In today’s post, I’ll try and answer two questions that were sent to the Personal Finance Clinic. You may also want to check out Money Gardener and Triaging my way to Financial Success, who have also been fielding questions that were sent to the Clinic.
Gaby of Toronto asks:
While ETF’s can provide some stability and peace of mind, would it be possible to do better by buying individually enough of an ETF’s main components that cover a big chunk of the holdings? For example, if the iShares Canadian Tech Sector ETF (XIT), is moving up, would it theoretically be possible to buy its top two or three components (Research in Motion, CGI Group Inc. – Class A, and Open Text Corp) and therefore weed out the smaller stocks holding the performance back?
You are talking about unbundling ETFs and buying the component stocks directly, which could work out cheaper due to $10 stock commissions and the concentrated nature of many sector ETFs. The StingyInvestor.com website has a nifty tool for comparing the cost of the ETF with buying the shares directly. If you are willing to live with the tracking error introduced when dropping some of the smaller names, unbundling the ETF could work out even cheaper.
Dennis from Toronto asks:
Are there any tax advantages/disadvantages in choosing iShares CDN MSCI EAFE ETF (XIN) over Vanguard Europe-Pacific (VEA)? I understand that the MERs are different and iShares hedges foreign currency exposure. However, are there different tax implications for choosing Vanguard versus Canadian iShares?
Yesterday’s post showed how holding Canadian ETFs that in turn hold US ETFs results in a withholding tax that cannot be recovered for registered holdings. In taxable accounts, ETFs such as XIN that hedge foreign currency exposure have a different problem: the gains due to currency hedging are taxed as capital gains on an ongoing basis. In other words, ETFs such as XIN that hold foreign ETFs have a tax leakage due to withholding taxes in RRSPs and a tax leakage due to ongoing capital gains in taxable accounts.
