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.
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