC close to 20%). You would have to do the math each year to make sure your asset allocation is within your target range. 

If you are okay with the asset allocation of VBAL or VGRO, then the simplicity of the approach may trump all other considerations.


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## agent99 (Sep 11, 2013)

Topo said:


> XAW and ZAB throw distributions mostly consisting of interest. RRSP and TFSA are fine places for those type of ETFs.


Wouldn't XAW (as a Canadian ETF holding US stocks) be subject to withholding tax in a registered account? Generally better to hold individual US stocks or US ETFs if you want US exposure in a RRSP/RRIF?

BTW. What is ZAB?


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## AltaRed (Jun 8, 2009)

It happens with almost any ex-Canada holdings from a Cdn domiciled ETF (and all of them in a TFSA). Tax inefficiency might be 25 bp assuming the majority, but not all, of the yield from US and Int'l stocks is subject to 15% withholding. Not terribly material for the convenience.


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## agent99 (Sep 11, 2013)

AltaRed said:


> It happens with almost any ex-Canada holdings from a Cdn domiciled ETF (and all of them in a TFSA). Tax inefficiency might be 25 bp assuming the majority, but not all, of the yield from US and Int'l stocks is subject to 15% withholding. Not terribly material for the convenience.


From what I have read, XAW is a wrap. IOW, it holds US ETFs that in turn hold international stocks. Apparently withholding tax would in effect increase the fees+taxes from 0.26% to 0.58% if held in a RRSP/RRIF/TFSA vs a taxable account. Yield is so low that maybe the actual $$ cost is not high, but still not the best place to hold that type of ETF. Never did find an ETF with ZAB as symbol.

I had just been looking at how to simplify our portfolios as we age. I have 11 Canadian stocks plus 5 internationals (ADRS) in my RRIF. I don't usually own ETFs, so have been researching how they are taxed. I realized I could perhaps buy one or two ETFs to replicate my Cdn holdings, but it would be best to maintain the individual International ADRs (non of them have WHT), because of taxation on Cdn etfs with US/foreign holdings. Same situation as not having holdings in TFSAs that attract WHT. 

Useful WHT summary: https://www.dropbox.com/s/z3cxuz9yiibyl9v/withholding-tax-reference-guide.pdf?dl=1


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## AltaRed (Jun 8, 2009)

I'd still simplify to ETFs, but in a RRIF/RRSP, hold the US domiciled ones instead. VT has been an 'all in one' go to for this purpose even if it contains a tiny bit of Canada. It will have some Int'l tax withholding that is lost to Canadian residents but I suspect it is very little.


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## agent99 (Sep 11, 2013)

AltaRed said:


> I'd still simplify to ETFs,


Not in a rush. Will wait until after we do our RRIF withdrawals in January to start. Not too hard to do in RRIFs and TFSAs except for trading costs. 

In taxable accounts we have large CGs across the board. Have run out of losers to offset gains against. Equity holdings and yield are actually not much different than some of the high div ETFs like XEI, ZDV. So, in a way, we have our own ETF. No point in paying CG taxes just to simplify portfolio. Too bad we couldn't transfer holdings to an etf without creating CGs. I have seen this sort of in-kind purchase on web, but not sure if it is applicable. https://www.horizonsetfs.com/In-Kind-Transfer-Process


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## AltaRed (Jun 8, 2009)

My Cdn equity portfolio is stocks but everything else is ETFs. I reckon I may have depleted several of my holdings by the time I become incompetent so not big a deal for my POA or executor.


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## OptsyEagle (Nov 29, 2009)

There are many issues one needs to consider when deciding which ETFs to go into a registered account. The first and most important, would relate to Canadian Taxation. Obviously if those Cdn. domiciled foreign ETFs were in a taxable account, they would draw a considerable amount of Canadian taxation, at least for anyone in a higher tax bracket. So obviously one wants those inside a registered account to keep one's taxes lower.

The next is the issue with respect to withholding taxes. In a taxable account the ability to recoup them is available but not in a registered account. On the surface that would suggest using a taxable account, but when the above paragraph is considered one would see that it would be like cutting off your head to deal with a zit on your nose.

Many then will suggest buying the foreign domiciled ETFs, to avoid foreign withholding taxes. Although this is possible for US ETFs, it would be virtually impossible for international ones. Those would still have foreign withholding taxes based on their treaties with the US. Even with the US ETFs, one then needs to deal with the cost of currency exchange fees. It would take many years, on most US ETFs, where the loss to withholding taxes would be more then the round trip cost of exchange rate fees on just changing your money from Canadian to US and back again when you sell. Even if you believe you will be able to leave the money there that long to benefit from not losing those withholding taxes, on that small part of the ETFs return, you need to look at your actual experience and not your plan. There is just too much change in the ETF world, not to mention your personal portfolio management, where your plan to hold a particular ETF for decades into the future, finds you wanting to change it within a year or so of holding it.

To deal with some of the above, one could use a $US RRSP, but my advice is much more simpler then that. Don't worry about. It's a small amount. Just buy the Canadian domiciled international ETFs and hold them in a registered account. That's what I do anyway. At least with respect to the withholding tax loss issue.


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## AltaRed (Jun 8, 2009)

Tax leakage due to inability to recover withholding taxes in registered accounts often is the tax tail that wags the dog inappropriately. While a prudent DIYer can minimize that using US domiciled ETFs in their RRSP/RRIF, that same DIYer is also likely familiar and willing to have a USD RRSP account and do a Norbert's Gambit to convert CAD and USD (either way) for significant sums. That is a very small percentage of the investing population and even a minority of DIYers who are often best to just use the Cdn domiciled ETFs and not worry about tax leakage. 

