Portfolio Allocation - Thoughts on Emerging Markets
Portfolio Allocation - Thoughts on Emerging Markets
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?
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?
Re: Portfolio Allocation - Thoughts on Emerging Markets
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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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
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Re: Portfolio Allocation - Thoughts on Emerging Markets
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 ?
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 ?
Re: Portfolio Allocation - Thoughts on Emerging Markets
No issues there.
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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
Re: Portfolio Allocation
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....
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....
Re: Portfolio Allocation - Thoughts on Emerging Markets
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.
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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Re: Portfolio Allocation - Thoughts on Emerging Markets
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?
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?
Re: Portfolio Allocation - Thoughts on Emerging Markets
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.
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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Re: Portfolio Allocation - Thoughts on Emerging Markets
I was reading the MD&A in CPP Investment's 2020 annual report and it was surprising to me just how much exposure the Plan has to emerging markets.
As of March 31, 2020, public equities accounted for 28.2% of the Plan's investments; 9.3% were emerging markets...so about a third. I also checked out the BC Teachers Pension Plan AR (2019) and found about a quarter of their public equity holdings were in emerging markets. The CPP also indicates they're open to boosting their EM exposure for the portfolio as a whole from 21.4% of net investments to as much as a third by 2025.
I find that level of commitment to EM intriguing, given most global-oriented investment funds the average investor has access to devote far less to EM than these pension funds do.
I understand many Canadian investors require income from their stock and bond portfolios to meet expenses and need those funds in Canadian dollars (and to a lesser degree greenbacks), hence more focus on Canadian (or US) investments.
However, for a growth-oriented investor, particularly someone younger, should more attention be given to EM in one's portfolio? For example, if I invest in XAW, I'm getting only 12% of my portfolio in EM. Should I be thinking more like the pension plans and ramp up my emerging market exposure?
As of March 31, 2020, public equities accounted for 28.2% of the Plan's investments; 9.3% were emerging markets...so about a third. I also checked out the BC Teachers Pension Plan AR (2019) and found about a quarter of their public equity holdings were in emerging markets. The CPP also indicates they're open to boosting their EM exposure for the portfolio as a whole from 21.4% of net investments to as much as a third by 2025.
I find that level of commitment to EM intriguing, given most global-oriented investment funds the average investor has access to devote far less to EM than these pension funds do.
I understand many Canadian investors require income from their stock and bond portfolios to meet expenses and need those funds in Canadian dollars (and to a lesser degree greenbacks), hence more focus on Canadian (or US) investments.
However, for a growth-oriented investor, particularly someone younger, should more attention be given to EM in one's portfolio? For example, if I invest in XAW, I'm getting only 12% of my portfolio in EM. Should I be thinking more like the pension plans and ramp up my emerging market exposure?
Too much cheap money sloshin’ around the world. First mistake we ever made was letting Nixon get off the gold standard – Lou Mannheim, Wall Street
Re: Portfolio Allocation - Thoughts on Emerging Markets
Good questions. In our VXC about 11% of the portfolio is EM - I'll leave it to their benchmark to adjust that percentage. Hard to predict the impact of future EM returns, yet I would argue that having some exposure to EM in an ETF is better than nothing - just go for the ride?However, for a growth-oriented investor, particularly someone younger, should more attention be given to EM in one's portfolio? For example, if I invest in XAW, I'm getting only 12% of my portfolio in EM. Should I be thinking more like the pension plans and ramp up my emerging market exposure?
Last edited by poedin on 03 Sep 2020 15:53, edited 1 time in total.
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Re: Portfolio Allocation - Thoughts on Emerging Markets
I guess we all go for a ride when we're investing in equities, as per today's market -- ouch
I'm just trying to understand the contrast in EM exposure between, say CPP and other pension plans, and the benchmarks of the index products the rest of us invest in, like VXC.
I thought the report would speak to their rationale for such a high weighting in EM. It seems in the media all we hear about is the US market and FAANG. If they discussed it, I couldn't find it.
Also found it interesting that, unlike EM, they have very little invested in Canadian equities.
I'm just trying to understand the contrast in EM exposure between, say CPP and other pension plans, and the benchmarks of the index products the rest of us invest in, like VXC.
I thought the report would speak to their rationale for such a high weighting in EM. It seems in the media all we hear about is the US market and FAANG. If they discussed it, I couldn't find it.
Also found it interesting that, unlike EM, they have very little invested in Canadian equities.
Too much cheap money sloshin’ around the world. First mistake we ever made was letting Nixon get off the gold standard – Lou Mannheim, Wall Street
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Re: Portfolio Allocation - Thoughts on Emerging Markets
Canadian equities are about 3-4% of the global market cap, so if they are following weightings based on global market cap that might explain the low allocation to Canadian equities.moneyscribe wrote: ↑03 Sep 2020 15:45 Also found it interesting that, unlike EM, they have very little invested in Canadian equities.
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Re: Portfolio Allocation - Thoughts on Emerging Markets
Vanguard: "GDP growth may not be a good proxy for earnings growth ... Much of the market capitalisation growth in emerging markets comes from share issuance rather than rising stock prices." (source)
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