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It’s always easy to sit back and give other people advice when there is no risk to your own money.

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.

Low MERs

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:

  1. Apple Inc.
  2. Exxon Mobil Corp.
  3. Microsoft Corp.
  4. General Electric Co.
  5. Chevron Corp.
  6. Johnson & Johnson
  7. Google Inc.
  8.  International Business Machines Corp.
  9. Wells Fargo & Co.
  10. 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

  1. Royal Dutch Shell plc
  2. Nestle SA
  3. HSBC Holdings plc
  4. Roche Holding AG
  5. Novartis AG
  6. BHP Billiton Ltd.
  7. Toyota Motor Corp.
  8. Samsung Electronics Co. Ltd.
  9. Vodafone Group plc
  10. 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!

Article comments

Dan Klinka says:

Thanks for the great posts. I’m new to the ETF investing game as I’ve been doing mutual funds. Silly man! Anyway, I’ve moved to ETF strategies and feel better about it. My question relates to stick market cycles and how no one really knows what they’ll do but right now we have some signals. Trump is a key factor here and if he pulls out of NAFTA I’m worried the stick market will crash into chaos. My question is should I invest in bonds right now until more calm times appear? I don’t want to invest my money in a good market only to watch it dive . Pre 2007 scenario but for different reasons.
Thoughts are welcome!

Kyle says:

Hi Dan,

I can definitely see a scenario that proves you right. The real question you want to ask yourself is, when you look at the collective information that is being acted on and “baked into” market prices – are you assuming that you or I will know more about it then everyone else making decisions at major funds etc? There are always a laundry list of experts willing to yell that this is the greatest time ever to invest, or that the crash is just around the corner. Good luck parsing that out because I’m not going to hazard a guess!

Hello Kyle. Thanks a lot for the nice post. It might be a silly question but do you need to buy those with USD ? I have some that I’m trying to shift to Questrade (I read your post on it), but it would be a lot easier with CAD money.

Kyle says:

It will automatically convert CAD into USD Jon, but as an update on how I get my US market exposure these days: https://youngandthrifty.ca/top-seven-etfs-young-canadian-investors/

ThriftyGinger says:

Just curious, where does your money sit before you make a contribution to your ETFs? We’re going to start regular contributions to ETFs in our TFSAs (we have lots of room), then shift accordingly on an annual basis to the ETFs in our RRSP. That way we have a committed monthly contribution that isn’t just sitting in a chequing/savings account. Thoughts?

pal vin says:

Hi Kyle,
Thanks for all of your advice.
What is the Canadian equivalent of Vanguard ETFs (VTI and VXUS).

Harsha says:

Hi Kyle,

I am regular follower of you blog and I invest based on your recommendations. In your previous blog you mentioned top 3 ETF’s VXC, VCN and VAB, there you also mentioned how I can avoid the issue of exchange rate considering Canadian investors. Now you are suggesting to go with ETF’s traded in USD, will the exchange rate wont hurt my investment ?


Kyle says:

Hi Harsha,

The exchange rate could help or hurt your investment. When I wrote this article our dollar was at part with the USD. I was pretty certain it was not going to stay that way (not a hard call to make given the economic fundamentals) and so I had no problem changing my CAD to greenbacks. Today I wouldn’t be so sure. Does that make sense?

Cody says:

Newbie question, sorry. I was just curious with the Canadian dollar low and perhaps coming back close to parity with the green back in the distant future, wouldn’t it be better to find a comparable Canadian based ETF with similar holdings as VTI? Or perhaps there isn’t such a thing?

Kyle says:

We’re just about to update this article Cody, and I promise that it will answer your question. Stay tuned!

Great calls on the ETFs. Own them as well. 🙂


Teacher Man says:

I figured those would be right in your wheelhouse Mark!

Hi Kyle,
Great to see you’ve decided to invest using index ETFs – not sure about these two exactly, but here in Australia the management fees on Vanguard ETFs are even lower than the corresponding unit fund. I am always interested to learn how different individuals have determined their portfolio split between domestic and international equity – was there a specific reasoning behind the 40/60 split?

Teacher Man says:

Basically the idea behind this split FI, is that I wanted to contribute to my RRSP for the moment as opposed to my TFSA for various reasons. Living in Australia you likely aren’t familiar about the specific tax advantages of each of these accounts, but the short answer is that there are several reasons for putting USA-based equities in an RRSP account and CAD-based equities in your TFSA. Eventually my split will probably be something like 20-30% Canada stocks, 20-30% USA stocks, and then 30% or so internationally, with a small bond position or something like that. Nothing fancy, just basic diversification (these companies are so massive now anyway, and everything so interdependent, I’m not sure how much geographical diversification even matters).