Portfolio Allocation - Thoughts on Emerging Markets

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frankrom
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Portfolio Allocation - Thoughts on Emerging Markets

Post by frankrom » 02 Aug 2017 22:27

I liquidated my assets (real estate and mutual funds) and I am rebuilding my portfolio via etfs.

Right now our RRSPs and a small LIRA hold VTI. Our TFSAs are holding EAFE by holding XEF.TO.

I still have non registered funds to allocate. I am wondering if I go with more XEF or VTI... But then I started thinking if it would be worth to add some meeting markets... such as EEM.

Thoughts?

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adrian2
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by adrian2 » 02 Aug 2017 22:36

frankrom wrote:
02 Aug 2017 22:27
But then I started thinking if it would be worth to add some meeting markets... such as EEM.
In case you decide to get some emerging markets, I see absolutely no reason to buy EEM (72 bps MER), when you could buy VWO (14 bps MER).

I did own EEM in the past; nowadays I own VWO.
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frankrom
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by frankrom » 02 Aug 2017 22:42

Thanks for that. No thoughts on Emerging Markets this?

I guess by the virtue of you owning vwo you think it's a good idea.

It would have to go into my non registered side. Any issues there ?

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adrian2
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by adrian2 » 02 Aug 2017 22:47

frankrom wrote:
02 Aug 2017 22:42
It would have to go into my non registered side. Any issues there ?
No issues there.
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frankrom
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Re: Portfolio Allocation

Post by frankrom » 02 Aug 2017 23:01

I should have added this into my OP.

So to recap:

RRSPs holding VTI
TFSAs holding XEF

I have to figure out how I deal with my non registered funds. When I bought VTI and XEF I wasn't of the opinion that I wanted to hold Canadian securities (I may be second guessing that now). Thus I felt XEF was the best option for the TFSAs. If I change my mind is there any issue holding the Canadian market in my non registered accounts? Or should I move XEF to the non registered side and hold the Canadian market in the TFSA. Canadian securities in the non registered account won't be tax free but I'll get a dividend tax credit.

Currently holding XEF in my TFSA means I am getting dinged with withholding taxes. If I move XEF to my non-registered side of things i could claim the foreign dividend tax credit.

So would it be better to structure my investments like this...

RRSPs - VTI
TFSAs - Canadian ETFs (please provide any recommendations if you don't mind!)
Non-Registered - All my XEF and additional VTI or Canadian ETFs as needed... Plus some possible emerging markets.

Thoughts ? I should have been more clear in my original post....

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AltaRed
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by AltaRed » 03 Aug 2017 10:00

I'd suggest to you that the loss of witholding tax in XEF in your TFSA is less significant than the benefit of the dividend tax credit in your non-registered account.

Look well down the list of https://www.blackrock.com/ca/individual ... -en-ca.pdf to find XEF. It had about 6.5 cents/unit (last column) of foreign withholding tax that would be non-recoverable in a TFSA in 2016. That is not terribly significant in distribution that exceeded $0.63/unit in 2016.

At some level, you have to back out of the trees and look at the forest to see what you are trying to accomplish, e.e. a long term financial plan at 'reasonable' cost, or even 'low' cost.... not necessarily at the lowest cost on the planet.

Added: I've always been agnostic on Emerging Markets. If it is an ETF I might own (like XWD or XAW or VXC)... so be it. If I can easily avoid EM, I do. From my perspective, what have the BRIC countries in particular done for anyone over the longer term? Nausea on a roller coaster mostly in my opinion. Whether you like Ketchup or Mustard on your burger is a personal choice.
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frankrom
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by frankrom » 03 Aug 2017 10:17

Hahaha AltaRed - you make me laugh...

I love how you describe things... I personally like Ketchup and Mustard on my burger... but sometimes I like to avoid both and go for the BBQ sauce... Not sure what the BBQ sauce would be in the investment world?

I don't quite follow you on the foreign withholding tax and the dividend tax credit comment however.

XEF - in a TSFA means you get drag on the foreign withholding tax
CAD equities - in non-registered means you pay tax but get a dividend tax credit

Alternatively

CAD equities in TFSA means tax free dividends and no drag
XEF in non-registered funds means you can claim a foreign dividend tax credit

Isn't the second scenario more efficient? It has much less drag does it not?

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AltaRed
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Re: Portfolio Allocation - Thoughts on Emerging Markets

Post by AltaRed » 03 Aug 2017 10:37

Maybe. You have to do the math for your tax bracket. It is possible to pay very low tax on your Cdn eligible dividends in your non-reg account, or pay full rate tax on your XEF dividends in your non-reg account. Recovery of the foreign withholding tax of XEF in a non-reg account doesn't mean that you don't pay tax on your XEF dividends - it just means you don't get double taxed.

You can use the taxtips calculator or simply add these income items to your 2016 tax return in your own tax software to simulate both cases, i.e.ZLB or VCN or XIU. Take the actual yield of $100k worth of that ETF and plunk it into tex software as eligible dividends on a grossed up basis to see tax due AND add the lost withholding tax you lose on $100k of XEF. That is your tax cost for $200k of investment in VCN (in non-reg) and XEF (in TFSA). Then do the reverse... How much tax would you pay with $100k of XEF distributions (taxes as Other Income) in non-reg.

You may find you are grasping at second decimal points and the annual effect may only be a lunch at Boston Pizza. ultimately, look at the broader picture. If you are likely going to be contributing significant sums to your investment portfolio over time, you may find that you simply don't have room in your TFSA to put enough XEF or ZLB in anyway. So you are forced to spill over into your non-reg. If you are likely to overwhelm your TFSA with ZLB (as compared to XEF), then I'd be tempted to use XEF in the TFSA regardless.

If it means anything to you, I simply would not worry about a bit of foreign withholding tax leakage in a low yielding ETF in your TFSA. It would be of more impact if you had an ETF with a 5% yield, but with a 2% yield? You won't notice the difference of the loss of 15% of 2% each year.
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