Investment Workshop 10: Understanding Your ETFs

Hi everyone, and welcome back to the Investment Workshop! Today we’re going to take a break and get to know your ETFs a little better.

ETF’s, which of course stands for Exchange Traded Funds, are the single best way for Joe-Shmoe investors like you and me to build a low-cost Indexing Portfolio.

But they aren’t without their confusing quirks.

Our email gets blasted every day with people asking us how to understand these things we own. Specifically,

  1. How do I figure out what my fees are?
  2. How do I know this ETF is actually owning the index like it claims it does?
  3. How do I figure out my ETF’s yield, and how will it be taxed?

Let’s go over these one by one.

How do I figure out what my ETF’s fees are?

I have written before, and will write again, about the toxic, degenerative, and corrosive effect of investment fees on a portfolio. The average Management Expense Ratio (or MER) of an equity mutual fund in Canada in north of 2%, and as proud as I am of the North, I’m not THAT proud. By comparison, the average cost of an equity index ETF is less than 0.2%.

That is one TENTH of the big banks! While owning the same companies!

Why people continue to buy the crap banks sell continues to elude me.

But don’t take my word for it. Figure it out for yourself. An ETF’s MER is easily discoverable. All you have to do find it.

And in case you’re too lazy, we’ve gone ahead and done it for you.

If you’ve been following our Investment Workshop, you will have noticed that we’re using three ETF providers: Blackrock (formerly iShares) and Vanguard, and BMO, which is a Canadian-only ETF provider.

Let’s start with iShares/Blackrock. If we were to take an ETF that we owned, like XEF, we would just go to the Blackrock site, search for XEF, and get taken to the fund’s website, where we would find this:

In the bottom left corner, you can see the important figure, the MER, sitting at an impressively low 0.22%. Remember that the typical Canadian equity fund has an MER of around 2%, or 10X higher while giving you NO extra performance!

So now let’s see what the Vanguard site looks like for our All-American ETF, VTI.

There, on the right, is the Expense Ratio of…0.05%?!?


Wow. Once again you Americans have managed to beat our Canadian asses in terms of investment options.

Here’s where your much higher population density helps you. One ETF like this has a potentially 10x higher market than ours because your population is around 10x ours. Our entire country has less people than the state of California! So the costs of running an ETF can be spread over more people, hence the much lower MER. Good for y’all! We’re not jealous at all.

*grumble grumble grudgingly sips maple latte*

And finally, BMO’s site for their ETFs can be found similarly by googling the ticker symbol. I’ve picked ZCN, the BMO TSX Index fund and found my way here:

ZCN’s Management Expense Ratio is an impressive 0.06%, which actually rivals Vanguard! BMO is a relative newcomer to the ETF space, and given that Canadian banks have been known to create crappy high-fee products, I wasn’t expecting much from them, but I’ve been genuinely impressed by how good their ETFs have been. Good job BMO!

How do I know my ETF is owning the index?

Now let’s talk about what those ETFs actually hold. Remember, ETFs are just baskets of other stocks (or bonds), and the value of the basket is simply a sum of the value of the whole.

But how do you know what your ETF is holding?

Well, if you’re holding some random actively-traded ETF (or mutual fund), I’ve got bad news for you: You have no idea!

Your holdings are basically just made up by whoever your fund manager is, and that manager is free to change their mind at any time.

But with an Index ETF, it’s far easier to figure out whether the fund is doing what it’s supposed to. While actively traded mutual funds have a generously ambiguous mandate of “make money,” passive ETFs like the ones we own have a much more concrete mandate of “track this specific index.”

Funds that have the former, ambiguous mandate are very difficult to evaluate. You can pour over their prospectus, look over their top 10 holdings, and then…what? What have you learned? Nabisco and Pepsi are your top two holdings? What does that tell you?

