# What ETF's to buy



## Flash (Nov 25, 2014)

So looking to get into ETF's. Currently owning roughly 20 individual stocks, but while I am waiting to hunt for bargains, I would like to invest my surplus into ETF's. 

My strategy for these ETF's is long-term, unless of course emergencies. From what I understood, ETF's trade exactly like stocks, except that instead of buying 1 company, you buy a whole bunch (or however many are into the ETF). Basically they are similar to mutual funds, but most of the time with a much lower MER.

I am however, slightly confused how dividends work that are generated from the stock's which are tracked by the ETF. Maybe someone could explain how they get distributed. I know for stocks, you can either automatically re-invest (drip), or be deposited into the investment account.

Anyway, from my research, Vanguard seems to be the smartest pick for ETF's. Not sure however, which one would be the best option from their list 
https://www.vanguardcanada.ca/individual/etfs/etfs.htm

I was thinking
VFV for US
VCN or VCE for Canada (not sure which)
VDU for everything else excluding NA. MER is slightly higher unfortunately for this, but I guess that's ok.

Any feedback regarding these 3 ETF's? As I said, planning to keep adding to them on a regular basis unless I happen to find some bargain stocks

For my individual stocks I am banking with BMO, but for ETF's I was actually thinking of opening an account with Questrade, since AFAIK buying ETF's is free there. I believe selling is the standard 4.95$/trade?

Cheers


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## merevial (Sep 21, 2014)

Essentially a dividend is a direct cash payment to shareholders. Now personally I only purchase stocks that pay some sort of cash dividend of 5% and above. Some stocks and ETF's completely cater to the need for cash flow producing investments such as REIT's, Energy stocks. Depending on how much you have to invest it might be better to purchase individual stocks. There are plenty of great energy and real estate cash producing investments at 10%> yield.


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## fatcat (Nov 11, 2009)

one of the big brokers has a large whack of etf's you can trade in and out of for free i believe ...


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## My Own Advisor (Sep 24, 2012)

FWIW, just posted...I was thinking of this myself in recent weeks:
http://www.myownadvisor.ca/top-equity-etfs-indexing-fans/


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## Butters (Apr 20, 2012)

why not just follow Canadian Couch Potato's model for 2014

if you want to skip the bonds....
30% VCN
70% VXC

VXC is likfe VFV and VDU combined

Keep it simple



And Questrade is great, you can add say $200 a month there, then you just need to remember to login in monthly and by the ETF's constantly!


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## gibor365 (Apr 1, 2011)

I was also thinking about it.... but not better to buy some index mutual funds to avoid trading fees....?


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## leeder (Jan 28, 2012)

@flash: The choices you listed are fine.

My choices would be:
Canadian: ZCN, XIC, or VCN (Note: They all cost the same. Surprisingly, ZCN has a slight edge in terms of number of holdings. There's higher volume with XIC compared to the other two.)
US: VUN (Note: slightly more expensive than VFV/XUS/ZSP, but it's much more diversified. You pay slightly more for more holdings, which is fair to me.)
International and Emerging: XEF and XEC (Note: They track the investable market index, which is more broad than a standard EAFE and emerging market index. The fees are just as low as other products like ZEA, VDU and VEE.)

VXC is also a good alternative, and I have no beef if anyone told me they use that in place of a separate US and International. It makes portfolio management simpler, but it's slightly more expensive than holding individual ETFs as listed above. It is also slightly less than diverse in holdings than holding separate ETFs (VXC holdings: 3018 vs VUN+XEF+XEC: 3796+1708+1794=7298.). I personally find managing 4 ETFs as easy as managing 2, but that could differ with different investors.


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## Eclectic12 (Oct 20, 2010)

Flash said:


> ... I am however, slightly confused how dividends work that are generated from the stock's which are tracked by the ETF.
> Maybe someone could explain how they get distributed. I know for stocks, you can either automatically re-invest (drip), or be deposited into the investment account.


AFAICT - the cash payments from the ETF have the same choices in a brokerage account as would a dividend paying stock (i.e. a synthetic DRIP which may have a discount or cash).


