iShares Expands Its Core ETF Lineup

iShares shook up the ETF marketplace last March when it launched its Core family of low-cost ETFs in the major asset classes. This week iShares announced some new additions to its Core lineup, including two broad-market funds that go head-to-head with recently launched ETFs from Vanguard. Let’s take a peek at these compelling new offerings.

Blanket coverage of the US

First up is the iShares Core S&P U.S. Total Market (XUU), which provides exposure to the broad US stock market, including large, mid and small cap stocks.

This is iShares’ answer to the Vanguard U.S. Total Market (VUN), and it comes in five basis points cheaper, with a management fee of just 0.10%. However, the coverage is not quite as complete: VUN holds more than 3,800 stocks, compared with 1,500 for XUU. Although XUU’s benchmark is the S&P Total Market Index (which includes almost 3,900 companies) the fund actually holds three US-listed ETFs that make up the S&P Composite 1500 Index. But we should keep this in perspective: the other 2,300 companies are so small that they collectively make up just 10% of the US market, so one should expect VUN and XUU to perform similarly.

One-stop global diversification

The iShares Core MSCI All Country World ex Canada (XAW) is a one-fund solution for adding global diversification to an equity portfolio, with broad coverage of the US, developed and emerging markets.

The counterpart here is the Vanguard FTSE All-World ex Canada (VXC), launched last June and recently added to my model ETF portfolios. In this case, the new iShares ETF actually offers broader coverage: it holds about 5,000 stocks, compared with just over 3,000 for VXC. Again, the management fee is five basis points lower at just 0.20%.

XAW holds five underlying funds: it gets US exposure through the three ETFs that make up the S&P Composite 1500; it gets European and Asian developed markets through the iShares Core MSCI EAFE IMI (XEF); and it covers emerging markets through the iShares Core MSCI Emerging Markets (IEMG).

This ETF does not use currency hedging, so Canadian investors will be exposed to a basket of foreign currencies: primarily the US dollar (just over half of the fund), the British pound, the yen and the euro.

Should I switch?

I’ll try (probably unsuccessfully) to head off the questions I always get whenever new ETFs are launched with lower fees: “Are you going to update your model portfolios with these new funds?” and “If I already own VUN or VXC, should I sell them and buy these new ones?”

The answer to both questions is no, at least for now. These new iShares offerings look like excellent products, and if you’re building a portfolio from scratch I would have no hesitation recommending them as alternatives to the Vanguard ETFs in my model portfolios. (The same is true of the iShares and BMO Canadian equity ETFs, which are perfectly good alternatives to VCN.) The difference it will make to your long-term performance is likely to be trivial. And it makes no sense to incur trading commissions and bid-ask spreads to save 0.05% a year in management fees. Remember, that’s $5 on a $10,000 investment.

However, if you already hold one of the Vanguard ETFs, these new funds may be useful for tax-loss selling. This strategy works best when you can find two ETFs that get very similar market exposure while tracking different indexes. There really were no ETFs that made good substitutes for VUN and VXC until now. One of these days, when we actually see significant losses in US or international equities—that hasn’t happened since 2011, not that we’re complaining—one could harvest a loss in VUN and purchase XUU in its place, or sell VXC and replace it with XAW.

 

92 Responses to iShares Expands Its Core ETF Lineup

  1. Sheldon March 19, 2015 at 10:31 pm #

    For completeness, a seperate question is this: If XUU were held in a taxable account, is it correct that US withholding tax applies, but can be recovered?

  2. Canadian Couch Potato March 20, 2015 at 8:34 am #

    @Sheldon: XUU does not hold stocks directly: it holds three US-listed ETFs. Therefore in an RRSP the withholding taxes will apply and are not recoverable. You would be exempt from US withholding taxes if you held a US-listed ETF in an RRSP, but this would involve the additional expense of converting currency, so it’s always a trade-off:
    http://canadiancouchpotato.com/2013/12/09/ask-the-spud-when-should-i-use-us-listed-etfs/

    Yes, in a taxable account the US withholding tax applies but is recoverable.

