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, which means the US currently makes up half the fund. The bulk of the rest is developed countries in Europe (25%) and Asia (15%). The largest international holdings are Japan and the UK at about 8% each, followed by France, Germany, Switzerland and Australia (3% to 4% each). The remaining 10% or so is emerging markets such as China, Taiwan, Brazil, India and South Africa.
The ETF gets its exposure to these markets by holding four US-listed ETFs: Vanguard Large Cap (VV), Vanguard FTSE Europe (VGK), Vanguard FTSE Pacific (VPL) and Vanguard FTSE Emerging Markets (VWO). This allows the fund to benefit from economies of scale, which help to keep the management fee low. However, if you hold the fund in an RRSP or a TFSA you will pay two levels of foreign withholding taxes on the international dividends. Based on the calculations we made in our recent white paper, I’d estimate foreign withholding taxes would add approximately 0.45% to the cost of the fund if it’s held in a registered account.
The fund does not use currency hedging, so investors will have exposure to the US dollar, the yen, the euro and the pound, as well as several other currencies.
The alternatives: There are no other Canadian ETFs or index funds that give you exposure to all countries outside Canada. The closest competitor is the iShares MSCI World (XWD), which holds US and developed international stocks: however, it also has a small holding in Canada and does not include emerging markets.
The only other comparable funds are US-listed ETFs such as the Vanguard Total World Stock (VT) and the iShares MSCI ACWI ETF (ACWI). Both of these ETFs include an allocation of just under 4% to Canada.
The bottom line: VXC is a useful ETF for anyone looking to wipe out home-country bias with a single holding. An investor building a small Global Couch Potato portfolio could use VXC in place of separate US and international holdings: that would reduce trading costs and complexity, as well as adding a bit more diversification with a slice of emerging markets.
For larger portfolios—especially RRSPs—using US-listed ETFs will be more tax-efficient, since the foreign withholding taxes would be much lower (the US portion is exempt and the international dividends are subject to one level of withholding taxes rather than two). But as always, that assumes you’re not getting gouged on currency conversion when you trade in US dollars. For many investors, the simplicity and convenience of VXC is likely to be a good choice even in an RRSP.
Some investors will argue there is a benefit to splitting your foreign equities into separate holdings for US and international stocks and rebalancing when outperforms the other. That’s possible, though the benefit isn’t likely to be large. There are always trade-offs when you opt for simpler solutions, but they’re usually good ones to make.
Disclosure: I own VXC in my own portfolio.
Will the new subscription service still provide RSS feeds? This is almost exclusively how I follow blogs such as yours. After Google Reader shut down, I moved to Feedly.
@Scott: Yes, it will still be possible to get the RSS feed: I’m just not yet able to give specific instructions for doing so. Will know more soon. (For the record, I’ll be using AWeber to manage subscriptions.)
The couch is back!! … and the potato looks delish …I am looking forward to the new and improved site.
Any idea why Vanguard would include VV, which is more expensive and less diversified than, say, VTI?
@Tyler: The index tracks only large and mid-caps, whereas VTI includes small-caps as well. Not sure the reason for that decision, but if the index had included small-caps it would have been been harder to track in international markets (more US-listed ETFs in the underlying holdings). It could have included close to 10,000 stocks.
Hi,
I presently own VUN, XEF and XEC.
Is there a difference in holdings with my 3 ETF vs VXC?
Thanks
Do you think that there is an opportunity cost by not adding small and micro cap (VUN) to this ETF ? You see, I’m wondering if by not adding the small companies into this index I may ended up losing much more in returns that 2-3 additional trades at 10$ per year.
Thanks in advance
@Scott and @Canadian Couch Potato (and all else concerned!):
Yes, there will be a new feed, though the FeedBurner tap will be shut off soon! But…
I would highly suggest getting the great CCP insights via the new sign-up form that will be launched with the new website. You’ll have content delivered straight to your inbox (perhaps as you always do), and as CCP grows into the new format this site will be able to better tailor its delivery for all of you folks out there in e-land!
Also, the traffic that comes to the site – in part due to the new system, and any comments about the format/content delivery/design will also help CCP (and me) tweak the site by fine tuning the hows and whys of the new design.
Check back Monday as we break the proverbial bottle of champagne over the bow of this investment ship!
