Big disclaimer

I will write about my favorites Vanguard ETFs. These names reflect my risk tolerance and my way of thinking. Under no circumstances, they should be considered as recommendations or suggestions for any of the readers to follow.  This is NOT a recommendation of asset allocation either.

Although investing in index funds is mostly a buy-it-and-forget-it strategy, and you get the most benefits by never touching your money until you need it for retirement, it’s always nice to be aware of the prevalent ETF News to keep you updated on the sector.

Why Vanguard

Vanguard is the pioneer and current leader in the low-cost index fund / ETFs industry. Some of its mutual funds or ETFs are managed for as little as 0.04%; this is $4 for every $10,000.

Typically, in the mutual fund industry, investors have to put up with sales loads as high as 10%, and management fees between 2.5% to 3%. When you compare that kind of expense vs. the 0.04% of Vanguard ETFs, you can appreciate the much lower cost.

Years of research have proven that one of the most important factors when investing is cost. The lower the cost, the better the investment. If Vanguard ETFs are the low-cost leader and it has a great reputation, currently managing over five trillion dollars (trillion with a “t”), then, I don’t have any trouble trusting it with my few thousand dollars.

Bonds are a loser’s game

I don’t like any of Vanguard’s fixed income alternatives. I just don’t see the point. If we all know that stocks do better than bonds, just get stocks. The opportunity cost of getting bonds in exchange for lower volatility is just too high. Take a look at this graph. This graph represent$100,000 invested in bonds or in the S&P 500 for 46 years. Our bond portfolio gave us $109,759 while our stock portfolio gave us $734,517. Which one would you choose if you had another 10, 20, 30 years to invest?

To hedge or not to hedge currencies

Canada is only 2% of the global economy, and most of our Canadian market is not even diversified. The Canadian market is composed mostly of the four major banks and four or five major oil companies.

I don’t hedge any of my non-Canadian investment. Hedging costs money. In a time period of 10 years plus currencies will fluctuate in value but it will average out.

The only rationale for hedging the Canadian currency is if I believe that in a time period of 10 years plus, the Canadian currency will be much stronger than the currency of all the other countries in the world. As much as I like and believe in the Canadian economy, I don’t see that happening.

Active or Passive?

I like passive funds. There are funds which are called “Smart” which are run by computers, they are supposed to find all the winner stocks and get rid of the loser ones. This is too similar to active investment and for the moment, I rather stay away from them.  They have a higher expense ratio, higher expenses due to the bid and ask spread, and a few other disadvantages. I will go with passive. Thank you very much.

How about REIT?

REITs stand for Real Estate Investment Trust. In short, an investor buys a small portion of a real estate investment. The trust is supposed to payout 90% of its revenues as dividends.

As for the investor, REITs are taxed as regular income. So it’s not the best investment to have outside your registered account. And within your registered account, it’s a management annoyance, to have to deal with reinvesting that money every month.

I don’t think that owning REITs due to its diversification allure is a good enough reason.

The list of my favorite Canadian ETFs

After all those disclaimers, and elimination fo the ETFs that I don’t like, here is the list of the leftovers.

Name	Ticker	MER
FTSE Canada All Cap Index ETF	VCN	0.06%
FTSE Developed All Cap ex-North America Index ETF	VIU	0.23%
FTSE Developed Asia-Pacific All Cap Index ETF	VA	0.22%
FTSE Developed Europe All Cap Index ETF	VE	0.22%
FTSE Emerging Markets All Cap Index ETF	VEE	0.24%
FTSE Global All Cap ex Canada Index ETF	VXC	0.27%
S&P 500 Index ETF	VFV	0.08%

A fictitious Vanguard Canadian portfolio

If I was going to build a Vanguard portfolio for myself, this is the way I would do it. I would get 1/3, 1/3, and 1/3 of the following and I would NOT rebalance at all. Instead of rebalancing, when I would invest more funds, I would add it to the larger and when withdrawing funds, I would withdraw it from the leader.

Name	Ticker	MER
FTSE Canada All Cap Index ETF	VCN	0.06%
FTSE Global All Cap ex Canada Index ETF	VXC	0.27%
S&P 500 Index ETF	VFV	0.08%

This graph is created with the assumption that we invested $10,000, equally divided between VCN, VXC, and VFV on January 2015 with no rebalancing.

This would be the per year returns.

Related Posts

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2. How often and how to rebalance a portfolio
3. Talking about financial autonomy with my nieces

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