But on the other hand, Index ETFs have a very clear mandate: Track their index. That is a clear, unambiguous goal. And more importantly, that can be measured very very easily. For example, here is SPY, the oldest and largest S&P 500 ETF brought up on Google Finance.

And here is the actual S&P 500 overlaid on top by typing in the ticker symbol .INX into the “Compare” field.

Nice. The fact that the two lines overlay each other so tightly tells us that the ETF is doing what it’s supposed to. It’s mandate is to track the S&P 500, and it’s price history has indicated that it has done exactly that.

Here’s VTI, the Vanguard Total Stock Market ETF overlaid with the S&P 500:

Again, the two lines are following themselves pretty tightly. In this case, VTI does diverge on occasion because it’s actually a TOTAL stock market fund, rather than just the top 500, so on occasion it will under-perform if small/midcap stocks are dropping faster than the top 500, and on occasion it will out-perform if small/midcap stocks are rampaging ahead, like right now, which is why the blue line is slightly above the index.

You can do this with all of the ETFs we own to see how closely they track their respective index, and before we picked these ETFs for our workshop, this is exactly what we did to make sure they were good Index ETFs. Try it yourself! It’s fun!

What’s my ETF’s yield, and how is it taxed?

And finally, let’s figure out yields.

Each fund distributes, or pays out, a certain amount of sweet sweet cash over a set schedule. This happens because either the underlying bonds pay interest (for a bond ETF) or the underlying companies pay dividends to their shareholders (for an equity ETF).

But how much can you be expected to get? Well for that, let’s go back to the fund summary pages and look for the fund’s yield.

On Blackrock/iShares’ site, just scroll down a bit to the fund’s Portfolio Characteristics section

And you can see that for XEF, we can expect a nice juicy 3.3% distribution yield going forward.

On Vanguard’s site, this info is listed in the fund’s summary under “SEC Yield”

Here we can see that VTI has a projected yield going forward of 1.96%.

BMO’s is also listed right beside their MER, under “Annualized Distribution Yield.”

In the case of ZCN which we examined earlier, you can see it has a yield of 3.49%.

But how do we know when these distributions happen, and more importantly, how do we know what TYPE of distribution they are for tax purposes?

Well for iShares/Blackrock, we scroll up to the top of the fund’s info page and find that cute little “Distributions” chart in the left sidebar.

Click on that and a window pops up showing you exactly when each distribution got paid.

Here, we can see that XEF pays semi-annually. Once in December and once in June.

Now, click over to the Calendar Year tab and you’ll see this:

And if you scroll over to the right…

You can see exactly how each distribution is classified for tax purposes. For XEF, we can see that most of the distribution is classified as “Foreign Income,” which is treated as regular income for tax purposes. That’s why we want to hold these in an RRSP or TFSA, if possible.

For Vanguard, just click the “Distributions” tab on the fund’s main page and you’ll see this.

And here, we can see how VTI distributes and how those distributions are classified. VTI paid out quarterly (March, June, September, and December) and those distributions are dividends.

And for BMO, just scroll down to “Distribution History” and you’ll see this table.

Here, you’ll be able to tell at a glance what the distribution schedule is and how much you can expect each quarter. Interestingly, BMO’s ETF’s seem to have a very regular payments, which makes these ETFs more attractive when you’re retired like us and need the income.

Passiv’s Dividend Report

It’s worth mentioning here that if you’re using Passiv as your reporting tool, it has an excellent feature that reports how many dividends you’ve been paid over the year. To access it, log in, click “Reporting” on the left menu, and scroll down until you see something like this.

This was my dividend report for 2023, and as you can see it shows you how much each ETF paid you, when, and all sorts of other useful information. I use this in retirement extensively to make sure that my dividends come in when I’m expecting, and you should too!

And We’re Done

And that is it for us today! Thanks for tuning in everyone. I hope that answers some of your questions. We will see you back here next time, same Bat Time, same Bat Channel!

Onto the next section!

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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:

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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.

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