I've just signed up for Questrade with the intent to purchase an index ETF based portfolio. I would like to hear some thoughts on the PWL Broad bonds vs PWL Short Bonds vs CCPs 3 ETF
I'm a young professional looking at starting up long term retirement investments. Is the PWL setup worth the added complexity?
Posted Jan 28, 2016, 5:51 PM UTC
Using CCP's VXC is easier, but PWLs is a bit more efficient as the XEF ETF which accounts for 40% of your foreign equities doesn't have a double drag of withholding tax on dividends. See what happens is VXC is a fund of funds: it's a Canadian ETF that holds US ETFs which in turn hold foreign securities. This means you're getting taxed on dividends either 15% or 30% from both the IRS and other foreign governments. This increases its cost from a base MER of 0.27% to a total of around 0.66% (based on recent yields). VUN and XEC operate similarly. XEF however is a Canadian ETF that holds foreign securities directly so you're cutting out the IRS from the picture.
What you should consider instead is doing the three fund solution but replace VXC with XAW which is cheaper and more tax efficient. It's basically the PWL's foreign holdings wrapped into one ETF and XAW is actually recognized now by the CCP author as a superior fund. Doing PWL would be even cheaper in terms of MERs but it's pretty negligible, and you won't have to worry about re-balancing allocations or making more trades.
http://canadiancouchpotato.com/2015/02/18/ishares-expands-its-core-etf-lineup/
http://www.moneysense.ca/columns/foreign-withholding-tax-explained/
Noon question here, I want to follow the PWL model portfolio. If I put it in the TFSA, I won't have to worry about those taxes right? Or is it better to put it into an RRSP?
Foreign governments don't recognize that your account is tax free so since you're following PWL, no you won't have to worry as you'll be getting equally dinged in both accounts.
The exception you're thinking of is if you decide to directly hold US equities in USD in your RRSP, like VTI or say AAPL, as there is a special exemption for this case. What isn't exempt in the RRSP is a Canadian ETF like VUN which happens to hold VTI. It will have its dividends taxed by the IRS, and the index fund in turn gives you the reduced dividend yield. This would then become a question of if you think bearing through the fees, price spread, and large hastle of exchanging USD/CAD is worth dodging the pretty negligible IRS tax. If you were to hold Vanguards US ETFs, you would instead be doing something like VTI, VGK, VPL, and VWO as your foreign allocation.
The article I linked earlier has all the available ETF configurations detailing withholding tax explained.
I wanted to ask this question as well! Debating if I should start my portfolio with those ETFs portfolio or just a tangerine fund. What's the difference between the broad bond and short bond?
Tangerine is much easier as you send a set amount of money every paycheck and Tangerine does the rest (rebalancing and all that stuff)
Manually buying 4-5 ETFs require balancing by yourself.
Honestly though, if you have an excel spreadsheet that calculates the balancing needed each time you add money it shouldn't be hard at all
I have a tangerine balanced growth portfolio that I put $100/week into it (which roughly equates to your yearly TFSA contribution). My plan is in December I'll pull out those funds from Tangerine and place them into ETFs just trying to determine which setup to go with. That way I get the convenience of an automatic savings deposit that's out of sight out of mind, and the funds are always in an indexed strategy of some sort. Subsequently I'll use my tangerine transfer funds to rebalance my Questrade account if the portfolio gets skewed one way or hte other.
I have NO idea what the real differences are between broad and short, hoping someone chimes in!
Those are the basically the same portfolios (authored by the same people too ;). Using VXC is easier - it combines VUN, XEF and XEC in one package saving you some trading fees (also rebalancing is easier). I say go with 3 funds and if your investment horizon is 10+ years then go with VAB.
Edit: you can read more here.
If I use questrade trading fees are pretty minimal though as I understand it.
My investment horizon is definitely 10+ years, probably looking at the ~20 year range. Your suggestion would be the PWL setup if that were the case correct?
If your using Questrade with that horizon I would suggest to go with the PWL setup with VAB.
Can you explain or elaborate the differences between the short term or broad bonds of the two PWL setups?
Short term bonds tend to have lower returns (in the long term) but also lower volatility.
So when bond prices drop, short term bonds will usually drop less than the average bond. And when bond prices increase, they will usually increase less than the average bond.
Broad bond indexes are a mixture of short, medium and long term bonds.