Archive | ETFs

Foreign Withholding Taxes in International Equity ETFs

It seems Canadian ETF providers are paying more attention to foreign withholding taxes these days. Not so long ago, you rarely heard anyone discussing this hidden drag on returns. But last month BlackRock announced a significant change to its iShares Core MSCI EAFE IMI Index ETF, ticker symbol XEF, which makes up the international equity component of my Global Couch Potato portfolio. The change was made specifically to reduce the impact of foreign withholding taxes.

When the fund was launched in April 2013 it simply held a US-listed ETF, the iShares Core MSCI EAFE (IEFA). That was a convenient way of getting exposure to the 2,500 or so stocks in this large index. Over the last three weeks, however, XEF has gradually bought up the individual stocks in the index and now holds them directly. According to BlackRock:

“XEF will generally no longer be subject to U.S. withholding taxes. While foreign withholding taxes will continue to apply to dividends paid on certain international equity securities included in the XEF Index, it is expected that the change in investment strategy implementation will reduce the overall amount of withholding taxes borne directly or indirectly by XEF.”

A refresher course on foreign withholding taxes

A few words of explanation will help here.

Continue Reading 33

Drilling Down into the iShares Core ETFs

When iShares launched its Core ETF series back in March it made some waves in the industry. The company cut the fees on nine ETFs it considers building blocks of a long-term portfolio. Its boldest move was to slash the cost of one of its flagship products, the iShares S&P/TSX Capped Composite (XIC). At the time XIC was weighed down by a management fee of 0.25%, much higher than its competitors from Vanguard and BMO. After that fee was reduced to a stingy 0.05%—making it the cheapest ETF in the country—it prompted BMO to follow suit less than a month later.

Now more moves are afoot. On July 21, iShares rebranded these nine ETFs to include “Core” in their names. They also launched a new addition to the family: the iShares Core Short Term High Quality Canadian Bond (XSQ).

The new ETF is extremely similar to the iShares Canadian Short Term Bond (XSB) in most respects: both are about 60% government bonds and 40% corporates, and the holdings are all investment-grade (rated A or higher). Their fundamentals are almost identical:

XSB
XSQ

Yield to maturity
1.58%
1.55%

Average coupon
2.98%
2.81%

Duration
2.83
2.77

Average term
2.83
2.92

Source: BlackRock Canada

.

Continue Reading 22

Under the Hood: Vanguard FTSE All-World ex Canada (VXC)

This post is part of a series that takes a detailed look at specific Canadian ETFs or index funds.

The fund: Vanguard FTSE All-World ex Canada Index ETF (VXC)

The index: The fund tracks the FTSE All-World ex Canada Index, which includes “primarily large- and mid-capitalization stocks of companies located in developed and emerging markets, excluding Canada.” The index includes approximately 2,900 stocks in 46 countries.

The cost: The management fee is 0.25%. Since the fund is brand new we don’t know the full MER, but it should be less than 0.30% after adding taxes and incidentals.

The details: VXC started trading on July 7 and was one of five new Vanguard ETFs launched that day. The fund is a one-stop solution for those looking to diversify outside of Canada. Not so long ago, investors needed two or three ETFs to get exposure to the US, international developed markets and emerging countries (unless they were willing to buy US-listed ETFs). Now they can get it with a single fund.

VXC weights each country according to the size of its capital markets,

Continue Reading 54

Calculating Adjusted Cost Base: A Case Study

If you’ve read our ironically titled white paper, As Easy as ACB, you understand how complex it can be to track the adjusted cost base of ETFs. You need to account for all purchases and sales of shares during your holding period and then adjust for any reinvested distributions, return of capital and share splits along the way. Since that paper came out, several readers have emailed to ask whether it’s really necessary to do all that work.

That’s up to each investor to determine, but I wouldn’t want the Canadian Revenue Agency to discover you were paying a lot less tax than you owed. And as we discovered recently with a client of our DIY Investor Service, taking the time to accurately calculate your adjusted cost base can also save you from paying unnecessary taxes.

Our client purchased 300 shares of the iShares S&P/TSX Composite Index ETF (XIC) in September 2005 and added another 200 shares the following year. She eventually sold the entire holding (which by then had more than doubled in value) in April of this year. On the surface that seems like a straightforward set of transactions,

Continue Reading 22

Ask the Spud: Why Do ETF Yields Differ?

Q: The Vanguard S&P 500 (VFV) currently has a dividend yield of 1.44%, but the US-listed version of the same ETF has a yield of 2.01%. How can these two funds have such different yields when their underlying holdings are exactly the same? – Lindsay

The US and international equity ETFs from Vanguard Canada do not hold their stocks directly: they get their exposure by holding a US-listed ETF. The Vanguard S&P 500 (VFV), for example, simply holds the Vanguard S&P 500 (VOO), which trades on the New York Stock Exchange.

