- Reader Case: From VP TO FIRE - November 21, 2022
- Is it Canada’s Turn for a 2008-Style Housing Crash? - November 7, 2022
- Student Loan Forgiveness: Good Idea or Socialist Giveaway? - October 24, 2022
Today we’re going to talk about Exchange Traded Funds, or ETF’s. But before we do, just a quick note to all our Workshop participants, by now you should be (hopefully) done setting up your Questrade or Vanguard accounts and funding them. Again, we’ll be using Personal Capital as our UI front-end for our American audience. Unfortunately, Personal Capital isn’t available for Canadians 🙁
New readers, please click here to start from the beginning.
Once you’ve set up your account and linked them, you should be able to see your trading account in Personal Capital when you log in, as well as any money you’ve put in. Here’s what my dashboard looks like, showing the first $1000 I’ve put into the account as cash. If you can see something similar, you are all set.
Last week, we went over how to pick our overall top-level asset allocation: equities and fixed income. This will generally determine your long term investment gains as well as your overall portfolio volatility. For this workshop we will be using the same 60% equity/40% fixed income portfolio we used to retire, but based on your own investment timeframe and spikiness-tolerance, you may choose to go more or less aggressive than this.
The Trump Effect
As we’ve mentioned previously, all rosy everything-will-be-fine economic scenarios have been tossed out the window courtesy of incoming President-Elect Donald Trump. The impact of a Trump presidency is unclear because he himself has been so unclear on the campaign trail. As Seth Meyers said on Late Night, Donald Trump has held every possible position on every possible issue. And there’s a ton of negative stuff coming down the pipe for the rank-and-file American citizen such as the elimination of Obamacare, the sharp increase in violent hate crime across the country, and uncertainty in America’s future participation in military alliances such as NATO.
However, the Millennial Revolution is a finance blog so we will focus on the economic impacts. Specifically:
- Drastically cut the corporate income tax, from 35% to 15%
- Impact: Positive for stock markets as this would increase corporate profitability
- Push the Fed to raise interest rates faster
- Impact: Posssibly Negative as a too-rapid rise in interest rates would cause a recession
- Rip up and renegotiate NAFTA
- Impact: Negative as the imposition of tariffs would increase labour costs and decrease corporate profitability
- Label China a currency manipulator and start a trade war using punitive tariffs
- Impact: Negative for the same reason as above, but with a much bigger impact
So basically, all eyes are on those trade deals. If those policies get implemented the way Trump yelled about on the campaign trail, look out below because the US will get hit with a triple whammy: Job losses, Crashing Stock Markets, and Higher Inflation since the cost of imported goods will rise.
Right now, stock markets seem to be relatively calm, indicating that Wall Street is expecting to get the first line item relatively easily (since tax cuts are easy to pass through a Republican Congress), but are expecting the NAFTA/China trade wars to get stalled by Republicans weary of tanking the stock market and therefore their own investment accounts. I hope they’re right.
Nevertheless, we should assume the worst and invest accordingly, meaning through a portfolio of low-cost Index ETFs that cannot go to zero, no matter how badly Trump screws up the economy. This is the same portfolio that survived 2008/2009, and will survive Trump as well.
Since we last checked in with Canadian Couch Potato, they seemed to have changed their ETF model portfolio. A few years ago, they used to track each individual index (S&P500, EAFE, etc.) using a separate ETF for each, but now they’ve converged all those holdings into a single ETF called VXC which is an “All-World Ex-Canada ETF,” meaning that it covers all global equity indexes minus Canada.
I actually prefer the old approach because it gave us the ability to shift allocations between countries while this one is one giant monolithic black box. Fortunately, they still have the old portfolio still linked on that site (go to the Model Portfolio’s page, scroll to the bottom, click the link that goes to the “Canadian Portfolio Manager” blog run by one of the contributors to Canadian Couch Potato, then click “Model ETF Portfolios (with broad-market bonds)“.
2022 Update: For our most up-to-date portfolio allocations, click here.
So since we’re targeting a 60% equity/40% fixed income portfolio, we want to scan over and look at the column labelled “40FI-60EQ.” This is the ETF mix we will be starting with.
|Vanguard Canadian Aggregate Bond Index ETF||VAB*||40%||0.13%|
|Vanguard FTSE Canada All Cap Index ETF||VCN||20%||0.06%|
|Vanguard U S Total Market Index ETF||VUN||20%||0.16%|
|iShares Core MSCI EAFE IMI Index ETF||XEF||16%||0.22%|
|iShares Core MSCI Emerging Markets IMI Index ETF||XEC||4%||0.26%|
The majority of these Index ETFs are run by Vanguard which is great as they have the lowest fees out there, running at 0.06-0.16%. iShares is not far behind, with their EAFE and Emerging Market funds charging 0.22-0.26%. Total MER of this portfolio is a scant 0.14%, compared to the average 2% of actively traded mutual funds.
