An Easy Way to Buy the World

When you’re investing a relatively small amount of money — in an RESP or a Tax-Free Savings Account, for example — it pays to keep things simple. That’s especially true if you’re buying ETFs from one of the big banks’ discount brokerages. Those $30 trading fees are significant, and if your portfolio holds eight to ten ETFs, each with only a few thousand bucks, adding new money and rebalancing quickly gets expensive.

I recently looked for a way to simplify the international allocation in my own portfolio. I use Vanguard ETFs for all my foreign equity holdings: 42.5% in Vanguard Total Stock Market (VTI) for the United States, 42.5% in Vanguard Europe Pacific (VEA), and 15% in Vanguard Emerging Markets (VWO). I wondered if it made more sense to simply use Vanguard’s Total World Stock Market (VT) instead. This single ETF would eliminate the need to rebalance, and I could make just one contribution a year rather than three.

The first step in my comparison was to see whether the country weightings in VT are similar to the mix I had with the three individual ETFs. Turns out they are: the only significant difference is that VT includes Canada:

Allocation US Europe Pacific Canada Emerging
VTI 42.5% 100%
VEA 42.5% 65% 35%
VWO 15% 100%
Total 100% 42.5% 27.6% 14.9% 15%
VT 42% 26.6% 13.8% 3.6% 14%

So far, so good. The next step was to compare the costs of the two strategies. VT has an MER of 0.30% — that’s extremely low by any standard other than Vanguard’s, but it’s actually double the weighted average of the three individual funds. The trade-off is that I would save two trading commissions annually. A spreadsheet helped me figure out the break-even point:

Allocation Amount MER MER in $ Trades Total $
VTI 42.5% $16,575 0.09% $14.92 $29.95 $44.87
VEA 42.5% $16,575 0.16% $26.52 $29.95 $56.47
VWO 15% $5,850 0.27% $15.80 $29.95 $45.75
Total 100% $39,000 0.15% $57.23 $89.85 $147.08
VT $39,000 0.30% $117.00 $29.95 $146.95

It turns out that the break-even point is $39,000: if you’re investing this amount, the cost of the two strategies is virtually identical. If your portfolio is larger, you’ll save by splitting your foreign holdings into the cheaper individual funds. (You’ll also get a bit more diversification, since VT doesn’t hold everything in other three funds.) But if you’re investing less than $39,000 in foreign equity, consider just using VT. For a small RRSP, an education savings account, or a TFSA, it’s an inexpensive and convenient way to buy the whole world.

17 Responses to An Easy Way to Buy the World

  1. Marcus April 15, 2010 at 7:54 am #

    There is one other option – VTI and VEU and VSS gives you true world exposure. VT does not have small cap stocks. VTI does have small cap U.S. So, it goes something like this – 40% VTI, 54% VT and 6% VSS. The VSS gives you exposure to small cap non-U.S. The MER is quite high by Vanguard standards (0.40%) but it is only 6%. I think it blends out to 24 basis points which is cheaper than option 1 and more expensive than option 2 but actually provides more exposure.

    Just a thought.

  2. Canadian Couch Potato April 15, 2010 at 8:10 am #

    Just to clarify, VEU is the Vanguard FTSE All-World ex-US ETF. It’s 46% Europe, 24% Pacific, 24% emerging markets and about 6% Canada.

    VSS is the Vanguard FTSE All-World ex-US Small-Cap ETF. Interestingly, its largest country holding is Canada (15%).

    My take is that smallish portfolios (under $100,000 or so) don’t get much benefit from adding a tiny allocation to small caps, or to any other asset class, for that matter. Small portfolios are usually better off keeping things simple, with no fund making up less than a 10% allocation.

  3. Marcus April 15, 2010 at 8:12 am #

    I totally agree. My option would be for larger portfolios. This is a great site btw.

  4. Canadian Couch Potato April 15, 2010 at 8:25 am #

    One follow-up note. iShares Canada does offer a global ETF: the Canadian MSCI World Index Fund (XWD), however it does not include emerging markets. It’s also more expensive at 0.45%, and given that there’s no lessening of currency risk (XWD is not hedged), there’s no advantage to choosing the TSX-listed product over Vanguard’s, except the CAD-USD conversion fee when you buy and sell.

  5. Brian April 15, 2010 at 8:50 am #

    Another great post CCP!

    As Canadian couch potatos, we usually have a higher % allocated to Canadian stocks in our portfolio’s, (I’m equal weighting Canada, US, and EU/Pacific). Do you agree with the 3.6% Canada allocation of VT for Canadians?