Since the underlying holdings of VFV and VOO are identical, you might expect the two funds to have the same dividend yield. Yet if you visit their respective websites you’ll find the published yields actually vary by 57 basis points. What gives?

More than one way to do the math

Turns out there are several ways to calculate a fund’s yield. Vanguard Canada uses the trailing 12-month yield, which it defines as “the fund’s cash distributions over the past 12 months divided by the end of period net asset value.” The last four quarterly distributions from VFV totaled $0.52905 per share,

Continue Reading 13

Vanguard Goes Global With New ETFs

[Note: This blog post was updated several hours after it was published, as new information became available.]

The Vanguard Total International Stock ETF (VXUS) has long been part of my Complete Couch Potato portfolio, since it gives instant access to virtually all the world’s markets outside the United States. I’m frequently asked whether Vanguard is planning to launch a Canadian-listed version of VXUS, so investors could avoid the expense and hassle of converting their loonies to US dollars. The answer is probably no—but the solution might be even better.

Vanguard Canada announced today that it will launch five new ETFs later this year, the most interesting of which is the Vanguard FTSE All-World ex Canada. While full details have not been published yet, the preliminary prospectus explains the fund will track “the performance of a broad global equity index that focuses on developed and emerging markets, excluding Canada.” The management fee has been set at 0.25%.

This new ETF is not a Canadian wrapper for VXUS: it will include US stocks and exclude Canada, whereas VXUS does the opposite.

Continue Reading 39

Inside the RBC Quant Dividend Leaders ETFs

In January, RBC launched the Quant Dividend Leaders ETFs, a family of dividend-focused funds covering the Canadian, U.S. and international markets. I recently had a chance to speak with Bill Tilford, Head of Quantitative Investments at RBC Global Asset Management, to learn more about the new ETFs:

RBC Quant Canadian Dividend Leaders (RCD)
RBC Quant U.S. Dividend Leaders (RUD/RID.U)
RBC Quant EAFE Dividend Leaders (RID/RID.U)

The funds do not track a third-party index: rather, the portfolios are built using a rules-based methodology. Unlike the popular S&P Dividend Aristocrats indexes, which focus on past dividend growth, Tilford says the RBC ETFs try to be forward-looking. So in addition to screening for stocks with above-average dividend yield, the strategy also looks at three measures of financial strength to determine the sustainability of the dividends.

The first is called the Altman Z-score, which has been used since the 1960s to estimate the probability of a bankruptcy. “It also does a great job of forecasting dividend growth,” says Tilford. The other factors are the volatility of the firm’s return on equity (ROE) and the amount of short interest.

Continue Reading 13

How Low Can ETF Fees Go?

Less than a month ago, BlackRock aggressively cut the management fees on several of its core ETFs. The boldest move was to slash the fee to just 0.05% on its broad-market Canadian equity fund, the iShares S&P/TSX Capped Composite (XIC). That seemed to get the attention of the competition, because BMO has hit back with similar fee reductions on several of its own ETFs. (Good thing I didn’t update my model portfolios.)

On April 30, BMO will reduce the fees on the following ETFs:

Fund name
Old fee
New fee

BMO S&P/TSX Capped Composite (ZCN)
0.15%
0.05%

BMO S&P 500 (ZSP)
0.15%
0.10%

BMO S&P 500 Hedged to CAD (ZUE)
0.15%
0.10%

BMO MSCI EAFE (ZEA)
0.30%
0.20%

BMO MSCI EAFE Hedged to CAD (ZDM)
0.35%
0.20%

BMO MSCI Emerging Markets (ZEM)
0.45%
0.25%

BMO Short Corporate Bond (ZCS)
0.30%
0.12%

.
In the major equity asset classes, the management fees are now identical on comparable BMO and iShares products. Surprisingly, the Vanguard counterparts are now the most expensive in the group. I’m pretty sure no one saw that coming,

Continue Reading 49

Adjusted Cost Base With US-listed ETFs

Many readers have used our white paper, As Easy as ACB, to learn how to calculate the adjusted cost base of their Canadian ETF holdings. I’ve received several comments and questions from readers who wonder whether the process is the same for US-listed ETFs—and the answer is no.

You already know that dividends and interest from US securities are taxed at your full marginal rate. What you may not realize is that return of capital (ROC) and capital gains are also fully taxable. And although ROC and reinvested capital gains affect your ACB with Canadian securities, they are unlikely to be a factor with US-listed ETFs.

Schmidt happens

First some background: in a 2012 court case, a Calgary investor named Hellmut Schmidt argued that ROC and capital gains distributions from a US-listed security should get the same tax treatment as they do when they come from Canadian funds. He argued the ROC should not be taxable, and that he should be on the hook for only half the capital gain. But the judge disagreed and ruled that all the US fund’s distributions were fully taxable as foreign income.

Continue Reading 31