# ETF Portfolio feedback



## Shaun80 (Oct 22, 2016)

Hi 

I am new to this forum. I am a 35 year old professional from Toronto, looking to passively invest in a couch potato portfolio for the next 20 to 25 years. I am starting a bit late as I have most of money invested in real estate (primary residence and a rental property in Toronto). I Currently have $45,000 in my TFSA and $166,000 in my RRSP invested in the following allocations below. Please critique my portfolio and give me feedback on how I can make improvements. I appreciate all your help. 

TFSA

VCN - 24%
VRE - 9%
VUN - 33%
XEF - 9%
XEC - 24%

RRSP
VCN - 24%
VUS- 38%
XEF -24%
XEF - 7%
VRE- 7%

Do you think I entered the ETF market when they are overpriced (Should I have waited for a correction?) I have been looking at possibly consolidating my portfolio to MAW104 as well, it seems to perform well , despite its higher MER. Any thoughts?

Shaun


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## Argonaut (Dec 7, 2010)

I think you're already very exposed to real estate with your residence and rental property, so no point in overweighting in REIT ETFs. Just the general indexes will already have REITs anyways. You've also seemed to go out of your way to find the most illiquid ETFs possible. I know this may be the current couch potato doctrine to go with these tiny ETFs, but I personally don't like it.

If stock commissions weren't a thing I would restructure your weightings so it's more simple and logical. The US ETF should only be in the RRSP for example. Something more simple to work towards like:

30 Canadian
40 USA
15 International
15 Emerging Markets

Not an allocation I would recommend per se, but an idea to look at.


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## Shaun80 (Oct 22, 2016)

One typo in the RRSP it should be VUN not VUS. So I will sell VRE and buy more VCN in the TFSA, and sell VRE in the RRSP and buy more VUN or VTI. Should the TFSA only have canadian equity 100 percent ? RRSP all US and international equity?


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## Shaun80 (Oct 22, 2016)

Hi Argo

Thanks for the help. What are your ETFs of choice with greater liquid assets. ?

Thanks


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## Argonaut (Dec 7, 2010)

I buy individual stocks in Canada as opposed to ETFs, so I don't have an opinion on what the best ones on the TSX are. But looking at some of the Vanguard ones, it concerns me that they trade maybe 7000 shares per day. I wouldn't be surprised if Canadian Couch Potato is getting kickback for recommending these ETFs that nobody seems to own.

Like some have said in the other thread, in the RRSP owning VTI or SPY would be the way to go. Be sure to learn how to get US dollars by gambitting if you go that route. I prefer SPY because it's liquid, actually holds the 500 stocks, and has the best options market in the world. If you're pure couch potato maybe VTI is better though. Keeping it simple could mean housing all of the US/International stuff in the RRSP as VTI/VEA/VWO, and all of the Canadian stuff in the TFSA.


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## mordko (Jan 23, 2016)

In 2016 VUN traded, on average, 26,000 shares per day. It is NOT an indication of liquidity in any way, shape or form. ETFs are not stocks and are subject to arbitrage. Vanguard can issue as many ETF shares as is necessary. It is the liquidity of the underlying stock that actually matters. VUN is highly liquid.

And of course VTI also holds the underlying stocks.


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## Shaun80 (Oct 22, 2016)

Thanks everyone. Passive ETF couch potato is more complicated then I thought. I think I need to have more knowledge, where each ETF belongs RRSP or TFSA and which ETF to buy to minimize both tax and MER and maximize returns. I also have to look at how large the ETF volume is? I was under the impression all you had to do is choose a diverse portfolio of funds with a low MER and add and rebalance annually and just forget about it for 20 years. I guess there is more to it. 

Shaun


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## mordko (Jan 23, 2016)

Small obscure ETFs should be avoided but the ones you picked are fine.


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## GreatLaker (Mar 23, 2014)

Shaun80 said:


> Thanks everyone. Passive ETF couch potato is more complicated then I thought. I think I need to have more knowledge, where each ETF belongs RRSP or TFSA and which ETF to buy to minimize both tax and MER and maximize returns. I also have to look at how large the ETF volume is? I was under the impression all you had to do is choose a diverse portfolio of funds with a low MER and add and rebalance annually and just forget about it for 20 years. I guess there is more to it.
> 
> Shaun


A basic couch potato portfolio like you proposed, or the ones at Canadian Couch Potato or Finiki are simple, low-cost and tax efficient, and easy to manage. As long as you avoid mistakes like market timing and performance chasing you should do much better than a high-cost actively managed mutual fund portfolio.

A lot of posters here are very knowledgeable and experienced, spending time to get the ultimate in low cost and tax efficiency. I dunno how much improvement in performance we get, but don't let it dissuade you from a starting with a basic couch spud portfolio. The perfect portfolio is the enemy of a good portfolio.

Regarding taxes, if you only have registered (RRSP, TFSA) accounts, which funds you put in TFSA vs. RRSP does not make much difference. The main concern is don't put US stocks or US domiciled ETFs that hold US stocks (VTI, VOO) in a TFSA because they are more tax efficient in a RRSP. When your RRSP and TFSA are full and you start investing in non-registered accounts then which asset class goes in which account becomes more important.