(p.s. I’ll be perusing comments for the first couple of weeks to see if there are any design suggestions or issues that might arise!)
@Bettrave: A combination of 50% VUN, 40% XEF and 10% XEC would be comparable to VXC, and indeed it would provide a bit more diversification in the form of small-cap stocks. But VXC would certainly be easier to manage.
@Marc-André: I do like total-market indexes that include small and microcap stocks, which is is why I tend to recommend VTI/VUN and VXUS. If you’re willing to accept a little extra work and a couple of trading commissions, it’s probably worth it. But it’s hard to go wrong either way.
Could you explain if VXC is a good choice for a non-RRSP account?
I’m not clear what the tax implication and currency differences are?
Could You reduce the Couch potato funds to 3 and expect similar returns.
ie VCN, VXC (replacing VUN and XEF), and then VAB for bonds?
If this is really comparable in MER and returns, then why not every time??
Thanks.
@cecilhenry: From the original post: “An investor building a small Global Couch Potato portfolio could use VXC in place of separate US and international holdings: that would reduce trading costs and complexity, as well as adding a bit more diversification with a slice of emerging markets.” There may be reasons to split the holdings, such as if your portfolio has multiple accounts or if you want to hold different proportions of US, international and emerging markets. But overall reducing the portfolio to three funds is often a benefit.
The tax implications and currency risk for VXC are the same as for VUN and XEF. In a taxable account, most of the foreign withholding taxes would be recoverable. You would be exposed to all the foreign currencies.
I’m currently using 45%VUN, 45%VDU, 10%VEE for my international equity wich are holded in a CISSP.
Based on a some article here I’m thinking of two scenario
Scenario 1 – Keep VUN and VEE and switch the VDU to ZEA to lower the foreing tax on the developped part
Scenario 2 – Switch everything to VXC
Scenario two is simpler to manage but I would lose small cap and pay a little more in tax. Is ZEA a good option in place of VDU ?
@Louis: I think you’ve summed up the trade-off well. It’s up to you to decide whether the small amount of additional tax is worth the convenience (and lower trading costs) that would come with the one-fund solution.
@CCP: Thanks again for a nice article. Your analysis of the tradeoffs of the new ETF is very helpful. Looking forward to your revamped site!
I’m puzzled by, or perhaps misunderstand, the statement: “In a taxable account most of the foreign withholding tax would be recoverable.” I thought that, in a taxable account, foreign withholding tax can be credited against domestic tax payable. In other words, you don’t avoid the foreign tax withheld, i.e., it is not recovered, although you are credited domestically for having paid it. This differs from an RRSP in which you outright avoid the US portion of the foreign tax withheld, i.e., it is recovered, period.
Am I misunderstanding the situation, or is this just a terminological issue?
@KISS: I think we’re just arguing semantics. In a non-registered account the foreign withholding tax is deducted before you receive the distribution, but then you can claim an offsetting credit on your return, thereby “recovering” it. In an RRSP I’d say you’re exempt from the US withholding tax. It’s not paid and then recovered.
I like the new logo.
Just when i think I have it right something new comes along. I have a large portfolio in a non-registered account and presently am using VUN, TDB911 and VEE. VUN has an MER of 0.15% and the tax is recoverable. The TDB911 fund has a relatively high MER of 0.51 but it directly holds the foreign stocks so the withholding taxes are recoverable and there are no trading fees. VEE has an MER of 0.33% and the taxes aren’t recoverable. Using the 50-40-10 weighting of VXC the average MER is 0.31% (similar to the .30% you are projecting for VXC) but more of the taxes are recoverable and there are no trading fees for the TDB911 fund.
So am I roughly in the same place as I would be with VXC but with more control and small caps? I was wondering why you mentioned that it would be good for a small portfolio. Any reason why it wouldn’t be good for a large one?
@Brian, why not use VTI/VXUS like all the cool kids do ? Simply use norbert gambit to convert CAD/USD and you are done.
@Brian,@Michel: Be carful, in taxable. As soon as you hit the $100K limit in foreign investments, you increase your workload at tax time.
@Michel. I also have those in my USD account which unfortunately I did before I knew of Norbert’s gambit. The average MER is about 0.1% which is sweet. But it seems to be a hassle doing the gambit and not without some costs. Then again, the extra 0.21% on the Canadian version is $2,100 a year on a million dollar portfolio. Not inconsequential. So I’m always torn.
