Monday, 4 November 2019

Translating VTSAX for Canadians

Like most of you, I've read The Simple Path to Wealth and thought "Wow! Now to head to Vanguard and set up my account! Hey, WTF??" If you haven't read the book, feel free to read it in blog form on the authors blog right here.
Photo by Kelly Sikkema on Unsplash
Probably a proper rite of passage for any Canadian pursuing FIRE is to hear about the message from an American blog or podcast and then immediately google VTSAX only to realise that the mutual fund is not offered to Canadians. To add further insult to injury we can't even open a Vanguard account. ....well fuck you too, Vanguard. Just kidding!

Vanguard is Canadian-friendly - very much so. They have superb products available for Canadians to buy in the form of ETF's from the numerous stock exchanges around the globe. This certainly adds complexity to the average Jane or Joe trying to buy their first index fund but no greatly so. In fact, I keep it VERY simple in this blog post called the 7 Simple Steps to Investing for Canadians in 2020 (coming soon to a blog near you!). I will be keeping that thing updated so feel free to check back often and feel free to pass that around the internet, you'll do me and my blog a big favour, not too mention the person on the receiving end obtaining such valuable advice, all for free!

Okay, now that the rambling and shameless self-promotion is out of the way, let's look at how to buy the Total US Stock Market Index, otherwise known as VTSAX. As I hinted above, we cannot buy this in mutual fund form from Vanguard, we have to look at ETF's only. For the purposes of this article, I will be focusing only on Vanguard products.

Option #1 - VCN [0.06% MER]

Okay, this ETF isn't American at all, VCN is actually Vanguard's Total Canadian Stock Market Index. Some Canadians might think this is the Canadian equivalent version so instead of buying every single piece of public companies in the US, you are doing the same thing in Canada with Canadian companies. Cool, right?

Ehhhh, sort of. This is an excellent ETF to invest in but its not at all the same thing. If you have read JL Collin's book you'll know he recommends buying one fund and leaving it there. While I think this advice comes with certain risks it is especially risky if you do this with VCN because we're not as big or as diversified as the US. Canada has several amazing companies and very profitable businesses that you should want to invest in but there is enough reputable and research-based information coming from this guy that we ought to know better than to put all our eggs in one basket.

Option #2 - VUN [0.46% MER inside TFSA or RRSP, 0.16% in a taxable account]

Here is the literal translation for Canadians. VUN holds the exact same thing VTSAX does, there is no difference besides the under-the-hood mechanics of holding the US stock market in Canadian dollars which is stuff we don't need to fret about. There's nothing else you have to worry about unless that MER seems incredibly high. If it does, I've got some news for you - it sucks to be Canadian sometimes.

As a Canadian investing in the US companies with Canadian ETFs and/or with Canadian dollars, we get hit with a foreign withholding tax. Essentially, foreigners to the US are treated to an additional tax consequence of 0.30% when a US company pays a dividend. This is why Vanguard's posted MER of 0.16% is actually 0.46% to us Canadians. This post by FrugalTrader of Million Dollar Journey (one of the best blogs about Canadian investing) gets into even more detail if you're interested but since we're on a simple path, we're gonna leave it alone and not think too much about this issue. This is the main way to buy a VTSAX equivalent for Canadians, especially in our TFSA.

Option #3 - VTI [0.03% MER]

VTI is VTSAX but in ETF form. Held in US dollars, this is the fund that Canadians want to hold in their RRSP if they want to achieve the ultra-low MER dream while avoiding the foreign withholding tax mentioned before. Since Canada and the US have a tax treaty for each others retirement accounts, Canadians have the option of converting their Canadian dollars into US dollars and then buying VTI from the New York Stock Exchange (NYSE).

Converting your CAD to USD is quite expensive, although made much cheaper using Norbert's Gambit, a cool-sounding name for a fairly boring process. The manoeuvre does come with some risks and while I'll be posting about it in the future, let's put it on the shelf for now and talk about it in a different post because it's not the Simple Path we've signed up for.

Option #4 - VEQT or your All-in-One Asset Allocation Fund [0.50% MER give or take]

I'm going to go out on a limb here and say this is probably the simplest way to invest. While the MER is quite high for registered accounts (like TFSA and RRSP) we can't ignore how absolutely freaking simple this is to have worldwide exposure. VEQT only holds 40% of its value in Total US Stock Market, so it's not quite the same as JL Collins' advice but it's pretty darn close. 

Once you hold $100,000 or more an a single registered account, you might want to think about breaking up VEQT into smaller parts. This will add complexity to your life in the form of rebalancing and calculating all sorts of different MER's in different accounts and blah blah blah. All-in-One funds are designed to just stop that kind of worry and just go with the flow.

It's not the end of the world to pay an MER of 0.50%. Half of it isn't even your fault, you're just a Canadian doing the right thing by diversifying your portfolio, a move that will surely be well worth the price. Even if you're one of my readers with 6 figure registered accounts, I still wouldn't shame you for choosing the simpler path. Less time agonizing over your finances is ALWAYS a good thing. It's like calculating dog years - I'm certain for every year you spend finding the best way to invest is the equivalent of losing 7 years in real life.

We all know and understand that the more you tinker with your investments the more likely you are to damage your long-term gains. Changing your mind and bouncing back and forth can be costly not only in processing fees but also if you happen to take your money out of the market even if just for a day. Remember, investment firm Fidelity even released data showing some of the best performing investors were estate accounts. It is at this time I would like to adopt the phrase:

"Invest like the Dead"

Summary: 
- VCN isn't a viable strategy to copy the Simple Path to Wealth, although it could have a place in your portfolio. 
- VUN is great for TFSAs and VTI is great for RRSPs with more seasoned investors with a high balance.
- VEQT is the most diverse Simple Path to Wealth but only holds 40% of its value in Total US Stock Market.

The choice is yours, I hope this post as helped. Feel free to leave me comments here or where I link this article online. I respond to everybody!

Ryan Myricks
You can email me here: canadianfire1@gmail.com
You can listen to me here: www.exploreficanada.ca

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