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.
8 thoughts on “Portfolio Update: Switched from iShares’ XIN to Vanguard’s VEA”
Great blog with some very interesting points.
Just a quick question. With regards to balancing ones portfolio, would ETF’s like VEA and I see there is now one that encompasses the whole world excluding the US, not pose a problem. If for example the European markets did well one year but the Pacific markets performed poorly, then one would be unable to rebalance by selling a Eurpoean based ETF’s (like VGK for example) and buying more Pacific based ETF’s (VPL for example). With everything in one basket one could not take advantage of the gains to be made by selling high and buying low. Is this assumption correct? Or is it true that because VEA comprises 75% VGK and 25% VPL, that it would reflect any net changes made by owning a combination of both VGK and VPL?
Thanks for your time and I look forward to your comments.
Hey Paul, thanks for your question. I wrote a lengthly reply here:
Ask Dave: Index ETFs and Rebalancing (or lack therof)
How do currency exchange fees factor into the decision between VEA and XIN? XIN’s MER is 0.35% higher, but it is purchased using Canadian dollars, so there is no exchange fee. VEA’s MER is nice and low, but don’t you immediately lose a few percentage points of your investment when you buy it due to currency exchange fees?
Blitzrieg. I just did a little back of the envelope calculation. Assuming a 2% forex charge when you put the money in and a 2% forex change when you take it out, that means that we get:
With the Canadian one we don’t have the forex charge but we have a higher MER by 0.35%. So:
It looks to me like if you hold the investment for longer than 13 years, it becomes more worthwhile to own the USD investments and take the forex hit. After 30 years, for example, the extra 0.35% MER becomes equivalent to a 5% forex charge when putting the money in and 5% when taking it out, for about 10% total.
Dave, thanks for the quick response. I confirmed your calculation of a 13 year break even point. I guess this is an issue to consider when purchasing either of these ETFs in addition to the extra currency exposure with VEA.
Hello, I know that you originally didn’t want to hold so much USD that’s why you wanted to go with XIN. Now that you’re switching over from XIN to VEA, if you still use the same ratio for your portfolio, you’ll be holding 72% USD. I’m having a hard time trying to diversify using VTI, VEA, and VWO but I don’t know if it’s a wise idea to be holding onto so much USD?
Ryan, I think it’s ok if you’re in your 20s or 30s but once you get a bit older it’s probably a good idea to gradually start shifting towards more CAD as you get closer to retiring, either by selling USD investments, or just buying more CAD investments.