My ETF Picks for Asset Allocation

One of the basics of investing is understanding what the breakdown of your various asset classes will be. Most investors will want a mix of canadian bonds, canadian stocks, along with foreign stocks.

In this post I'll explain what ETFs I picked to represent each of those asset classes. I use ETFs  exclusively for my investments because they cover a broad range of assets, and have low management fees.

For reference my own target asset allocation is:

• 30% Canadian Bonds
• 35% Canadian Stocks
• 15% US Stocks
• 20% International Stocks

I don't try to have cash in my portfolio, but I essentially accompish the same thing by keeping a reasonable amount of cash in my savings account.

Canadian Bonds - TSX: XSB (iShares DEX Short Term Bond Index Fund)
XSB is a Canadian ETF that includes a wide range of Canadian bonds with maturity dates of 1-5 years. I chose this ETF because:

• It has a low 0.275% Management Expense Ratio
• Short term bonds are less inflation sensitive than other bond options
• Short term bonds are less correlated with equities than long term bonds.

Returns on Bonds are classified as income and do not benefit from capital gains tax credits. Accordingly, I only hold XSB in my RRSP or TFSA where gains will not be taxed.

Canadian Equities - TSX: XIC (iShares S&P TSX Capped Cmpst Indx Fnd)
XIC is a Canadian ETF that tracks a broad range of Canadian stocks. I chose this ETF because:

• It has a low 0.25% Management Expense Ratio

XIC produces both dividends and capital gains. Since both dividends and capitalare taxed favorably I try to keep my holdings of XIC outside of my RRSP.

US Stocks - NYSE: VTI (Vanguard Total Stock Market ETF)
VTI is a US index that tracks the entire US stock market. I chose this ETF because:

• It has a low .07% Management Expense Ratio. Yes, .07%! Can't get much lower.
• I prefer a total stock market index to one that tracks the S&P 500 because the holdings are more diverse.
• Many US stock ETFs are hedged to the canadian dollar, but I prefer unhedged investments

Hedged investments are more stable, while unhedged investments are more efficient. I chose unhedged because:

• I am investing for the long term, and the common concensus is that in the long term currency fluctuations will average out.
• Hedged investments have a significant drag in performance over unhedged

Returns from this fund are classified as Dividends or Capital Gains, but because this is a foreign stock things get a little more complicated:

• There is a 15% US witholding tax on Dividends. If this stock is held in a Canadian RRSP the witholding tax is waved. Note - if you invest in a Canadian fund that holds US stocks there is no way of avoiding this witholding tax.
• Note witholding tax is still charged on dividends earned on US stocks held in a TFSA
• Tracking capital gains on foreign owned stocks is a bit of a pain compared to Canadian stocks, so that in itself is a good reason to hold these stocks in an RRSP.

I choose to hold VTI in my RRSP to avoid the witholding tax. This means I don't benefit from favorable treatment of capital gains. Holding this ETF outside of an RRSP would also be good choice but will make doing taxes more complicated.

International Stocks
I hold two major ETFs to represent international stocks. I weight my holdings 3:1 for MSCI Europe vs MSCI Emerging markets. I hold these ETFs in my RRSP for the same reason that I hold US stocks in my RRSP - avoid some dividend taxing and simpler book keeping.

NYSE:VEA - Vanguard Europe Pacific ETF

• Tracks the Morgan Stanley Capital International (MSCI) Europe, Australasia, Far East (EAFE) Index
• 0.15% MER

NYSE:VWO - Vanguard Emerging Markets ETF

• Tracks the MSCI® Emerging Markets Index
• 0.27% MER

Game Dev Story mini-review

What is it?

Game Dev Story is an iPhone sim game where you run your own game development studios. It costs $3.99.

Why is it important?

From my own experience and this thread on NeoGaf, it appears Game Dev Story has succeeded in getting players to form and share narrative within a fairly simple sim game context. I’ve seen similar stories shared on Facebook and Twitter.

Users commonly share stories about games they have released, how many sales they received, whether or not they received an high review scores, and whether they received any awards. This sharing occurs outside of the game (which is a positive indication for how much players want to share).

Key to achieving this high degree of sharing is simple personalization options. Players can name their studios, and name their games. It’s much more interesting to share that “Barry Soft” released “Golf Town” than a nameless studio releasing a nameless game.

Game Dev Story also mixes in innumerable humorous references to the computer and gaming industry and popular culture. You can hire employees like Donny Jepp, Stephen Jobson, Walt Sidney. Console to develop for include Game Kid by Intendro, and Senga Play Gear. These add additional narrative details you can easily incorporate into your story – “Stephen Jobson did my proposal, and Walt Sidney did the graphics!”

Game Dev Story is a great example of how in a restricted environment players can leverage their own imagination to tell complex stories.