Here is some info that explains it:

http://www.finiki.org/wiki/Tax-efficient_investing

http://canadiancouchpotato.com/2016/07/11/foreign-withholding-taxes-revisited/


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## Shaun80 (Oct 22, 2016)

Hi

Thanks for the feedback I sold VRE here is my new allocation

TFSA

33%- VCN
33%- VUN
23%- XEF
10% -XEC

RRSP

27- VCN
37- VUN
27- XEF
9 -XEC

I know it is better to keep US equities like VTI in your RRSP in place of VUN for tax efficiency and lower MER, and to avoid US equity in TFSA because of taxation. But this is what I have for now.


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## larry81 (Nov 22, 2010)

FYI: https://www.pwlcapital.com/en/Advis...-Bender-Diversification-of-iShares-ETFs-vs-Va


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## Argonaut (Dec 7, 2010)

mordko said:


> In 2016 VUN traded, on average, 26,000 shares per day. It is NOT an indication of liquidity in any way, shape or form. ETFs are not stocks and are subject to arbitrage. Vanguard can issue as many ETF shares as is necessary. It is the liquidity of the underlying stock that actually matters. VUN is highly liquid.
> 
> And of course VTI also holds the underlying stocks.


Just had a chance to check some of these little Vanguard ETFs during a trading session, and found that many of them have a bid-ask spread of several pennies. This totally *IS* a measure of liquidity, and my initial feelings were right. Because these ETFs are so thinly traded, the investor is at the mercy of the market-maker, i.e. Vanguard, who will scalp them of their bids and asks. I dislike the spreading of falsehoods throughout the board, especially with respect to teaching novice investors.


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## mordko (Jan 23, 2016)

Argonaut said:


> Just had a chance to check some of these little Vanguard ETFs during a trading session, and found that many of them have a bid-ask spread of several pennies. This totally *IS* a measure of liquidity, and my initial feelings were right. Because these ETFs are so thinly traded, the investor is at the mercy of the market-maker, i.e. Vanguard, who will scalp them of their bids and asks. I dislike the spreading of falsehoods throughout the board, especially with respect to teaching novice investors.


1. We were talking about the trading volume of ETFs and how it impacts liquidty. Let me repeat... It is NOT how you measure liquidity of ETFs. VUN has a bid-ask spread of 0.03% (1 cent). That's highly liquid in my book. I am sure some Vanguard funds have a larger spread. It depends on the nature of the underlying fund. 

2. You may want to read this, so that you don't "spread falsehoods": https://am.jpmorgan.com/blob-gim/13...12894_Debunking-myths-about-ETF-liquidity.pdf. What you are spreading is a popular myth. Popularity does not make it right. 

3. In general it is better to learn first and teach second.


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## Shaun80 (Oct 22, 2016)

I am confused about the bid ask spread. When you want to sell an ETF do you lose money by selling at the market price if the ETF is not liquid? Can you explain this to me. When I sold VRE did I not get the optimal price at market price because of liquidity bid ask spread? how does trading volume and number of trades and size of fund of ETF affect your purchase and sale of an ETF? Can you direct me where I may gain more knowledge on this ? Website or book? 

Shaun


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## mordko (Jan 23, 2016)

This isn't complicated. Large bid-ask spread means you lose a little bit every time you buy or sell. What matters is the percentage spread vs price. If it's less than 0.5% for an ETF then there is no issue. 

Here is a nice summary: http://www.etf.com/publications/jou...21-etfs-spreads-and-liquidity.html?nopaging=1


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## Argonaut (Dec 7, 2010)

Not necessarily looking at VUN, but small ETFs in general. Some of these small guys have a bid/ask spread more than a few cents. Citing JP Morgan who has an interest in flogging their own funds is not persuasive. I'm not saying these small ETFs are a sham, just that they are unattractive because they're less liquid than the ETFs with more volume. This is likely to take away any MER advantages they may have.

EDIT: Your own link states that smaller ETFs = bigger bid/ask spreads. This is a liquidity issue.


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## Shaun80 (Oct 22, 2016)

Thanks for the help, so in the future it is best to buy an ETF with more volume (fund value and number of shares?) and small bid to ask spread (less then 0.5%)?

Thanks


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## mordko (Jan 23, 2016)

Shaun80 said:


> Thanks for the help, so in the future it is best to buy an ETF with more volume (fund value and number of shares?) and small bid to ask spread (less then 0.5%)?
> 
> Thanks


Volume does not matter all that much for ETFs. VUN may have volume of 26,000 but it holds VTI which trades 1.8M shares. What matters is that you avoid exotic or brand new products which hold funny assets designed to satisfy the latest marketing gimmick. Vanilla indices which you are picking up are a safe bet. 

Spread should come into your calculations of ETF costs. When you are comparing similar products, all other things being equal, then the smaller spread should win.


