In the brief time they’ve been around, asset allocation ETFs have transformed the way DIY index investors manage their portfolios. These balanced funds have become the default choice, as it’s harder and harder to justify adding more moving parts and more complexity to a portfolio by using individual ETFs for each asset class.
While other fund providers now offer their own versions, the Vanguard and iShares asset allocation ETFs remain the most popular, and for good reason. I’ve included both in my model portfolios because you can’t go too far wrong with either family. Vanguard and iShares both offer five options, with equity allocations ranging from 20% for conservative investors, all the way up to 100% for the most aggressive. Each fund combines several underlying ETFs, which invest in thousands of individual stocks and bonds, providing Canadian investors with extensive global diversification.
Asset Mix | Vanguard ETF | iShares ETF |
---|---|---|
20% equities / 80% bonds | VCIP | XINC |
40% equities / 60% bonds | VCNS | XCNS |
60% equities / 40% bonds | VBAL | XBAL |
80% equities / 20% bonds | VGRO | XGRO |
100% equities | VEQT | XEQT |
But that’s not to say they’re identical. The Vanguard and iShares families have several differences in composition and strategy. None of these is terribly dramatic, but they’re worth understanding if you’re looking to make an informed choice. In our latest blog-and-video joint venture, Justin Bender and I present a head-to-head comparison of the Vanguard and iShares asset allocation ETFs.
Before we dive into the details, let’s address the most obvious difference: fees. The iShares portfolios are slightly less expensive at about 0.20%, compared with 0.25% for the Vanguard funds. A margin of five basis points would be a good tiebreaker if the funds were exactly the same in all other respects. But as we’ll see, they’re not, so this shouldn’t be your only point of comparison. And let’s say it again: costs are always important, but unless your portfolio is very large, small differences don’t add up to a lot of dollars. On a $100,000 balance, five basis points is less than $1 a week.
Canadian equities
We’ll start our comparison by looking at the allocation to Canadian stocks. Our country makes up only about 3% of the global equity market, but Vanguard and iShares both overweight domestic stocks in their asset allocation ETFs. Vanguard assigns 30% of their equity mix to Canadian stocks, and 70% to foreign stocks. iShares goes with 25% Canada and 75% foreign.
Based on recent performance, you may be tempted to favour the iShares ETFs, with their higher allocation to foreign stocks. After all, during the decade ending December 2019, foreign stocks outperformed Canada by around 4.6% per year. But if you’re old enough, you might remember that from 2000 through 2009, Canadian stocks crushed the rest of the world by an average of 8.1% percentage points per year.
Remember, global diversification is based on the idea that all countries have roughly equal expected returns over the very long term, even if they experience wide variance over shorter periods. Indeed, if you had been invested during the 25 years from 1995 to 2019, it would have made virtually no difference whether you had selected 30% or 25% Canadian stocks. Both portfolios would have delivered virtually identical results: an average return of 7.4% per year, with the same level of volatility.
Bottom line: This one’s a coin flip. The small difference in allocation to Canadian equities will likely have no meaningful impact over the long term.
Foreign equities
As we’ve noted, Vanguard allocates 70% of its equity portfolios to foreign stocks, while iShares assigns a weight of 75%. But there are also more important differences between the way these fund providers divvy up this allocation between US, international, and emerging markets equities.
Vanguard assigns a weight to each region based on market capitalization: that is, according to the total dollar value of all publicly listed stocks in each region. For example, today the US comprises about 58.7% of the global stock market, not including Canada. International developed markets make up about 30% of the global market (ignoring Canada), while emerging markets grab the remaining 11.3% or so. The foreign equity allocation in the Vanguard asset allocation ETFs is broken down according to those proportions.
It’s important to stress that these weights are not static: they will change over time as the market caps of various countries evolve.
iShares, by contrast, assigns specific target weights for their US, international, and emerging markets allocations. U.S. equities receive a 60% share of the overall foreign equity allocation in each ETF, with another 33.3% going international developed countries and the remaining 6.7% to emerging markets.