The ETF though, usually has more than one type of income that makes up the cash that was paid.
Using ETF XIU as an example, in 2013 it paid out eligible dividends and return of capital (RoC). In 2007, it was more complicated as it paid out eligible dividends, non-eligible dividends, other income, capital gains and RoC.
http://www.blackrock.com/ca/individ...ex-etf?locale=en_CA&siteEntryPassthrough=true

In a registered account, it's good to know the breakdown - especially for the RoC to help identify issues but there are no tax implications (there's also no dividend tax credit either). 

In a taxable account, most of these types have to be reported on one's tax return for the year the income was received.
http://www.taxtips.ca/personaltax/investing/taxtreatment/etfs.htm


Then too, the ETF could choose to pay a non-cash distribution.
http://www.theglobeandmail.com/glob...by-phantom-etf-distributions/article18225076/


Stocks tend to be a much easier structure, with less bookkeeping required to accurately determine the cost (i.e. adjusted cost base) for when a sale transaction is done.


Cheers


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## gocanada (Jan 3, 2014)

Any suggestions for REITs and Bonds? 

I currently hold RWO, ZFM, and VSC - thinking about consolidating Bonds into VAB.

I also hold: 
PXC (Canada),
XCS (Canada Small Cap), 
VTI (US), 
VBR (US Small Cap),
EFV (International), 
SCZ (International Small), and 
VWO (Emerging).

I'm thinking about swapping some of these out for some with lower MERs.


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## dogleg (Feb 5, 2010)

Flash: You might like to read the Feb./March issue of Money Sense. It has a good article on "The Best EFTs to Buy Right Now" p.46. Good luck.


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## leeder (Jan 28, 2012)

gocanada said:


> Any suggestions for REITs and Bonds?
> 
> I currently hold RWO, ZFM, and VSC - thinking about consolidating Bonds into VAB.
> 
> ...


If you're looking for Canadian REITs, I prefer to unbundle it. There's only about 15 holdings in a typical Canadian REIT ETF, you can probably choose 2 or 3 individual REITs from the REIT ETF holdings to save yourself the MER. In terms of fixed income, VAB is a pretty solid choice. However, I prefer shorter duration, as longer duration products are more sensitive to interest rate movements. It could be a good thing or bad thing, depending on what Bank of Canada does. VSB and VSC are my choices for short duration bond ETFs.


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## Flash (Nov 25, 2014)

Thank you all. All very good solid replies for me to look into it. I will try and open a Questrade account too just for ETF's as they are free to buy and keep adding on a constant basis. I'l also need to balance my individual stock purchases and ownership with ETF's.


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## dogleg (Feb 5, 2010)

Flash: Good luck. I know many people on this board disregard mutual funds because of the MERs - I often do too- however, end results matter. You might like to look at my comparison for XDV and my RBC Div. fund posted as a new thread today. It has caused me to reconsider.


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## Flash (Nov 25, 2014)

Are ETF's MER reflected into the return performance? For example, looking at google finance, TSE:VFV,TSE:XUS, comparing VFV vs XUS, the 1 year return is 31.16% for VFV and 31.19% for XUS. However, XUS MER is 10% vs VFV 8%. Or maybe I should not be looking at the ETF price/share when judging performance? VFV also seem to have 1.33% dividend yield vs 0.71% of XUS. As mentioned, trying now to chose my first US ETF to start with this month. Still a bit fuzzy how exactly ETF's work


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## leeder (Jan 28, 2012)

Flash said:


> Are ETF's MER reflected into the return performance? For example, looking at google finance, TSE:VFV,TSE:XUS, comparing VFV vs XUS, the 1 year return is 31.16% for VFV and 31.19% for XUS. However, XUS MER is 10% vs VFV 8%. Or maybe I should not be looking at the ETF price/share when judging performance? VFV also seem to have 1.33% dividend yield vs 0.71% of XUS. As mentioned, trying now to chose my first US ETF to start with this month. Still a bit fuzzy how exactly ETF's work


The MER is already deducted from the performance % you see in the ETF website. There are at least two reasons why the performance isn't the same:

1) Vanguard reduced its fees around October of last year, while iShares cut its fees around April. That may have some impact to the performance. 

2) In addition, both VFV and XUS track the S&P 500 index, and both may have tracking errors. Tracking error is the difference between the performance of the index and the performance of the ETF, net of MER and currency difference. If the products had the same MER and had the same tracking error, then both should technically perform the same with all else being equal. However, in fact, no two products are the same. One may perform better or worse in any given year.