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## mordko (Jan 23, 2016)

Argonaut said:


> Not necessarily looking at VUN, but small ETFs in general. Some of these small guys have a bid/ask spread more than a few cents. Citing JP Morgan who has an interest in flogging their own funds is not persuasive. I'm not saying these small ETFs are a sham, just that they are unattractive because they're less liquid than the ETFs with more volume. This is likely to take away any MER advantages they may have.
> 
> EDIT: Your own link states that smaller ETFs = bigger bid/ask spreads. This is a liquidity issue.


Sure, but the real issue is the underlying asset. 

Here is another reference, also from a reputable source. He is not flogging his own assets. 

http://canadiancouchpotato.com/2012/09/10/etf-liquidity-and-trading-volume/


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## mordko (Jan 23, 2016)

Argonaut said:


> Not necessarily looking at VUN, but small ETFs in general. Some of these small guys have a bid/ask spread more than a few cents. .





> I wouldn't be surprised if Canadian Couch Potato is getting kickback for recommending these ETFs that nobody seems to own.


I am just curious which specific CCP-recommended ETFs that "nobody seems to own" have large spreads.


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## Argonaut (Dec 7, 2010)

mordko said:


> I am just curious which specific CCP-recommended ETFs that "nobody seems to own" have large spreads.


XEF and XEC trade an average of 12k-20k shares per day. Bid/ask spreads of 4 or 5 cents. I certainly wouldn't be putting my life savings into something that doesn't have tighter bid/asks. And CCP is in the industry as an advisor now, presumably as someone who flogs these ETFs.


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## mordko (Jan 23, 2016)

XEF usually trades with a spread of 2c. Obviously it's higher at certain times, like when the market opens. Not sure about XEC, I don't use it.

Anyway, 4c on XEF and XEC is ~0.15% spread. 

That's fine for ETFs. Remember, we are not buying and selling all the time like day-traders. Say we are losing 0.08% (half of the total spread) when we buy due to spread. That's a one-off cost for buying Australian, Japanese or Indian shares. There is simply no cheaper alternative with a CAD denominated product, which is why Couch Potato is recommending XEF and XEC. Do let me know if you can find a better value index-based product for countries outside N America.


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## tdiddy (Jan 7, 2015)

Shaun80 said:


> Hi
> 
> Thanks for the feedback I sold VRE here is my new allocation
> 
> ...


Why duplicate ETFs in both account? More hassle and trading costs as I see it


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## Shaun80 (Oct 22, 2016)

Hi

tdiddy, do you have your candian equity in TFSA and , american international in RRSP?


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## tdiddy (Jan 7, 2015)

My situation is a bit different as most of my investments are in CCPC (corporate investing account) as small business owner. But yes I would think that would be a good strategy (VCN in TFSA and rest in RRSP) for you.


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## mordko (Jan 23, 2016)

There can be advantages in having the same ETFs in different accounts. For example, you can then use dividends to rebalance by purchasing securities that haven't done so well. That means you don't have to sell as often, which saves costs.


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## larry81 (Nov 22, 2010)

Like i posted in the other thread, why not go full-vanguard and replace XEC/XEF with VIU/VEE ?

On top of extra diversifiction (about 1500 company) and lower cost (a full 0.02% lower mer on VEE), Vanguard is customer orientied company while iShares is owned by Dracula himself.


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## mordko (Jan 23, 2016)

20 cents on $1000 invested isn't a huge difference but I agree that right now the Vanguard pair holds a tiny advantage.


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## tdiddy (Jan 7, 2015)

mordko said:


> There can be advantages in having the same ETFs in different accounts. For example, you can then use dividends to rebalance by purchasing securities that haven't done so well. That means you don't have to sell as often, which saves costs.


Ok, but since he is in the growth stage of his portfolio seems simplest to re-balance by buying. TFSAs are small and only growing at $5500/year, I don't see how it can be reasonable to hold multiple funds within it over the long term.


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## Shaun80 (Oct 22, 2016)

Is it worth to sell XEF and XEC at this time however and lose money with trading fees , bid ask spread, to purchase the equivalent vanguard fund in its place?


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## Spudd (Oct 11, 2011)

Shaun80 said:


> Is it worth to sell XEF and XEC at this time however and lose money with trading fees , bid ask spread, to purchase the equivalent vanguard fund in its place?


Not at all. 

Check out the bottom paragraph in this article:
http://canadiancouchpotato.com/2014/03/25/ishares-cuts-its-fees-to-the-core/


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## humble_pie (Jun 7, 2009)

larry81 said:


> FYI: https://www.pwlcapital.com/en/Advis...-Bender-Diversification-of-iShares-ETFs-vs-Va




good grief, why are you running a blatant piece of advertising on here

once upon a time you were your own man, larry. It's sad to see someone slip into bondage .each:


.


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## larry81 (Nov 22, 2010)

humble_pie said:


> good grief, why are you running a blatant piece of advertising on here
> 
> once upon a time you were your own man, larry. It's sad to see someone slip into bondage .each:
> 
> .


i understand not everyone is a penny pincher like me but what is not to love about 0.02% MER economy !


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## mordko (Jan 23, 2016)

Let me guess why Larry referenced Bender's blog:

- It's informative. 
- Makes a refreshing change from ignorant unsupportable hearsay.


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