The biggest takeaway here is that the iShares ETFs significantly underweight emerging markets (and overweight developed markets) relative to their Vanguard counterparts. This difference is even greater when you consider that South Korea is considered a developed market by Vanguard’s index provider (FTSE) and an emerging market by iShares’ (MSCI).
Bottom line: If you want your foreign equity allocation to roughly mirror the global stock market, the Vanguard asset allocation ETFs are the way to go. If you prefer to underweight emerging markets, choose the iShares ETFs.
Overall equity asset allocation: Vanguard v. iShares ETFs
Asset Class | Vanguard | iShares |
---|---|---|
Canadian equities | 30% | 25% |
US equities | 41.1% | 45% |
International equities | 21% | 25% |
Emerging markets equities | 7.9% | 5% |
100% | 100% |
Fixed income
Now, over to the fixed income side of the asset allocation ETFs. Here, too, there are some significant differences between Vanguard and iShares.
The Vanguard fixed income portfolios include 60% Canadian bonds and 40% foreign bonds. The domestic bonds cover the broad market, with government and corporate bonds of all maturities. As with the foreign equity portfolios, Vanguard includes US, international and emerging market bonds, weighted according to each region’s market cap. Currently this works out to approximately 43% US bonds and 57% international and emerging markets.
iShares opts for more Canadian content, with 80% of the fixed income portfolio in domestic bonds. Moreover, iShares also swaps out a portion of the broad-market Canadian bonds for shorter-term corporate bonds. The other 20% is US bonds, split evenly between government and corporate investment-grade issues.
Overall fixed income asset allocation: Vanguard v. iShares ETFs
Vanguard | iShares | |
---|---|---|
Canadian broad market bonds | 60% | 62.5% |
Canadian short-term corporate bonds | - | 17.5% |
US broad market bonds | 17.2% | - |
US government bonds | - | 10% |
US corporate bonds | - | 10% |
International broad market bonds | 22.8% | - |
100% | 100% |
Both fund providers hedge all the foreign currency in the bond portfolios (as they should), which reduces the volatility that would otherwise result from changes in exchange rates, making the foreign bonds behave more like Canadian bonds. For this reason, you’re not likely to see big differences in the performance of Canadian and foreign bonds, like you would in equities. So although the Vanguard portfolios have far more non-Canadian bonds that their iShares counterparts, this will likely have only a modest effect on long-term performance.
More significant, perhaps, is that the iShares bond portfolios have a lower average maturity (9.6 years versus 10.4 years for Vanguard’s) and lower duration (7.4 versus 8.1). Lower duration means the bonds are less sensitive to changes in interest rates, so the iShares portfolios might be slightly less volatile. However, the extra helping of corporate bonds also adds a layer of credit risk.
Bottom line: Vanguard’s approach—including all countries in proportions that match their size in the overall market—is much closer to a traditional indexing strategy. iShares makes some active decisions (no overseas bonds, more corporates, shorter duration) that you might not agree with.
Rebalancing strategies
Of course, one of the best features of asset allocation ETFs is that they rebalance for you: that means you never need to worry about selling bonds to buy more stocks during a bear market, or doing the opposite after a big run-up in stocks. Here again, though, Vanguard and iShares have different strategies.
We should acknowledge that this is probably a moot point for the foreseeable future. Investors have poured hundreds of millions into these ETFs in the last couple of years. Those huge cash flows have allowed the fund managers to simply buy more of whatever asset class is furthest below its target weight. That prevents the portfolios from ever getting so far out of alignment that the manager needs to sell securities to rebalance.
If those cash flows eventually slow down, however, then the asset allocation ETFs may need to actively rebalance after a big move in the markets. Vanguard’s plan is to prevent any individual holding from drifting off target by more than an absolute two percentage points. For example, VBAL has a Canadian equity target weight of 18%. If this becomes more than 20% or less than 16%, the fund manager would step in to rebalance.
The iShares strategy is a bit different. Their plan is to rebalance anytime an asset class drifts off target by a relative 10%. For example, XBAL’s target for Canadian equities is 15%, so the rebalancing threshold is 1.5 percentage points (because 10% of 15% = 1.5). So the managers rebalance if the allocation to Canadian equities creeps past 16.5% or falls below 13.5%.