@ccpfan. I know about that although I believe it’s when the cost of your holding are $100k+, not when their market value hits that threshold. The T1135 is a pretty minor form – just a few simple lines.
@Brian: VXC is a perfectly good choice for a large portfolio as well. However, people with very large portfolios with multiple accounts may like the added flexibility of keeping those asset classes in separate funds, including possibly US-listed funds.
Thanks for this great post. As you indicated, this post is one of the a series of ETF introduction. If any possible, I think it would be significant interests to a lot of couch potato investor if you would examine how to choose an appropriate one in the portfolio from the very similar ETFs. For example, for a Canadian broad market, there are several very similar ETF on the market, such as VCN, ZCN and XIC. I believe for other markets, such as US, developed ex. North American, and developing, there are also several very similar ones. Except the cost, what are the key difference among them? For those very similar Broad market ETFs, is there any one superior to others?
@Jim: I spend a lot of time on that question in my book, The MoneySense Guide to the Perfect Portfolio. Funds like VCN, ZCN and XIC are extremely similar, and in my opinion they are more or less interchangeable. My preference is for the most broadly diversified low-cost fund in each asset class, and I prefer plain-vanilla cap-weighted indexes in most cases—at least as a starting point for new investors. My recommend fund page (linked in the navigation bar) includes a list with some descriptions.
Such a wonderful new look for this great site.
I have a question for your recommended ETFs. For the international equity, you did not recommend ZEA bmo msci eafe ETFs. However, based on your previous research white paper, ZEA is the only one that directly hold the international equities. So it would be much more tax friendly and less costly. Do you have some specific reason, that we, as novice investors, should know, why this one is not in your recommended list? Thank you so much.
Great new layout. I would make one suggestion, which it to allow readers to reply to threads/comments directly, so that the subsequent discussion would appear below the original comment. I find it easier to follow an discussion as I don’t have to jump up and down the page, at least personally.
@Jim: Thanks for the comment. ZEA is indeed a good choice from a withholding tax perspective, and I probably should add it to my list. The fund is still very new and I am interested to see what its tracking error and taxable distributions are after at least a year. Our estimate of its total cost including MER and withholding taxes is just theoretical at this point.
@DMDave: Thanks, I will look into that, though we don’t have complete flexibility when it comes to formatting comment threads.
Hi @DMDave, thanks for the comments. I’ll be looking into the threaded comment section as soon as possible. Well, I’m actually just testing it with this comment, so hopefully it goes where it’s supposed to!
So I think the threading is working, this comment *should* be 3rd level nesting, which is currently the limit (but can be increased/decreased). Thanks again @DMDave for the suggestion!
@CCP and @AlexColeman: I love it — our old buddy the creased spud, and his time-worn couch are back. You’re right; it has a cleaner look, somehow managing to look reassuringly familiar, yet not dated at the same time! It sets a delightfully off-beat, whimsical tone that seriously belies the very high level information that is being dished out under the masthead, week after week, post after post.
I’ve always chuckled at the name. A real life Couch Potato would be physically lazy, and I suppose mental inertia is supposed to go along with the image package. The investing Couch Potato name was initially used in a self-deprecating sense, relating to the absence of detailed regular economic metric and data collection, analysis and resultant trading based upon this frenetic data manipulation. The name conveys a kind of laziness, and, in fun, the monicker can be seen to sort of fit, in the sense of that there is no constant data collection, and constant waiting for coded “signals” to buy or sell — indeed there is very little buying or selling, except at intervals that are generally pre-planned well in advance, involving trades that are not done with at-the-moment judgement, but rather, are made using mathematically trivial calculations based upon predetermined ratios decided upon when the portfolio is first set up, which could be years ago, and which don’t change (except for good and usually predictable reasons).
So the whole principle, and the community that uses it are often derided by the investment mainstream for being lazy and simplistic. Well, I think our community would agree the method is lazy in the special sense that we have elected to bypass activities (attempted market timing and specific stock selection) that rational analysis has shown to be fruitless. But it is far from easy, in the sense that to move from theory to actual consistent practice takes a lot of discipline that is very hard to come by, especially in the initial newbie period. But it gets easier as time goes by, and is intensely rewarding, in an intellectual sense (as well as financially, of course, but that part takes years to demonstrate!)