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## pedanticus (Apr 30, 2014)

SheaButters said:


> why not just follow Canadian Couch Potato's model for 2014
> 
> if you want to skip the bonds....
> 30% VCN
> ...


I've been considering VXC (and the new Blackrock version, XAW) lately. Not sure if it's more advantageous to buy the one fund or to hold VUN, XEF and VEE in about a 2:2:1 ratio and rebalance every year. Choosing the former option would cause one to lose out on the rebalancing bonus, however slight. I'm all about simplification, but the trading commissions paid for rebalancing annually or twice-yearly is just a rounding error truly. Thoughts?


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## GreatLaker (Mar 23, 2014)

pedanticus said:


> I've been considering VXC (and the new Blackrock version, XAW) lately. Not sure if it's more advantageous to buy the one fund or to hold VUN, XEF and VEE in about a 2:2:1 ratio and rebalance every year. Choosing the former option would cause one to lose out on the rebalancing bonus, however slight. I'm all about simplification, but the trading commissions paid for rebalancing annually or twice-yearly is just a rounding error truly. Thoughts?


There is a lot of debate whether rebalancing is a risk reduction tactic or if there it increases returns ("rebalancing bonus"). I think it depends on market conditions. In markets that go up consistently, rebalancing brings the investor back to their tactical asset allocation target and the associated portfolio risk level. In volatile markets rebalancing may result in increased returns. All About Asset Allocation by Rick Ferri and The Four Pillars of Investing by William Bernstein are good reference books to learn more.

But VXC and XAW hold underlying Vanguard and iShares ETFs, and are rebalanced by the fund issuer so you don't have to do it. Have a look at the holdings of VXC and XAW and see if it is the allocation you want to hold, and if you think the simplicity is worth the slight increase in MER.

Another concern with your proposal for holding XEF and VEE for your international equity is that the MSCI index that XEF uses considers Korea to be an emerging market, but the FTSE index that VEE uses considers Korea to be a developed market country, so in your proposal you would have no exposure to Korea which is the world's 10th largest market.

Your fund list only includes US, developed and emerging equities. Do you also plan on holding Canadian equities and fixed income?


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## pedanticus (Apr 30, 2014)

GreatLaker said:


> There is a lot of debate whether rebalancing is a risk reduction tactic or if there it increases returns ("rebalancing bonus"). I think it depends on market conditions. In markets that go up consistently, rebalancing brings the investor back to their tactical asset allocation target and the associated portfolio risk level. In volatile markets rebalancing may result in increased returns. All About Asset Allocation by Rick Ferri and The Four Pillars of Investing by William Bernstein are good reference books to learn more.
> 
> But VXC and XAW hold underlying Vanguard and iShares ETFs, and are rebalanced by the fund issuer so you don't have to do it. Have a look at the holdings of VXC and XAW and see if it is the allocation you want to hold, and if you think the simplicity is worth the slight increase in MER.


Currently the US exposure within those funds is about 53%, which is fine, but my concern is that if the US market continues on an upward trajectory, while Europe et al. languishes, you could see these funds holding 60%, 65% US equity. Whereas, if I hold separate ETFs, I'd have the opportunity to rebalance annually and, in theory, have the chance to reduce my risk and increase my returns slightly. Just thinking things through.

Thanks for the book recommendations. I'm currently making my way through Ben Graham's book. I'll look into those next.



GreatLaker said:


> Another concern with your proposal for holding XEF and VEE for your international equity is that the MSCI index that XEF uses considers Korea to be an emerging market, but the FTSE index that VEE uses considers Korea to be a developed market country, so in your proposal you would have no exposure to Korea which is the world's 10th largest market.
> 
> Your fund list only includes US, developed and emerging equities. Do you also plan on holding Canadian equities and fixed income?


Ah, very good point on Korea. I recall reading about that on the HowtoInvestOnline blog. I suppose XEC would be the better bet.

As for the other question, I hold XQB as 30–40% of each account (TFSA/RRSP/RESP), and 20% in XIC for each. That gives me a 50–60% exposure to the Canadian dollar, with the rest exposed to a mixture of other currencies through unhedged international equity ETFs. I used to hedge my currency exposure through XSP, XIN, etc., but took the prevailing advice kicked that habit a few years ago.


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