Bottom line: The asset allocation ETFs will likely remain very close to their targets at all times, so the differences in rebalancing strategies are likely to be negligible.
Purchase plans at your brokerage
Let’s wrap up by considering some differences between the Vanguard and iShares asset allocation ETFs that are specific to your online brokerage. If you don’t have a strong preference for one of these fund families over the other, these practical considerations might tip the scales.
First, both XBAL and XGRO are eligible for commission-free trades at both Scotia iTRADE and Qtrade. So if you invest through either of these brokerages, opting for these iShares ETFs instead of their Vanguard equivalents (VBAL or VGRO) will significantly reduce your trading costs.
Even if you invest with Questrade, where all ETF purchases are free, the iShares ETFs have one potential advantage: XBAL and XGRO are eligible for pre-authorized cash contributions (PACCs). This program allows you to arrange for a specified dollar amount to be taken from your chequing account and used to purchase ETF shares at regular intervals. While this allows you to put your portfolio management on autopilot, you should be aware that iShares seem to support the program reluctantly (it’s not advertised on the website) and it’s a nuisance to set up. But if you’re interested, contact Questrade’s help desk for instructions.
Bottom line: If you’re making small, regular contributions to your asset allocation ETFs, the iShares versions may offer more opportunities to reduce the commissions you pay. But this consideration should not be the driver of your decision between the two fund providers.
Thank you for the analysis. We appreciate that you provide it on a somewhat regular basis.
It would be great if there was a printer-friendly facility to print those analyses efficiently on a regular printer page size.
Bizarre that the greatest competitive advantage for iShares over Vanguard – PACCs – is not promoted by iShares…
Thanks for getting me thinking! Did you have any commentary on which discount broker either provides the best rate of return analysis, or link to companies that do. I always struggle with this. I am with Virtual Brokers, but their link to a third party RoR portfolio analytics powered by Wealthscope, is deeply flawed. It assumes that your current investment mix was been your mix since the first day you opened your account at VB Other third party apps I have tried require manual inputting, which I soon tire of.
Just wondering, in a non-registered account, are there any material tax differences between the Vanguard and iShares approaches? And, let me add my thanks for once again providing an easy-to-digest analysis.
Have you heard if TD Waterhouse plans to offer the preauthorized commission-free iShare option on their brokerage?
Great article! One question… If you hold any of these ETF’s in your TFSA (vs an RRSP) is there a 15% withholding tax due to the non-Canadian equities and bonds? Or is this tax reduction included in each of the ETF’s fees?
Thanks
I would be very interested in seeing an analysis by you of the Horizons asset allocation ETFs. In a non-registered account they seem to offer some deferral tax benefits worth consideration, but they also have a considerable TER (Total Expense Ratio) which is a deterrent for me to invest using these ETFs, at least so far. Your thoughts would be very much appreciated.
Very good analysis. But I’m a bit surprised that you have not included the BMO asset allocation ETF especially ZCON, ZBAL and ZGRO. The three of them feature a 0.20% MER and the performance is very similar to iShares and Vanguard
Is anyone out there actually using the PACC, and if so how well does it work? Dan, do any of your clients use it?
I’d love to see a post reviewing the PACC in detail. How long do purchases take? Do you get market price / bid price, and at what time? What happens to leftover cash that cannot buy whole shares?
Second comment I have is that this is a great breakdown of these ETF families. But there are a lot of new players in the game – BMO, TD, and now even MacKenzie. It is getting crowded and I have to wonder how some of these less conventional players measure up to the ‘big two’.
@tristan TD Direct Investing is staying away from the general commission-free ETF purchase service available at Questrade, etc. Instead, they have just launched the app-based (app on a smartphone or tablet) TD GoalAssist program where you can buy TD’s ETFs or their one-click ETF portfolios commission-free. You pay the standard $9.99 commission for ETFs from other issuers.
To piggy back on a previous comment, in a non-registered account, is the tax drag significant on products such as VGRO/XGRO? Wondering if it would be worth considering for a larger taxable account and become hands-free???
@Alan M: There will likely be small differences in the taxable distributions of the Vanguard and iShares funds, but there is no fundamental advantage of one over the other.
