It’s always easy to sit back and give other people advice when there is no risk to your own money. When you haven’t had to trade your personal time for the cash in your investment account things always seem so simple. When it isn’t your retirement date being affected either way, suddenly investing becomes a much more logical exercise. That’s why I decided to give everyone a peak into what I just invested in this morning – it isn’t necessarily what I would recommend to everyone, but it isn’t just another hypothetical article either.
Another Reason Teachers Love Summer
Yesterday was a big day for many teachers across Canada as it was the last Friday in June (*Editor’s Note: This article got lost in the dryer for a couple of weeks). Many school divisions choose to take their salary in even monthly installments and then get paid for July and August at the end of June (you wouldn’t believe how many teachers are unable to budget for two months when they get a lump sum payment, but I digress). This means that teachers can get a considerable amount of money at the end of June, and since I budget a certain amount to throw into long-term savings (don’t worry this isn’t another personal finance sermon on the benefits of saving 10%+) I decided I could invest – what is for me anyway – a pretty decent chunk of change this morning.
How I Bought Into Nearly 10,000 Companies This Morning
So, forget what I tell everyone else to buy – what did I purchase? I put about 40% of my new capital into VTI and about 60% into VXUS. In other words, I actually invested in 9959 stocks from around the world. I’m sure there will be many detractors out there that will rationally point out that many of those stocks will be losers, and gosh darn it, why would you want to invest in so many companies that will eventually lose money when you can just pick the good ones?
My reasoning revolves around two assumptions: I don’t think I am a skilled enough investor (yet) and I don’t have enough leisure time to identify stocks that will outperform these indexes over the long term. If you think you fit into the exclusive category above, you’re almost assuredly wrong – but you could be part of the 1-2% that are right. Read our free eBook for more details on why your sexy stock-picking strategies that you got off of suckeroftheweek.com probably aren’t going to help you much over the long term.
Why These ETFs?
But why purchase these broad-based ETFs specifically and what’s so great about them? Well, first and foremost, I like the fact that they are on the NYSE/NASDAQ and are not hedged to the Canadian Dollar. The CAD has been at historical highs vs the USD for several years now. Given the relative size of each of our economies, it is almost impossible that this will continue over the long term. With the Fed talking about finally easing off the throttle a little this week, the USD looks like its set to go on a streak and I’ll only be able to long for the days when investing my CAD-based salary in US-based equities was so easy and profitable.
VTI and VXUS have expense ratios of .05% and .16% respectively so they are extremely cheap to hold for the next several decades (when combined with no-commissions purchases on Questrade I’m almost getting to invest for free!). This is a fairly large advantage over the Canadian offerings that would be in the .17% range for the American market exposure, and around .47% for equivalent world stock exposure. I’ll try not to start another (un?)holy war on mutual funds here, but to get the sort of equities exposure I’m getting with these two ETFs for a rough average MER of .12%, many international mutual funds based out of Canada would charge 2.5%. That's pretty tough to argue with. Another option would be to simply to have purchased units of the ETF VT (.19% MER), but my strategy gives me a slightly lower MER for similar exposure.
Related: Updated Questrade Review
But This Isn’t Balanced?!
So why no Canadian content or bonds this time around? The bonds question is a little easier to address. As a teacher with a pretty decent pension plan (and a union that seems powerful enough to keep it 95%-100% funded) managed by a third party, the no-risk, solid-income pillar of my retirement plan is already rounding into shape. Since I’m relatively young investor I likely won’t have any exposure to bonds for twenty years or more.
Why I have very little Canadian exposure (a little through VXUS) is a little more complicated. The exchange rate with USD and the difference in MER are both factors. I expect that CAD-based ETFs will continue to see their MER fees trend downward over the next few years and the exchange rate will revert back to the mean. At this point I will be more likely to even out my exposure. Another consideration that I won’t get into extreme detail on is that I wish to have the vast majority of my Canadian equities in my TFSA (leaving my RRSP for all the other good stuff). In fact, my TFSA may very well only hold one ETF (whatever the cheapest one is that tracks the TSX 60) during my whole life. The reason why I’m not starting to build that part of my nest egg yet has to do with some really weird and crazy stuff concerning my dual Canadian/American citizenship. Suffice to say, I will eventually be buying a lot of Canadian equities, (20%-30% of my eventual ideal portfolio) just not right now.
What the Heck Is In These ETFs Anyway?
VTI tracks the CRSP US Total Market Index. It has exposure to large-, mid-, and small-cap stocks across the whole US market. The sector breakdown looks like this (according to Vanguard.com).Consumer Discretionary 12.60% Consumer Staples 9.20% Energy 9.80% Financials 17.50% Health Care 12.40% Industrials 11.20% Information Technology 17.80% Materials 3.80% Telecommunication Services 2.40% Utilities 3.30%
The top ten holdings have a few names you might have heard of before:
- Apple Inc.
- Exxon Mobil Corp.
- Microsoft Corp.
- General Electric Co.
- Chevron Corp.
- Johnson & Johnson
- Google Inc.
- International Business Machines Corp.
- Wells Fargo & Co.
- Procter & Gamble Co
I’m pretty sure those guys aren’t going to bankrupt anytime soon!
VXUS – The Rest of the World Doesn’t Suck!
VXUS tracks the FTSE Global All Cap ex-US Index. Basically it allows you to invest in companies of all sizes from around the world – other than the USA. It has exposure to stocks in the Eurozone which are pretty beaten up right now, emerging markets, Canada, and pretty much everywhere else.
Ten largest holdings
- Royal Dutch Shell plc
- Nestle SA
- HSBC Holdings plc
- Roche Holding AG
- Novartis AG
- BHP Billiton Ltd.
- Toyota Motor Corp.
- Samsung Electronics Co. Ltd.
- Vodafone Group plc
- BP plc
Here’s where your money is going on a geographical basis:18.9% Emerging Markets 44.4% Europe 28.3% Pacific .4% Middle East 7.4% North America .6% other
Indexing Is the Right Fit For Me
Occasionally I read some interesting stuff on stock picking using various strategies from other bloggers or noted authors. One day I’m sure I’ll try my hand at trying to identify undervalued small-cap stocks in sectors that I know a little better than most. For right now though, I don’t have the leisure time to invest in these activities and statistically, I’m certain to beat the vast majority of stock pickers out there no matter what most of them claim. With today’s vanishing MER fees and substantially reduced trading commissions, it has never been a better time to invest in broad indexes and reap the benefits of widespread exposure. If I wasn't so obsessed with cutting costs to the bone, I would probably try something like a Wealthsimple robo advisor account, but for right now, low-fee ETFs are working out great for me!
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