    Complete info here:
    http://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/

  3. Braven March 25, 2015 at 10:10 am #

    Hi Dan,

    I looked at the holdings of XAW, it seems it has 35.7% Non-US Bond, while by looking at the underlying ETF, nothing indicated there is a bond component. Do you know why?

    Thanks a lot for all your great work!

  4. Canadian Couch Potato March 25, 2015 at 10:13 am #

    @Braven: What source are you using for that info? My guess is that’s it’s just incorrect.

  5. Braven March 25, 2015 at 10:56 pm #

    Hi Dan,

    There are two sources I looked at. First one is vanguardcanada.ca, there is a fund comparison tool, I was using it to compare VXC with XAW. In the generated report, I can see there is 35.70% Bond allocation for XAW. Then I went to tdwaterhouse.ca, under Market & Research, type XAW, it also show the same. I also checked blackrock.com, it shows 5 underlying holdings. Didn’t check the long list of 5069 holdings thought.

    Anyway, thanks a lot for your reply!

  6. Canadian Couch Potato March 26, 2015 at 7:56 am #

    @Braven: Not sure the reason for it, but that is certainly an error. XAW is 100% equities: the underlying holdings are three US equity ETFs (large, mid and small cap), international equity ETF and an emerging markets ETF. No bonds.

  7. Sam March 30, 2015 at 1:35 pm #

    In addition to the bond allocation error, a discrepancy I’m noticing, unless I’m missing something is that XAW has 8,245 holdings, not 5,000 ish, Or perhaps I am missing something.

    XAW looks to be superior to VXC both in holdings and in expenses, but I feel much more inclined to invest in something that CCP has investigated thoroughly enough to feel confident in including in the model portfolio. Is this reasonable, or do you think you might be swapping in XAW for 2016 provided nothing else comes along? Any other considerations for XAW vs VXC?

  8. Canadian Couch Potato March 30, 2015 at 1:47 pm #

    @Sam: You may be looking at the index holdings rather than the actual fund holdings. You can download a spreadsheet showing all the stocks held by the underlying ETFs and it’s about 5,000. I have always tried to emphasize that the decision between very similar funds like XAW and VXC is almost not worth worrying about. I would expect the two funds to perform very similarly over the long term.

  9. Greg March 31, 2015 at 7:06 am #

    Thoughts on the Quest Trade ‘Smart’ ETFs?
    Right now just have TD E-series (CDN E, US E, INTL E, CDN BND E), ENB, CNR (lots – ESPP), ZRE. Was looking to move some CNR to TFSA to protect dividends and 20-30 years down the road, the capital gains. Have RRSP with Sunlife. Could either move CNR to TD to keep it all nice and neat, or move a chunk to Quest Trade to create an account there (leave in TFSA) so can get access to free ETF purchases (vs TD’s high 9.99 flat rate per trade except with E-Series). Thoughts? Was thinking can either keep contributing to E-Series, or eventually increase individual stocks or look into some of the ETFs you round your portfolio out with like emerging markets or dividend based ones.

  10. SNB April 1, 2015 at 8:42 pm #

    Regarding the Core iShares line and one index ETF like XIC.TO…looking at the ETF’s 2014 T3 on the CDS website, it appears that capital gains and ROC change quite dramatically from year to year. Given that XIC is an index ETF, what is driving such large changes in capital gains from year to year? There are some years with no reported capital gains and then there is a $0.32 non cash capital gain reported for 2014. What is the reason for this?

  11. Canadian Couch Potato April 1, 2015 at 8:58 pm #

    @SNB: It’s not always possible to know the reason for a reported capital gain, but the most common culprit is changes to the index. Companies can get added or deleted from the index, and these changes are implemented quarterly. Deleting a company from the index may compel the fund to sell some stocks and realize a gain.

  12. SNB April 1, 2015 at 9:26 pm #

    @CCP The reason I asked is that if one holds a large portfolio of an index ETF in a non-registered account, the non distributed capital gains can lead to a large tax liability that will not be known until the Excel file is uploaded at CDS, usually by end-February of the following year. A tax liability greater than $3,000 can lead to quarterly remittances and other inconvenience. The only protection I can see is to keep some RRSP deduction room in reserve to bring down the tax liability in April. Any tips for dealing with these potentially large unexpected tax liabilities?