@KP: According to Justin’s analysis: “There is unrecoverable foreign withholding tax on VBG (tax drag of around 0.34% in an RRSP/TFSA), and even some on certain US bonds held by VBU (tax drag of around 0.11%). Although most US bonds are not subject to FWT, there are still some that are (and interest received from international and emerging markets bonds in Vanguard’s wrap structure is fully subject to the full 15% U.S. withholding tax).”
This means there will be slightly more FWT on the bond side of the Vanguard funds. But this will be at least partially offset by the higher FWT on the equity side of the iShares versions, due to the higher foreign equity allocation. Overall, any differences are likely to be very small.
In a TFSA there is no way around FWT of dividends, no matter what fund you use. In an RRSP, the only way to avoid US withholding taxes is to hold US-listed ETFs. This obviously makes the portfolio much more difficult to manage.
It’s important to remember that all-in-one ETFs are never going to be “optimal.” They will never be the absolute cheapest or the most tax-efficient choice. But we always need to remember that theoretically better alternatives are always more complex and subject to “user error” that will often undermine their benefits.
@David Scott, Michel LaFontaine, Marc H: We’ll be looking at asset allocation ETFs from other fund providers in the near future. Stay tuned.
@Yves: The only potential tax drag comes from the the presence of premium bonds: in a non-registered account you can theoretically achieve more tax-efficiency by using VEQT/XEQT and a fund such as ZDB for the bonds (and/or using some GICs). However, the benefit is likely to be modest. See Justin’s blog, where he estimates the the benefit at about 0.05% versus VGRO and 0.10% versus VBAL:
https://www.canadianportfoliomanagerblog.com/tax-efficiency-of-vanguards-asset-allocation-etfs/
Hi Dan, Long time reader…. by long time I mean I followed your methods a few years ago, and then forgot about this all until now (was working on the couch potato thing). I see a lot of things have changed around here since I originally set up my investment model. Was wondering if I could get your analysis/advice on someone who followed your old models.
I have three accounts set up: My TFSA which holds VCN, XEC, XEF, XUU and ZAG (this was a 5 fund model you had years ago), My RRSP which has VCN, XAW and ZAG (which is a 3 fund model a couple of years ago), and an RESP with VCN, XAW and ZAG as well.
Are these multi-fund models still relevant? Is it worth selling them all and consolidating into these new single ETF models? I’ve never had a problem balancing them, and I’ve been pretty happy with performance (as far as my untrained eye could tell). However I read a post on Reddit about how XUU and XAW might have some issues, which is making me consider changing things up https://www.reddit.com/r/PersonalFinanceCanada/comments/kh1v3s/xuu_and_xaw_huge_12_month_tracking_error/
Thanks for all the great work you do.
Does it really matter when one buys VGRO? Like I notice a drop in November then it kept going up until last week….I am just going to be buying for the first time and putting it on both RSP and TFSA accounts so wondering if it makes sense to wait for it to drop just a couple of dollars cheaper since this is for long term investment…..
@Maria: I understand that it sounds tempting, but waiting for the fund to drop is just guessing. There is a very real possibility that it will never fall to your target price. As you note, if this is a long-term investment (and especially of you are planning to make more purchases in the future) the timing of your initial buy is not likely to make much difference.
Any significant difference between a portfolio of all-world etf (VT OR XAW) and a bond etf or GICs and the all-in-one ETFs discussed here?
Hello CCP! Thank you for your continued generosity and knowledge. I have a question unrelated to this, that I can’t seem to find an answer for.
I use TD direct investing. There is the “projected income” tab, which I am assuming shows dividend payouts. My question: when we say that a fund had a 10% increase in a year, does that include the dividend payouts in that total growth percentage?
Thank you!
Are any of these ETFs (ie VBAL, VGRO) DRiP eligible in an RRSP account? If so, which brokerages provide this?
@Russ: In theory, all ETFs can be DRIP-eligible, but in practice this varies with the brokerage. So it’s best to simply contact your brokerage and ask whether these specific ETFs are eligible in your accounts.
@Marc: The published returns of any ETF or mutual fund includes dividends. So if the fund reports a 10% return that might consider, for example, of 8% price appreciation plus a 2% dividend.
