tag:blogger.com,1999:blog-5433839636644874439.post6704033758878810610..comments2024-03-04T13:37:11.022+00:00Comments on Canadian Financial DIY: Thoughts on How to Start a Portfolio from ScratchCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5433839636644874439.post-66037918569302081102007-12-17T13:43:00.000+00:002007-12-17T13:43:00.000+00:00dj, yes I agree that there can be a place for inde...dj, yes I agree that there can be a place for index mutual funds. The MER advantage of ETFs may be overcome by trading costs for rebalancing, purchases or redemptions. If you spend $100 (10 at $10 each) on trades in a year and your total portfolio is $50,000 that represents 0.2% of extra expense, which means a mutual fund could cost you up to that much more in MER and you would be further ahead. When your portfolio gets much larger and you don't do a lot of trading, the value of ETFs really comes out. It's just arithmetic. It's the main reason I think index mutual funds make sense for smaller portfolios.<BR/><BR/>For larger portolios, ETFs make sense because of costs but also because of the ability to diversify more since there is a larger selection of ETFs than mutual funds with passive indexing (US investors are lucky to have mutual funds like Vanguard which covers a wide range of US and international passive indices).<BR/><BR/>ck, that's why I chose, instead of only VTI, VV (Vanguard's large cap ETF), along with XSP (iShares currency hedged/neutral S&P 500 tracker), XSU (iShares Russell 2000 US small cap), and VBR (Vanguard US small cap). For those four ETFs, I get currency hedging on half my US holdings (and pay an extra 0.5-07% annually in fees and tracking under-performance) and a heavier weighting in small cap and value equities whose higher expected excess (i.e. relative to the risk) return should help my portfolio's performance. Some places you could read about the benefits of small cap and value include the IFA website (see link in the sidebar of this blog), as well as the book Asset Allocation by Richard Ferri, or the source itself, scholarly articles by Fama and French (search Three Factor Model). As for market coverage, despite the title, the Vanguard VTI "Total Market" fund only includes the 1300 largest US companies, c. 95% of total market value. The S&P 500, the 500 largest companies was about 82% in 2005. VV includes the 750 largest companies, while XSU is the smaller 2000 among the Russell 3000, which covers 98% of total market cap. You can buy IWV to own a Russell 3000 tracker, though its MER is 0.20% vs only 0.07% for VTI. There are always trade-offs and I've gone for what I hope is return-enhancement through my somewhat imperfect (missing about 250 mid-cap companies) US market coverage.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-69524312754438187412007-12-15T19:36:00.000+00:002007-12-15T19:36:00.000+00:00I agree with everything DavidS says but I still th...I agree with everything DavidS says but I still think that there is or can be, a role for index mutual funds from TD (MER .48%) or CIBC (MER .32% with 150K in assets). Even if they only receive your monthly contributions (and re-invest small distributions at no cost)and annually (or whatever) the money is then moved to ETFs, I think they make sense for many(most?) people.djhttps://www.blogger.com/profile/16170352853017782328noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-22694507148444899842007-12-15T13:22:00.000+00:002007-12-15T13:22:00.000+00:00Unless you have at least $1M to invest in individu...Unless you have at least $1M to invest in individual stocks, or you are a great stock picker (unlikely), funds should be used to achieve diversification. The most efficient funds are the broad index ETFs, unless you are a great fund picker (unlikely). <BR/><BR/>The main costs of investing in ETFs are commissions, spreads, and fund expenses. If you have a low cost broker, you can pay something like a few basis points in commissions. If you buy the most liquid ETFs through a broker with fair execution, the spread cost could also be something like a few basis points. If you buy ETFs with low expenses, the cost of holding the ETF could be something like 7 to 30 basis points per year. So, if you use a low cost broker to buy low cost ETFs with high liquidity and small spreads, and hold for several years, the main cost would be the fund expenses, and the total cost could be something like 20 basis points per year. That's a total of around $2,000/year on assets of $1M. Such an efficient portfolio could contain, for example, just XIU (the only Canadian ETF with low expense and good liquidity), SPY and VEU. <BR/><BR/>In contrast, Canada's mutual fund fees are the world's highest, an average of 2.56%/year, or $25,600 per year on assets of $1M. Since those fees are around the expected equity risk premium, I extrapolate and claim that, in aggregate, in the long run, virtually all of Canadian mutual funds returns are siphoned off as fees by the financial institutions.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-10250697486641606202007-12-15T02:17:00.000+00:002007-12-15T02:17:00.000+00:00I mean that it looks like 2 of the 3 are purchased...I mean that it looks like 2 of the 3 are purchased in Canadian dollars - and are you looking to keep most your purchases (when you have the choice that is) in Canadian dollars since you are going to retire in Canada. Just asking since I am Canadian and am thinking about putting 40% of my stock portfolio in VTI (which is purchased using US Dollars) - seems like you have a way to invest that may track similar to VTI but you keep more of your holdings in Canadian dollars.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-71154752358746323082007-12-15T02:14:00.000+00:002007-12-15T02:14:00.000+00:00Thanks for the reply.I am now curious about why yo...Thanks for the reply.<BR/><BR/>I am now curious about why you are buying 3 ETFs instead of the VTI. Looks like 2 of the 3 are in CDN funds - does that have anything to do with your decision, or is it more that they are hedged? My plan was actually to buy VTI but where can I read more to understand why purchasing those 3 would provide me similar returns (or better) and still have the same amount of market coverage?<BR/><BR/>Also, looking up XSU seems like it has not been around long? Cant seem to find much data on it.<BR/><BR/>Thanks.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-44852335223833319832007-12-11T07:20:00.000+00:002007-12-11T07:20:00.000+00:00Mutual funds would be simpler. But if someone want...Mutual funds would be simpler. But if someone wants to use ETFs, I do the same as suggested here. 1) Come up with an allocation; 2) Make one purchase per month; 3) Buy into the position furthest below the target percentage.Tomhttps://www.blogger.com/profile/09592533267930141428noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-63603403046471919982007-12-10T21:55:00.000+00:002007-12-10T21:55:00.000+00:00DJ, nothing wrong with the ultra-simple approach; ...DJ, nothing wrong with the ultra-simple approach; sometimes what seems simple to folks who have been looking at it for years, looks quite complicated to a real new investor. <BR/><BR/>CC, the reason for holding VGK and VPL instead of only VEA, which has the same basic country exposure in different proportions, would be to take advantage of their non-correlation and further diversify the portfolio. I wouldn't think this is a huge difference, however, and again it could be a simplifying substitution to only hold VEA.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-19645835973384218242007-12-10T17:33:00.000+00:002007-12-10T17:33:00.000+00:00If you're fairly new to investing or you're asking...If you're fairly new to investing or you're asking yourself what the heck VWO or XBB is, or you would like something a little simpler:<BR/><BR/>open a TD mutual fund account and buy 4 eFunds every month.( Canadian bond index, Canadian equity index, US equity index and International equity index)<BR/><BR/>Once or twice a year, have a look at the totals. If the ratios are way out of whack, either change the monthly contributions to each fund or switch money between funds to re-establish your desired allocation.<BR/><BR/>Then relax and every time you get the urge, or are told to do something different, simply ask why? If you understand why and it saves you money (and isn't too much of a bother) then go ahead and change from this version of the ole' couch potato.<BR/><BR/>Good luck.djhttps://www.blogger.com/profile/16170352853017782328noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-75044439996505041582007-12-10T16:22:00.000+00:002007-12-10T16:22:00.000+00:00Any reason for option VGK + VPL over VEA?Any reason for option VGK + VPL over VEA?Anonymousnoreply@blogger.com