  13. Canadian Couch Potato April 1, 2015 at 11:37 pm #

    @SNH: The capital gains are usually declared in December, so you wouldn’t have to wait for the CDS spreadsheet. For example:
    http://www.marketwired.com/press-release/blackrockr-announces-final-annual-reinvested-capital-gains-distributions-isharesr-funds-1979474.htm

    The CDS spreadsheet will just tell you whether they were paid in cash or reinvested, which doesn’t affect your tax liability in the current year: it just affects your ACB. I don’t think the CRA requires quarterly remittance for capital gains: only for income.

    There’s really no way to predict these, but in general, “total market” indexes are likely to have fewer additions and deletions and are therefore likely to realize fewer gains from turnover. I discuss that idea in this post:
    http://canadiancouchpotato.com/2014/10/07/how-taxes-can-affect-etf-performance/

  14. Alon April 24, 2015 at 2:38 pm #

    @CCP Great read..thanks. XAW is very intriguing. My partner and I have over $170K USD invested in our RRSPs in VTI/VXUS. I’m wondering what you’re opinion is in selling those positions and purchasing XAW? Since they are in RRSPs, I’m not concerned with tax implications and I’m not terribly concerned with f/x considerations. I’m mostly thinking about this change from a portfolio cost standpoint. VTI/VXUS are both lower cost funds; is there an argument to be made to switch to XAW?

    Thanks in advance.

  15. Canadian Couch Potato April 24, 2015 at 2:44 pm #

    @Alon: In an RRSP, the US-listed ETFs are also more tax-efficient (because you’re exempt from the withholding taxes levied by the US). So I don’t see a good reason to sell the ETFs you already have.

  16. Jason April 27, 2015 at 10:51 pm #

    I apologize for the stupid question but I noticed that XAW pays dividends semi annually and VXC pays quarterly. Does that mean you get more dividends in a year overall from VXC?

  17. Canadian Couch Potato April 28, 2015 at 9:04 am #

    @Jason: The total dividend would be very similar: the frequency of payments makes no difference.

  18. Jerry June 2, 2015 at 9:26 am #

    commenting to subscribe to this post. XAW has been doing well

  19. Eric July 6, 2015 at 3:17 pm #

    Would it be better to hold the underlying ETFs that XAW and VXC contain for more tax loss selling opportunities in larger accounts (lets say $500K+)? One can imagine situations where the U.S. market is doing well but ex-NA is tanking. In VXC this might come out as no change, prohibiting tax loss harvesting? But then holding more equity in a single fund (VXC, XAW) would reduce the fuss. I guess it depends on how well world markets are correlated in downturns.

    What do you think of this issue?

    Thanks.

  20. Canadian Couch Potato July 6, 2015 at 3:26 pm #

    @Eric: On a large portfolio in a taxable account that would definitely make sense: it’s what we do with our clients. But for most people the simplicity of holding one fund instead of three is likely to be a better trade-off.

  21. P August 3, 2015 at 10:52 am #

    @CCP my 1st look at XAW and VXC are great. They can save time and trading cost to cover US, EAFE, and Emerging markets.
    Then I learned each market’s % depends on market cap.
    Market cap-weighted indexes are prone to risk of concentration. This is readily observed at a country level (Japan reaching over 40% of the MSCI World Index in 1989). At its highs, Nortel represented more than 40 per cent of the S&P/TSX 60 index.
    When a country grow very quickly in short time, e.g. china A share index doubled in one year, its % will increase madly in index to an unreasonable weight . That sharp change may twist investor’s asset allocation a lot. I understand this flaw is for all market capitalization-weighted index, we can’t avoid that totally.
    But XAW and VXC covers 3 kinds of asset, probably 50 % of many people’s portfolio. This flaw may be over its convenience. It seems better to use individual ETFs , set their target % based on my risk tolerance,e.g. XUU 25%,VDU 20%,VEE 5%, and re-balance annually.
    Right now , VXC has 8.33% in emerging market, It should be re-balanced according to my target %. But it is in VXC, I couldn’t do anything.