When you write “This difference is even greater when you consider that South Korea is considered a developed market by iShares and an emerging market by Vanguard” you are directly contradicting what you say in the video. So If your transcript is correct about the classification of South Korea your conclusion is wrong since the different classification of South Korea would mitigate the difference in emerging market weightings, not make it “even greater.” On the other hand, if the video is correct about the classification of South Korea it’s the transcript that is wrong about that. HINT: You will want to check the FTSE vs MSCI classifications of South Korea, an exercise that should remind us all to be careful about what indicies we follow.
@Dave: Good catch. The video is correct and I introduced the error when adapting the script for the blog. It’s now fixed.
You might cringe when I say this, but I am plan to buy an equal amount of all 5. Psychologically speaking, seeing at least 5 ETF’s going up and down is less likely to cause me to panic if there is another global meltdown of some sort. I might pay a little more in fees and I might risk having the portfolio go off balance a bit, but I think it will save some stomach lining. What do you think? Am I missing something in this strategy?
Hi Dan, new fan of yours here, thanks for this fantastic blog!
Couple of questions:
For a larger portfolio (approx. $1M) and assuming I’m ok with both approaches used by Vanguard and iShares (I assume that they’ll both perform equally over the long term), then the only other decision criteria is the MER and FWT which are both systematically higher at Vanguard. If so, then why would one choose Vanguard over iShares?
Also, maybe a dumb question, but does either one of these companies ever “actively” manage their asset allocation ETFs if they foresee some new macroeconomic trends? Or is it “set and forget” for the long term?
Again, thank you for this great analysis.
@Daniel: Welcome to the blog, and thanks for the comments. It would be entirely reasonable to favour the Vanguard ETFs if you preferred their strategy of allocating US and international equities according to their market capitalization, or including international bonds, as described above.
Fortunately, Vanguard and iShares have been clear that their asset class targets will not be actively managed in these products. But that’s not a dumb question, as other asset allocation ETFs are indeed more active (including VRIF).
Hi Dan,
Long time reader of your blog. Thank you for all the information.
We have followed your earlier advice and bought VTI, VEA, VWO and XBB in RRSP, XRE in TFSA, CPD & XIC in Taxable accounts with a 60/40 Equity/Bond ratio across all accounts. Our portfolio value is now 1.5M.
When I looked into your model portfolio page to send to a friend, I saw that Asset Allocation ETFs have replaced the earlier recommendations.
Should we now switch into these new ETFs? It would be simpler.
Should we buy VBAL across all our accounts – RRSP, TFSA and non-registered? How does asset location work in this case?
Thank you very much.
@Tan: You certainly shouldn’t feel the obligation to switch to a one-fund portfolio if you’re comfortable maintaining the one you have now. The asset allocation ETFs are neither cheaper nor more tax-efficient than portfolios built from individual components, and for a large portfolio the differences might be significant. But they are much easier to manage.
If you decide to use a fund such as VBAL, then the idea would be to hold it in all accounts, which eliminates the need for rebalancing. But it does mean you’re giving up any tax advantage you might get from asset location. There is definitely a trade-off to consider.
Hi Dan,
I’d love to reiterate Ivan’s question above as I couldn’t find an answer to it and I’m looking for the same:
TL/DR: Are these multi-fund models still relevant? Is it worth selling them all and consolidating into these new single ETF models?
Thank you
@Kamal: See the intro here:
https://canadiancouchpotato.com/2020/01/23/unveiling-the-2020-couch-potato-model-portfolios/
To Dan and fellow readers:
Has anyone ever tried “wealthsimple” or any other new /Robo advisor type of service? Wondering if they even have these Asset allocation ETFS available as a choice ?
I use TD Direct Investing at the moment and was only considering switching to WealthSimple as they seem to offer 0 commission trades.
Hi Dan,
Recent purchaser of VBAL, (one year) in TFSA. Confused as to how I pay the FWT. Do I need to keep track of dividends annually, then on my tax returns claim these? Or is the 15% taxed on these at source, meaning I don’t need to enter anything pertaining to them on my tax returns? Apologies for the rudimentary nature of my query.