Remember what we keep saying on this blog: Every time you buy an ETF you are making a statement. This portfolio is composed of index ETFs, with Canada, USA, and International Indexes weighed equally, so by investing in this portfolio, we are stating two things:
- We believe that it’s impossible to pick individual stocks from each index, so we are simply purchasing the entire index
- We believe that Canada, the USA, and International stocks will perform roughly equally
So this portfolio is basically a region-neutral allocation. Canada, USA, and International (meaning EAFE and Emerging combined) are all equal. So by sticking with this allocation, we are basically saying that no particular region will outperform the other.
Now, you’re probably wondering with my USA-will-doom-us-all talk that I would lighten up or eliminate our US exposure, right? Actually, no. We’ve gone through a US-led economic collapse before, and when that happened all stock indexes fell together at the same rate. Trying to guess which country will crash less didn’t help at all because when the US crashes, the world crashes. However, when the US eventually did rebound, they led the charge. So a significant portion of our portfolio should still be allocated to the US despite our deep misgivings about the current President.
This will be the Canadian portfolio we will build in the Investment Workshop. As always, feel free to disagree and design your own portfolio based on your own beliefs. For example, if you’re bullish on President Trump and believe that the US will outperform other countries, you may want to shift equity towards the US index, like so:
|Vanguard Canadian Aggregate Bond Index ETF||VAB||40%|
|Vanguard FTSE Canada All Cap Index ETF||VCN||15%|
|Vanguard US Total Market Index ETF||VUN||30%|
|iShares Core MSCI EAFE IMI Index ETF||XEF||11%|
|iShares Core MSCI Emerging Markets IMI Index ETF||XEC||4%|
However, please know that any guess about any particular region’s outperformance over any other is just that. A guess. So if you want to stake out a position on a particular region, don’t shift any asset class too much off a neutral stance or you risk being caught off guard and getting blown up if you turn out to be wrong.
And now let’s move on the Americans…
The American equivalent of a Canadian Couch Potato portfolio would be the Three Fund Portfolio pioneered by none other than John Bogle, founder of Vanguard and the pioneer behind Index Investing as an investment strategy. This guy knows what he’s doing, so for our American readers, we will be following his guidelines.
The Three Fund Portfolio basically states that you only need 3 funds tracking 3 asset classes: Bonds, US Equities, and International Equities, with the US and International Equities split equally between them. So for a 60/40 equity allocation, this is what our portfolio would look like:
|Vanguard Total Bond Market ETF||BND||40%||0.06%|
|Vanguard Total Stock ETF||VTI||30%||0.05%|
|Vanguard FTSE All-World ex-US ETF||VEU||30%||0.13%|
Total MER: An even more astoundingly low 0.08%!
Note that these are the Vanguard ETF versions of funds that many FI-ers like Jim Collins use (VTSAX being the most famous one). The only difference is that VTSAX requires your balance to be at least $10,000, but other than that they’re the same thing.
This allocation is, once again, a region-neutral allocation that doesn’t make any strong statement about US performance vs. International equities. And because we have no idea what’s going to happen under a Trump presidency, we will be going with this region-neutral allocation for our Workshop.
Again, if you are bullish on President Trump go ahead and shift some allocation away from VEU towards VTI. Another argument for a higher allocation towards US equities comes from fellow Early Retiree Jim Collins, who writes that because so many US companies are multinationals, you are getting more International exposure than you think through VTI. You can read his very good article on it here: http://jlcollinsnh.com/2012/09/26/stocks-part-xi-international-funds-2/
If you buy either argument, you may want to pivot towards US equities like so:
|Vanguard Total Bond Market ETF||BND||40%|
|Vanguard Total Stock ETF||VTI||40%|
|Vanguard FTSE All-World ex-US ETF||VEU||20%|
But again, if you take a position one way or another don’t move too far away from a neutral stance so you don’t get blown up if you’re wrong.
OK so now that we have our ETF picks ready to go, next week we will discuss our buying schedule. Namely, we will discuss the impact of lump-sum investing versus Dollar-Cost-Averaging as it relates to the current investing environment, after which we will schedule our first purchase.
Questions? Comments? Let’s hear it in the comments below!
How much does it cost to participate in the Investment Workshop? NOTHING. Because that's how we roll. All we ask is that you sign-up using the following affiliate links to keep it free forever:
Or, prefer to use a Robo Advisor? Check out Wealthsimple, and get your first $10,000 managed for free!
Disclaimer: The views expressed is provided as a general source of information only and should not be considered to be personal investment advice or solicitation to buy or sell securities. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decisions. The information contained in this blog was obtained from sources believe to be reliable, however, we cannot represent that it is accurate or complete.