  22. Canadian Couch Potato August 3, 2015 at 1:14 pm #

    @P: There is nothing wrong with setting your own targets and using individual ETFs, as long as there are valid reasons for deviating from the actual market cap weight. It’s reasonable enough to want to reduce your exposure to emerging markets if you feel they are too risky, for example. But overall it makes sense to use market cap as a guideline, and there is nothing inherently wrong with doing so using a fund like VXC or XAW.

  23. KISS August 3, 2015 at 1:36 pm #

    @P
    I’m really skeptical about setting one’s own country target weights and then rebalancing regularly to those targets. I can think of no reason to think that each country has a “natural” share of the world capital markets. Is there any reason to think that the US market, for example, will “naturally” mean revert to 50% (or 40%, or 60%, or any other number you care to pick) of the world market?? Had you started investing in 1989 with Japan at 40%, you would have ended up rebalancing to Japan at 40% for the next 25 years.

    There are reasons to overweight Canada, yes. That aside, however, it seems to me that one should just let the markets roll. VXC is ideal from this perspective.

  24. P August 3, 2015 at 3:39 pm #

    @CCP @KISS ,
    Before XAW/VXC available, almost all portfolios set target % for each country or sector . Even now, many portfolio still set target %, e.g. this one set 5% emerging market for aggressive risk level,

    http://www.canadianportfoliomanagerblog.com/wp-content/uploads/2015/07/2015-06-30-PWL-Model-ETF-Portfolios-Broad-Market-Bonds.pdf?850eac

    I agree the market cap is a good guideline. But my concern is emerging markets rise and drop so quickly, its market cap changes irrational fast, shouldn’t we re-balance its weight, just like we re-balance between bond and equity.

  25. Dar August 30, 2015 at 6:52 pm #

    @CCP – I’m curious why you use VXC instead of XAW in your model portfolio? What is the advantage? It seems that XAW has more stocks, includes more small cap and I thought I read an article somewhere by jason Bender that XAW was at least marginally more tax efficient than VXC. Excuse if you have already answered this…I pop in & out of your blog, so you may have answered elsewhere. Thanks!

  26. Canadian Couch Potato August 31, 2015 at 8:12 am #

    @Dar: I created the current model portfolios before XAW was launched. It would be a perfectly good substitute for VXC. Remember the model portfolios are just suggestions: you could substitute other ETFs for the Canadian equity and bond holdings as well and it would make little difference.

  27. gsp September 8, 2015 at 10:59 pm #

    Any idea why Blackrock is buying individual stocks in XUU to supplement the 3 ETF holdings?

  28. Michael October 28, 2015 at 6:56 am #

    To someone who has no ETFs yet, but will be coming into a large chunk of change from which to build a portfolio…would you recommend iShares in general, or XAW in particular as an alternative to your model portfolio. I see a lot of chat both in comments here and elsewhere that people seem to like it over VXC, but I don’t really understand it well enough. I get that you don’t want to send people already investing in your portfolio scrambling, but for someone cracking open a new portfolio, would you suggest it otherwise?

    Do you have a overall 2-4 fund solution for iShares that is comparable to your Vanguard one?

  29. Canadian Couch Potato October 28, 2015 at 9:52 am #

    @Michael: My model portfolios are just suggestions: there are many other ways to build similar portfolios with ETFs from iShares or BMO. XAW is a perfectly good alternative to VXC. The other iShares equivalents would be XIC for Canadian equities and XQB for bonds.

  30. Michael November 7, 2015 at 8:51 pm #

    Hi Dan,

    I am trying to build portfolio for RRSP account to hold US Stock and international Stock ETF.

    I chose VTI for US ETF, however I am having difficulty to find a broad international ETF exclude NA (since I will hold Canada stocks in TFSA). VDU only tracks developed market, is there an ETF tracking all market ex NA, or do I have to use two ETFs, one for developed market and one for emerging market?