SPUDS RULE!
@CCP: In a largish non-Registered account, my non-Canadian equity is represented by a US equity ETF component and an excluding-US equity ETF component that currently is made up of 2/3 ZEA and 1/3 XEC. The latter purchase was made before I fully understood the nuances of Foreign With-holding Tax.
Assuming that I am prepared to keep and manage the same asset ratios (i.e. 2/3:1/3 of EAFE markets and Emerging Markets), I understand that with ZEM about 36% of the underlying share value is made up of shares of a US based subsidiary which then own foreign assets. The rest are directly owned shares of foreign corporations. While this is not ideal, it seems to be closer to the ideal 100% directly owned than is the case for XEC.
Does it make (tax efficiency) sense, in light of this, to dispose of XEC and to make up the same ratio in ZEM ETFs?
New layout looks great. Love the clean layout, bold header, and return of the couch!
Thanks to everyone for the positive feedback and to Alex for responding to reader requests.
@Oldie: Our white paper did not look at Canadian-listed ETFs that hold emerging markets stocks directly because there are none that do this completely. ZEM comes closest and may be somewhat more tax-efficient, but the only way to know for sure would be to look in the annual report for the amount of foreign withholding taxes paid and then do the calculations. In terms of the overall portfolio costs I would be surprised is this amounted to more than a basis point or two.
I am only 6 months old in the world of ETFs. Need to confirm something in regards to the foreign withholding taxes (FWT) for ETFs held in RRSP.
1.) There would be no FWT for VTI in an RRSP account, however; if I hold VUN FWT would apply and is not recoverable, is that correct? And,
2.) If held in RRSP VEE would be subjected to 2 levels of FWT as opposed to VWO which will get only one level of FWT treatment. Correct?
Please confirm. Thanks.
@DT: Correct on both counts. Lots more on foreign withholding tax in our white paper, linked here:
https://canadiancouchpotato.com/2014/02/20/the-true-cost-of-foreign-withholding-taxes/
Cool new site! Thanks CPP for the always providing top quality info. I only have one concern, I’m finding the font small. Maybe just me? I cant seem to expand the size on my tablet.
Phil
Thank for you adding this neat little feature. I hope others will find it useful too.
I thought I would chime in to say that I despise “nested” commenting layouts such as this. It makes it impossible to see any new posts, because new posts get scattered all over the hierarchy as people reply to different comments. When I come back to the same post, I only want to see new comments, not have to scan the entire thread all over again.
I know this is a personal preference, so being able to turn this on/off would be great. The way it used to work was great.
For what it’s worth, I agree with Brian S regarding the nested commenting. It works well enough if you’re visiting after the discussion has ended, but it’s not easy for new posts (if you tend to come back a couple of times and check for new comments, like I do).
@Tyler: I tend to agree. You’ll notice the nesting feature has been removed. It also made it harder for me to monitor and respond to reader comments.
@CCP: I just realised that the options as I gave them, within a non-registered taxable account, using XEC or switching to ZEM, eventually come to the same thing. Whether there is more or less 2nd level foreign withholding tax i.e. at the US taxation level in this situation, whatever amount of US tax applied can be eventually be credited back when I file my annual Canadian tax return; do I understand this correctly?
However, suppose I were to hold Emerging Markets within a TFSA, whatever difference that exists between the two in the form of underlying holdings would become more apparent, would it not? I added up all the percentages of underlying holdings in BMO’s ZEM web-sheet in the “Total Holdings” table on July 17 that were in various iShares assets (rather than as directly held emerging markets assets) and they added up to 44.22%. Interestingly, I checked again on July 18, and there were tiny fractional percentage differences, but not adding up to more than a percentage point total difference.
Accepting that the final truth would be in the actual tax paid and reported by BMO at the end of the year, would it be reasonable to try to estimate ZEM’s 2nd level, US based FWT? Annual Dividends = approximately 2%; 15% FWT on iShares assets = 2% x 15% = 0.30%. 44.22% of this in ZEM’s case would be 0.132%; For XEC that would be 100%, i.e. 0.30%, a difference of 0.168% in non-recoverable FWT cost.