Thank you for your time
@Kevin: Robo-advisors generally have their own ETF portfolios and do not allow you to pick and choose your funds they way you can at with an online brokerage. However, Wealthsimple Trade is a service that allows you to purchase any ETF with no commissions, so you could use this service to invest using an asset allocation ETF.
@Walter: You never have to worry about remitting FWT. By definition, these taxes are withheld at the fund level or by the brokerage. If you are holding your ETFs in a taxable account, the foreign withholding tax is reported on your T-slip and your tax prep software will look after getting you the offsetting tax credit.
Hi Dan,
I’ve recently started investing and discovered your website. Thanks for all the information and advice, it has really help make things easier. I looked at your model portfolio and was wondering if you think the XBB/XEQT combination is the best in terms of flexibility. For example starting off young and being more aggressive by investing a greater proportion in XEQT than XBB and then readjusting that proportion as I get closer to retirement(buying more XBB and/or selling more XEQT). I feel that with the asset allocation ETFs you don’t have that flexibility and when I get closer to retirement I’ll have to “restart” by starting to invest in less aggressive asset allocation ETFs. Any advice?
@Anthony: I don’t think it’s necessary to plan for what specific holdings you will use decades from now. You may be using the same asset allocation for many years, and a lot can change between now and then, including new products and your own life circumstances. No matter what strategy use, your portfolio will likely evolve over time. If you’re investing in an RRSP or TFSA, selling your asset allocation ETF and switching to another would be extremely easy and cheap if that becomes necessary.
Thank you for taking the time to reply!
Hi, from the model portfolios I always had the impression that XUU and ITOT are equivalent and you just carry the latter in your RRSP and the former in everything else, but I’ve noticed lately that they track quite differently in the market and so looked at the holdings and XUU holds 42% of ITOT, 49% of IVV, and a handful of other things. IVV sounds like it’s basically S&P 500, so is holding ITOT instead of XUU actually increasing my exposure to tech and associated risk?
I’m in the same boat as Ivan and Kamal using the older multi etf portfolios. I do see the advantage to a simpler setup and removal of the need to rebalance which = some cost savings on commissions each year. I’m setting my asset allocation based on after-tax numbers so when I move funds from taxable account to TFSA each year, or withdraw from RRSP this affects my after-tax asset allocation % which leads to more frequent rebalancing. These single ETF’s would completely remove the need to rebalance.
I do see that the main drawback with the single ETF is the ability to set your own asset allocation %’s across the asset classes. Your stuck with whatever breakdown of equities the fund uses.
Any other benefits or drawbacks to the use of the single ETF I am missing?
Hi Dan,
I’m in my late 50’s with RRSPs, TFSAs, and Non registered accounts made up of 40% XAW + 20% VCN + 40% ZAG. I plan to retire at 70 and my principle residence is paid off in Toronto …so for risk considerations, where would my principle residence fit into this equation? Would my risk be considered lower than someone without a paid off principle residence? Just wondering if I should increase my equities exposure since my home is paid off.
Thanks!
@Franco: I really can’t offer you advice on an appropriate asset allocation. I don’t necessarily think that having a paid-off home should translate to a more aggressive investment portfolio, unless you honestly feel less anxious about your investments now, and you’re confident you won’t abandon your strategy during a severe bear market.
Hi Dan, I really appreciate your blog. I have been following the CCP strategy since 2018 and it has saved a lot of fees, stress, and time. I hold VGRO in my RRSP and TFSA.
The BoC and Fed have been carrying out significant QE operations. If they continue with QE and start doing yield curve control, will it have any negative long-term impacts to bond performance within VGRO?
Thank you!
Could you please comment on HGRO or HBAL vs the ishares /BMO/Vanguard funds?
Your comments on Vrif would be appreciated
@Dave cox: I did a four-part series on VRIF: just enter “VRIF” in the search bar to find them.
Hi Dan,
I’ve really learned a lot from your blogs and model portfolios. Thanks so much!!
I recently had an exit and have about 1M USD to invest, so I wanted to seek your advice on a few things.