    Michael

  31. Michael November 7, 2015 at 8:57 pm #

    Sorry Dan, forgot to mention, since the international ETFs will be held in RRSP account, and I have a large amount of money in RRSP account, I would prefer to use US listed ETFs only in RRSP account. Thanks!

  32. Canadian Couch Potato November 7, 2015 at 9:11 pm #

    @Michael: The closest you can get is VXUS, which includes all developed and emerging markets outside the US. It does include a small holding in Canada, but this should not be a significant issue. Asset allocation does not need to be precise, and using VXUS is probably better than using two separate ETFs for developed and emerging.

  33. Michael November 8, 2015 at 3:40 pm #

    Hi Dan, Really appreciate the quick response. just checked VXUS, it only has 6% holding in Canada and it would work for me. Thanks!

  34. Simon January 13, 2016 at 11:15 pm #

    http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?culture=en-CA&id=735920

    A drop of 3 basis points, looking more appealing now Dan?

  35. Shaun August 30, 2016 at 12:57 pm #

    Hi Dan,

    I don’t have a broad US stock market ETF yet and was thinking I would go with XUU over VUN as the MER is lower in XUU and the dividend yield is slightly higher. This would be held in a non-registered account. The only reluctance I have is that I checked the chart for XUU for the last 6 months and I noticed that XUU doesn’t seem to have a very high volume of trading. Could this give me a problem in terms of liquidity if and when I ever want to sell (I’m looking at about $50k worth for now) and, in your opinion, is it worth going for VUN instead because of this? Also I note you mention XUU is comprised of 3 US-listed ETFs. Would this make it worse to own in an non-registered account than VUN? Thanks.

  36. Canadian Couch Potato August 30, 2016 at 1:01 pm #

    @Shaun: XUU and VUN are both good choices for US equities. Low trading volume is typically not a problem with ETFs: just place a limit order at the ask price (or a penny higher) and you should be fine.

    http://canadiancouchpotato.com/2015/09/12/the-etf-volume-you-cant-hear/

  37. Jilly April 14, 2017 at 4:26 pm #

    Hi Dan,

    This was a great read. I’m presently planning on allocating 30% of my funds to VCN and 60% to XAW. Since they’re Canadian held, I don’t believe it will make a difference if I hold them in my TFSA or RRSP. However, any additional investments in a taxable account will allow from foreign withholding tax recovery. Is that accurate?
    I was thinking that I should put an proportional mix of VCN and XAW in my RRSP and TFSA. I understand that there may be some advantages of putting an ETF that I think will grow faster into my TFSA as this can positively impact contribution rooms…but since I’m a long term investor this may not be relevant.

    Thoughts?

  38. Canadian Couch Potato April 15, 2017 at 12:42 pm #

    @Jilly: It’s true that it usually makes sense to keep high-growth assets in a TFSA and slower-growing ones in an RRSP, but in your case 90% of the portfolio is equities. These are all considered “high-growth” so there’s not much of a decision to make. (The 10% bonds should probably go in the RRSP.)

  39. Jilly April 23, 2017 at 12:17 am #

    @Dan
    Thanks for your quick reply! Does it make sense to split my XAW and VCN between my RRSP and TFSA? I almost pulled the trigger and put all my VCN into my TFSA, max my RRSP out with XAW and put the remaining XAW in my margin account…but it occurred to me that it might make sense to split them up or even do it the other way around. I dont think there are any foreign withholding tax benefits…

  40. Canadian Couch Potato April 23, 2017 at 9:38 am #

    @Jilly: There is no difference in foreign withholding tax with XAW in a TFSA or RRSP. So to make rebalancing easier it is probably easiest to hold both Canadian and foreign equities in both accounts. VCN would be more tax-efficient than XAW in a taxable account because the Canadian dividends are taxed more favourably than foreign dividends.

  41. Brad August 20, 2017 at 6:08 pm #

    In a business investment account (taxable), how does XUU fair against VUN?

    Thanks

  42. Canadian Couch Potato August 23, 2017 at 10:21 am #

    @Brad: Their underlying holdings are essentially the same, so there should be no meaningful difference.

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