  6. Marcus April 15, 2010 at 9:26 am #

    JMO – I don’t. Again, it is just my opinion but I would think an additional fund, XIU or XIN could be 25 to 30% of the total equity exposure before applying one of the above portfolios.

  7. Canadian Couch Potato April 15, 2010 at 10:05 am #

    Hi Brian: Like Marcus, I certainly agree that it’s appropriate to overweight Canada. The example I discuss in the post applies only to the foreign equity part of your portfolio. My own portfolio mix is pretty much the same as yours: about one-third to each of Canada, US, and overseas.

  8. Len Currie April 15, 2010 at 4:29 pm #

    Would love one of these options which also paid back a dividend, I have an extremely small account dedicated to my young nephews University education.. and would love to have one that collected dividends and once a year I could purchase more shares..

  9. Raymond Ramshaw April 21, 2010 at 8:20 am #

    I recently bought 600 shares of VT after reading your article. The Canadian dollar was at parity. The commission for the purchase was less than US$20, but my surprise was that the premium for the dollar conversion was over C$6oo. It would be interesting to know why the premium charged is so high.
    Perhaps XSP would have been a better buy, since the S&P 500 contains many corporations that have exposure internationally.I would save $600 in charges.

  10. Canadian Couch Potato April 21, 2010 at 12:53 pm #

    Raymond: It’s true that currency conversion charges are a drag on your returns when you purchase US-listed stocks. However, the fee you were charged sounds high, even by bank standards. Assuming VT was trading at $45 per share (and therefore your purchase was $27,000), a $600 charge is well over 2.2% of the purchase price. About 1% or 1.5% is more typical.

    I am assuming you bought the ETF within your RRSP (otherwise you could have bought it with USD and saved any conversion fees). If you have significant holdings in US-listed stocks in an RRSP, you may want to consider one of the discount brokers that allows you to hold USD. Right now this is only Questrade and QTRade, although RBC Direct Investing has announced it will allow this later this year.

    XSP carries no forex charges when you buy and sell, but it has many other embedded expenses: higher MER than its US-listed equivalents, withholding taxes, currency hedging. Over the long term, it is usually cheaper to buy its US-listed equivalent, even with the currency conversion charge. But the US equivalent here would be SPY or IVV, which also track the S&P 500. XSP and VT are in no way comparable.

  11. Steve in Oakville March 14, 2011 at 10:52 pm #

    Hi Dan,
    I was going through this post again and I noticed the .30% MER for this ETF. It looks like Vanguard reduced it because it’s listed as .25% on the website. Still more expensive than most, but moving in the right direction!
    Steve

  12. Que June 21, 2012 at 5:26 pm #

    Dan,
    Why do you recommend XWD in your Global Couch Potato portfolio instead of VT?
    Is there a handy way to pre-calculate when XWD is preferable to VT in terms of currency conversion for short term accounts like an RESP?
    Also, is the low volume of XWD anything to be concerned about?
    Thanks, Que

  13. Canadian Couch Potato June 21, 2012 at 7:01 pm #

    @Que: For small portfolios and beginning investors, I think that US-listed ETFs are less than ideal. That’s why I like XWD for the Global Couch Potato and only recommend he US-listed Vanguard ETFs in the Complete Couch Potato.

    Determining the cutoff where it makes sense to move to US-listed ETFs is tricky, though I have written about this in the past. In general, I would err on the side of the Canadian products. The MER differences are almost trivial when you’re talking about small amounts and short holding periods.
    http://canadiancouchpotato.com/2010/10/18/are-us-listed-etfs-really-cheaper/

    The low trading volume of XWD is not a concern, because the underlying ETFs are very liquid. As long as the bid-ask spreads are kept tight by the market makers, there’s no problem. That said, you may still want to use a limit order when buying or selling.

  14. Jas September 12, 2012 at 7:01 am #

    VT is now tracking the FTSE Global All Cap Index which includes mid cap and small cap exposure. The MER is also lower now: 0.22%

    http://amateurassetallocator.com/2011/12/27/vanguard-improves-its-total-world-stock-market-index-fund-vtwsx-by-slashing-costs-and-adding-small-caps/
    https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT

  15. Jas March 5, 2013 at 8:36 pm #

    @CCP:
    Since VT’s MER is now down to 0.19 and also includes small caps, do you think it could be a good alternative to VXUS+VTI ?

  16. Canadian Couch Potato March 5, 2013 at 8:43 pm #

    @Jas: Sure, it would be a great way to add US and international diversification with a single fund at very low cost. With its broader index and reduced fee VT has certainly become more compelling.

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