I’m looking to invest in a fund like VGRO, but with the USD/CAD exchange rate being not so good right now, I’d like to keep the funds in USD. I found that AOA is similar to VGRO in terms of its allocation (although it is weighted slightly more towards stocks). In terms of foreign withholding tax, from my understanding (from reading https://www.vanguardcanada.ca/documents/impact-of-withholding-taxes.pdf), both VGRO and AOA will have withholding tax, regardless of their currency, since both hold US stocks. I wanted to ask if my understanding is correct and whether you would also recommend AOA as a replacement for VGRO.
Secondly, I wanted to ask you whether you would recommend using dollar-cost averaging and invest the 1M over multiple months, or just set a limit order and buy in a short timeframe? I read another commenter asking the same question for a smaller amount (10’s of thousands) where you recommended not to split over multiple months, and I was curious whether I should do the same. I’m concerned since stocks have been on a pretty big rally in recent months and there are many articles about the market being in a bubble.
Really appreciate your help Dan!
@Tom: I’d suggest rethinking the idea of keeping your recent windfall in USD. This is a big topic, but I’ll try to lay out the most important issues.
– RE: “the exchange rate being not so good right now,” compared to what? The average FX rate since 1990 (over 30 years) has been about $0.80 USD, so we are very close to that average. Even if the USD appreciated significantly after you bought AOA, you would need to sell an enormous holding to take advantage, potentially realizing a large capital gain.
– One-fund portfolios like AOA are designed for US investors and are fundamentally different from funds such as VGRO. AOA’s fixed income component is all in US currency, so it will be highly volatile if you measure your returns in Canadian dollars. It almost never makes sense to hold fixed income in a foreign currency.
https://www.vanguardcanada.ca/documents/portfolio-currency-hedging-decision.pdf (see page 5)
– Your allocation to Canadian stocks would be less than 3% and your allocation to Canadian bonds will be zero. Although presumably all of your liabilities are in Canadian dollars, you will have almost no exposure to your native currency.
– If you use VGRO, which includes an allocation of about 32% to US stocks, that portion is exposed to the USD and would benefit from any appreciation in the USD relative to the loonie:
https://canadiancouchpotato.com/2014/01/13/how-a-falling-loonie-affects-us-equity-etfs/
– The non-US equity allocation in AOA (about 37% of the fund) will be denominated in the currencies of the underlying stocks (euros, yen, and so on). So more than a third of your holding would be completely unaffected by the USD-CAD exchange rate. The currency exposure for these overseas stocks is the same in VGRO as it would be a US-listed ETF:
https://canadiancouchpotato.com/2014/01/16/currency-exposure-in-international-equity-etfs/
– Managing a large taxable account with USD securities is a bookkeeping nuisance. You will need to track your ACB in CAD (which your brokerage won’t do for you) and you’ll need to file a T1135 every year:
https://www.adjustedcostbase.ca/blog/calculating-adjusted-cost-base-with-foreign-currency-transactions/
https://canadiancouchpotato.com/2014/04/10/adjusted-cost-base-with-us-listed-etfs/
https://www.canadianportfoliomanagerblog.com/ask-bender-how-do-i-report-my-us-listed-vanguard-etfs-on-form-t1135/
– Assuming you will be investing in a non-registered account, the foreign withholding taxes on AOA will be higher than they would be on VGRO. However, they should be recoverable, so this is more or less a non-issue that should not affect your decision.
– I would probably recommend a dollar-cost averaging strategy for this lump sum because it’s so large, and you would be reducing the risk of very unlucky timing. I would recommend this regardless of market conditions:
https://canadiancouchpotato.com/2018/01/22/ask-the-spud-should-i-use-dollar-cost-averaging/
If one of my clients was in this situation I would likely convert the entire amount to CAD using Norbert’s gambit and then dollar-cost average in three to six tranches separated by one or two months each. If you’re using an asset allocation ETF and only making one trade per tranche, then you could make smaller and more frequent transactions, such as monthly over a full year.
Hope this helps and good luck!
Hi Dan,
Thanks for all your great posts. I’m new to investment. I’ve been having VGRO in my TSFA, RRSP, and non-registered account for 2 years at Questrade. Now it is the tax season. Do I need to track my ACB? If yes, how to do that? Thank you very much.