For BMO’s sister ZEA ETF which holds all the EAFE foreign assets directly, compared to, say, XEF which holds 100% indirectly through the US-based iShares company, the difference would be 0.30%. It would be nice if BMO, seeing as how they could do this for ZEA, would do the same for ZEM and reduce the indirectly held foreign holdings to zero, too.
Oldie, something that might adjust your calculation some, is that 7% (as of Friday) of ZEA is invested in the iShares MSCI EAFE ETF. The percentage seems to vary over time, but always seems to be between 5-15%. So there should be a small amount of uncoverable withholding tax there.
XEF also tracks a larger index, including small-caps and medium-caps, so I think its yield should be lower than ZEA which subsamples a smaller index. It might be subject to lower foreign withholding tax for that reason.
It would be ideal if BlackRock/iShares implemented the strategy change it announced back in March and actually started holding securities directly with XEF/XEC (like it does with the European-only XEU unveiled in April). Not sure if it is cost-effective for them to hold so many securities directly, though.
@Tyler: Darn!! I should have checked. BMO had stated their intention to convert all of ZEA to directly owned assets, and for no good reason, really, I assumed by now the would have done it all by now. 7% is admittedly a small percentage, but still, it’s annoying. And if there’s no guarantee that they’re going to end up at zero, really what’s to stop them from going up again to a significant percentage in future — maybe even higher than 15%?
What exactly was the strategy change BlackRock/iShares announced regarding XEF/XEC?
Yeah, I don’t know how BMO decides how much of the iShares ETF to hold. It goes up and down.
The strategy change for XEF/XEC actually included a whole bunch of iShares ETFs. Previously the investment strategy allowed only for the ETFs to hold one or more US iShares ETFs. With the change, they are now allowed to also hold index securities directly. I thought this represented an intention to do so, but apparently they’re in no rush. You can find the full press release at http://ca.ishares.com/content/en_ca/repository/resource/press_release/pr_2014_03_24a_en.pdf
@Tyler: My reading of your referenced March 24th press release is only that the referenced ETFs, which includes XEC, may now include directly owned assets, better or more conveniently (??) to match the underlying index, in addition to the shares of US-based iShares ETFs that they used to hold. Nowhere did I understand here that the intent was eventually to convert to a 100% direct ownership of foreign assets (in contrast to BMO’s stated intention for eventual conversion to 100% direct ownership of foreign assets making up ZEA’s underlying holdings, or at least that was my understanding.)
Yes, I realize that it doesn’t say they will necessarily switch over. But why make an announcement and change the investment strategy, if not planning to change anything? And right after BMO launched ZEA, too.
In any case, I don’t think the difference between ZEA and XEF is very large at the moment. ZEA (mostly) holds directly, while XEF is more diversified. I’ve been holding XEF since before ZEA was created and don’t plan on changing, unless it’s convenient to do so (i.e., I can make use of a capital loss). But if XEF does happen to start holding directly sometime, then it will be the clear winner, I think.
@Tyler: The difference is that BMO was explicit in its statement of intent to transition eventually to fully directly owned assets, to eliminate unnecessary foreign withholding tax at the US level. iShares may have announced their changes immediately after this, but the absence of stating their explicit intent to move eventually to totally direct ownership is, I would think, very significant.
It’s unlikely that ZEM & ZEA will ever get to 100% direct ownership. Only relatively few of the larger EAFE/EM stocks have interlistings or depository receipts on Canadian exchanges — to track the rest, a sampling strategy using US ETFs will continue to be necessary.
The exact savings of withholding tax of this “best effort” approach would be quite difficult to estimate. Only year-end reports will tell.
Oldie, that’s easy enough to say at this point in time. :) But who knows, maybe they’ll transition later (it’s only been a few months after all… but I’m quite impatient). In the meantime, it’s likely only going to be a couple tenths of a percent difference between XEF and ZEA, I think. Interesting to talk about, but not the end of the world by any stretch.
Human Capital, I don’t think Canadian-listed ETFs face any problems holding stocks listed on overseas exchanges. There are a number of funds that do that already. However, it is more expensive for the fund to manage several hundred/thousand stock positions than it is to manage a position in a single (or a small collection of) ETF(s) from the US.