Investing Intelligently

On Friday it was time for another ETF purchase as about $2500 had built up in one of our RRSPs. According to the actual allocations and the expected/desired/original allocations, the area we were most deficient in was International equities. I decided it was time to put the new cash into Vanguard Europe Pacific ETF (VEA), and at the same time, transfer my current holdings in iShares CDN MSCI EAFE Index Fund (XIN) into VEA. At the time that I chose XIN, I did not have time to do any detailed investigations so I chose it over EFA because of some advice I read on Martin Gale’s blog (note: VEA did not exist at that time). In an article called “Exchange Traded Funds: Recommendations” he said “Something is missing in the above: There’s no EAFE listed. That’s because the EAFE funds available on the US exchanges such as EFA, IEF, and EZU, or the country-specific funds, all have the same or higher cost than a fund that is available to you right here in Canada, so there is no point to buy them.” Unfortunately there is no date on that article so I am not exactly sure when he wrote it, but he wrote a later article called “Changes To Barclays Canadian iShares: XSP and XIN“:

Barclays’ new idea for these Canadian iShares exchange traded funds is to concentrate on eliminating “currency risk”. The idea is to give you a way of investing in American and overseas securities without having to worry about fluctuations in the Canadian dollar. Given the massive appreciation of the Canadian dollar over the past few years this certainly seems like a good idea–but it is not necessarily. It requires careful thought
. . .
Thus, a very strong argument can be made that if foreign securities made sense for you before, that they still make sense to you today, and that you should prefer to hold them in a foreign currency. The new XSP and XIN Canadian iShares are thus bad news for you, and you should avoid them–instead you should look at the alternatives you can now freely buy on the U.S. market.

I suggest reading the whole article, that is just a snippet. The idea is that if you can tolerate some foreign currency exposure (which I think I can and I do have some Canadian dollar holdings as well, namely, Canadian equities and bonds) foreign currency ETFs like iShares MSCI EAFE Index Fund (EFA) offer lower cost and so they are preferred (unless of course you really want to have all your holdings in Canadian dollars and are convinced that the Canadian dollar will grow to be more and more valuable than other currencies over the long haul). So in his future articles he would recommend EFA (like this one) and in even later articles recommended a combination of VPL and VGK because “there a few new ETF’s [VPL and VGK] on the market that we can use to track foreign equities, that are cheaper than the ETF’s we had available to us last year”.

Now VEA is out (as reported by the Canadian Capitalist) and is the perfect replacement for the higher cost EFA. VEA has an MER of 0.15% and EFA has an MER of 0.35%. Unfortunately I had to pay more commission ($20 CAD) as I had to sell my XIN, however, XIN had an even higher MER of 0.50% so I think it is worth it to switch over to VEA completely.

Popularity: 33% [?]