It’s also addictive

Game Dev Story has succeeded in achieving that “just 1 more turn” feeling where players feel like something exciting is always on the horizon.

Managing your game studio’s needs, a complex web of hiring employees, advertising your studio and upcoming games to increase sales, training employees, funding new games, executing contracts for other companies and earning money by shipping games all pipes through an easy to understand cash mechanic.

Since many of these systems are time based, where you spend money to receive a benefit in the future, it all feeds into the feeling that if you play “just one more turn” something amazing will happen, you’ll get rich, and your games will sell millions.

Using RBC Direct Investing for Norbert's Gambit (Part 2)

In my last post I discussed how I wanted to use Norbert's Gambit to convert USD to CAD. In this post I'll show the results of both a USD to CAD, and a CAD to USD conversion, using online trade RBC Direct Investing. I discuss the implications of the trading cost in my conclusion.

Attempt 1: USD to CAD

I was understandably nervous with this being my first attempt. Worst case I might end up with a shares in Royal Bank that I didn't want and some kind of invalid transaction fee for trying to sell shares I didn't own.

Step 1:	Purchased NYSE:RY shares @ 55.26 USD
Step 2:	Sold equal number of TSX:RY shares immediately @ 55.48 CAD

The exchange rate at this point was 1 USD = 1.00353 CAD, so my break even price for selling would have been $55.455, I sold at a profit of around 0.045%. This is a lot better than paying 0.965% for my bank to convert.

One gotcha I wasn't anticipating was the time for the transaction to clear. Immediately after the trade I showed as owning a positive number of shares in my USD account, and a negative number in my CAD account - this was my worst nightmare! After a little research I found another another RBC user who claimed that if I waited a couple days this would sort itself and it did. 48 hours later I showed as owning 0 shares of RY in either account, and my cash had cleared.

Attempt 2: CAD to USD

I attempts this trade a few days later after my first attempt had fully cleared.

Step 1:	Purchased TSX:RY shares @ 55.91 CAD
Step 2:	Sold equal number of NYSE:RY @ 55.06 USD

The exchange rate at this point was 1 USD = 1.01505 CAD, so my break even price would have been $55.081/share. I sold at 2.1 cents under that, or a penalty of 0.038%. Still much better than the 0.965% my bank would have charged.

What about Trading Costs?

I got lucky, averaging a 0.007% profit on my trasactions. Canadian Capitalist says on average you'll pay 63 basis points (0.63%) which is 0.345% less than my bank charges. If you're lucky you'll pay less, but you might pay more.

It also costs two trades (for me $20) to execute Norbert's Gambit, so how much money do you have to convert to make it worthwhile?

Assuming 63 basis points and the 0.965% comparable conversion fee from a bank, you will break even on average on a transaction of $5800. For every $1000 you convert over the break even point on average you will save $3.45, or about the cost of a latte.

Should you do Norbert's gambit?

• Do you need to convert $5,000+?
• Does your broker charge you $10 or less for trades?
• Does your broker support selling interlisted stocks?
• Do you like lattes?

If you answer yes to all of the above you may want to try Norbert's Gambit!

Using RBC Direct Investing for Norbert's Gambit (Part 1)

I'm a Canadian with a US employer. I periodically acquire stock in my company through an employee stock purchase plan. Selling this stock results in a regular influx of USD to my account, and the expected currency conversion fees when I convert back from USD to CAD.

I hate currency conversion fees.

Right now my bank (RBC) will let me convert currency online but the effective fee is 0.965% of the transferred amount. I've been looking for a while for alternative ways of converting currency to reduce these fees.

One option I considered is opening my own forex trading account, and I did via Oanda (http://www.oanda.com). I never got around to using them though. A co-worker of mine did though and he reports it was effective and considerably cheaper than going through the bank. What I don't like about this solution is it requires transfering money via a wire transfer both ways.

Then I read about a method for conversion called Norbert's Gambit. Here's the basics of how it works.

First you identify an interlisted stock (a stock that is listed on both the NYSE and TSX) like RY (Royal Bank). While interlisted stocks have separate prices on both exchanges, market efficiency keeps the ratio of their price very close to the current exchange rate from USD to CAD.

Next, to convert USD to CAD, you first spend the USD you want to exchange on your selected Interlisted Stock on NYSE, and then immediately sell an equal number of shares of the same stock on the TSX.

When the dust clears - you have converted your cash from USD to CAD (minus two stock trading fees).

Sounds great, but how does it work in practice? In my next post I'll discuss the result of two separate attempts at Norbert's Gambit using online broker RBC Direct Investing (one from USD to CAD, one from CAD to USD).

Disclamer: Talk to your broker before attempting to use this process to convert USD to CAD