One cannot expect a POA (or an Executor) to do these things. It is one thing to get the material benefits of DIY investing by not paying 1+% of AUM for portfolio management. It is quite another thing to worry about 10-50 bp in ETF MERs including tax leakage. Ultimately, when you get to be a senior and the probability of incompetence increases with every passing year, think about being kind to your eventual POA by using the KISS principle in your investment accounts. After all, that person has been generous enough to consent to being your POA in the first place. Don't rub their faces in the mud.

Added: If/when I become a POA to a few family members who have asked me to do so, if I find their accounts are not super KISS, I will change them to super KISS, essentially autopilot. Being a POA has a lot of responsibilities and investment management should only be a small (tiny) fraction of the overall effort of ensuring the person's health and safety and living conditions are taken care of.


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## agent99 (Sep 11, 2013)

OptsyEagle said:


> Obviously if those Cdn. domiciled foreign ETFs were in a taxable account, they would draw a considerable amount of Canadian taxation, at least for anyone in a higher tax bracket. So obviously one wants those inside a registered account to keep one's taxes lower.


If held in a taxable account, those funds would attract the same withholding tax as in a registered account. In taxable account, you would get a foreign tax credit. IMO, that is where this type of fund should be held. 
In a registered account you totally lose the withholding and would pay tax at max rate on total fund value (incl earnings and capital gains) on withdrawal. Makes no sense to me to hold a Canadian ETF that holds foreign stocks in a registered account. Why do it when there are better choices? KISS.


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## AltaRed (Jun 8, 2009)

Yeah, but OE is also saying your ongoing investment income will be taxed in a current basis in a taxable account, whereas it is tax deferred in a registered account. Does the permanent loss of the withholding tax in a registered account overwhelm the PV of deferred taxes? Hard to know but the permanent loss of withholding taxes may not be as significant as a lot of folks often make them out to be. 

Of course, it is true one can avoid most of that issue in a RRIF/RRSP with US domiciled ETFs, but that involves currency conversion and all of its complexities. To me, the best advice for the average DIYer is to ignore the noise and stay with Cdn domiciled ETFs, and/or one of the asset allocation ETFs. Put one's micro-management into things that matter more, e.g. career, family, social life.

This discussion is all 'off-topic' to the thread of course which was.... do I do a 3 fund ETF portfolio (XAW/XIC/ZAG) or a 1 fund (Asset Allocation) ETF?


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## OptsyEagle (Nov 29, 2009)

This is a perfect example of "ignorance is bliss". 

It is only the people that know about this that are actually being harmed... at least to any tangible degree. It is such a small amount, that requires a reasonable amount of aggravation and costs to avoid, that one is much better off if they did not know about it at all.


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## agent99 (Sep 11, 2013)

AltaRed said:


> This discussion is all 'off-topic' to the thread of course which was.... do I do a 3 fund ETF portfolio (XAW/XIC/ZAG) or a 1 fund (Asset Allocation) ETF?


This is true. It did get slightly off topic, but if you go with the 3 funds, better not to have XAW in registered accounts. That is what I learned! I likely wouldn't own it anyway.


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## AltaRed (Jun 8, 2009)

agent99 said:


> This is true. It did get slightly off topic, but if you go with the 3 funds, better not to have XAW in registered accounts. That is what I learned! I likely wouldn't own it anyway.


That is where I think things get silly. I'd suggest the OP have XIC preferentially in the taxable account to get the DTC on a yield of 3%. Don't care about 25bp or so leakage of withholding tax on a relatively low 2% yield in registered accounts. ZAG is best in the RRSP of course. Easiest decision of all is the 1 fund solution in all accounts.

I know all these things and still have MAW104 in my TFSA, my spouse has VBAL in her RRIF and my ex has VBAL in her TFSA. KISS!


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## pearl (Mar 5, 2015)

I have been thinking of buying some VBAL and VGRO for some time. But I am questioning myself recently if this is a good option for me. I have quite a few ETFs, individual stocks in my portfolios. I am not going to consolidate all of them into VBAL or VGRO. Even if I buy VBAL or VGRO, it would never exceed 10% my portfolios. I can save fee if I just buy other ETFs such as ZSP, XIC, XBB? I would like to others' opinions. Thanks


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## OptsyEagle (Nov 29, 2009)

pearl said:


> I have been thinking of buying some VBAL and VGRO for some time. But I am questioning myself recently if this is a good option for me. I have quite a few ETFs, individual stocks in my portfolios. I am not going to consolidate all of them into VBAL or VGRO. Even if I buy VBAL or VGRO, it would never exceed 10% my portfolios. I can save fee if I just buy other ETFs such as ZSP, XIC, XBB? I would like to others' opinions. Thanks


In my opinion, the extra fee is for the consolidation and self administering benefit. If you are not going to enjoy any of those then save your money and buy the lower fee ETFs, as you have been.


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## afulldeck (Mar 28, 2012)

OptsyEagle said:


> In my opinion, the extra fee is for the consolidation and self administering benefit. If you are not going to enjoy any of those then save your money and buy the lower fee ETFs, as you have been.


As the OP, this is what I eventually did. My portfolio is now just three ETFs XIC, XAW and QQQ.


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## pearl (Mar 5, 2015)

Thanks OptsyEagle and afulldeck for sharing your opinions.


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