EEE! Equity ETFs Explained

I had a couple readers ask what I meant with all my lovely 3-letter Exchange Traded Funds (ETFs) from yesterday’s post. What? Haven’t I talked about it enough for you guys to know? :) I really do appreciate comments and questions like this as it reminded me that I have never actually explained what they actually are!

Canadian equities

XIC – iShares S&P TSX Capped Composite Index Fund

My target allocation for Canadian equities is 30%. Although a small percentage of this is reflected by my holding in SunLife Financial (SLF), the majority of my investment portfolio with respect to Canadian equities is invested in XIC. This ETF is managed by iShares, and seeks to replicate the largest and most liquid securities listed on the Toronto Stock Exchange (TSX). By investing in XIC, I own shares in well-known Canadian companies such as Royal Bank, TD Bank, Suncor, Bank of Nova Scotia and Barrick Gold Corporation. Owning XIC provides me diversification (XIC currently owns shares in over 250 Canadian companies) at a fraction of what it would cost to buy all these shares individually. Boasting a MER of only 0.25%, I get decent exposure to the TSX and I am able to keep my portfolio costs down.

US equities

My target allocation for US equities is 25%. A small percentage of this is reflected in my holding of Carpenter Technology Corporation (CRS), but the majority of my investment portfolio with respect to US equities is invested in either XSP or VTI.

XSP – iShares S&P 500 Index Fund (CAD-Hedged)

This ETF is managed by iShares, and seeks to replicate the largest and most liquid securities listed on the S&P 500, which contains 500 of the largest publicly traded companies in the United States. By investing in XSP, I own shares in well-known American companies such as Apple, Costco, Ebay, Microsoft and Coca-Cola. Owning XSP provides me diversification at a fraction of what it would cost to buy all these shares individually. Boasting a MER of only 0.25%, I get decent exposure to the S&P 500 and I am able to keep my portfolio costs down. Since the companies are traded in US dollars, the Canadian hedged aspect of this ETF takes into account the differences between the Canadian dollar and the US dollar.

VTI – Vanguard Total Stock Market ETF

This ETF is managed by Vanguard, which is a company that I absolutely love, but a lot of their products were only being offered in the US. They are finally starting to move into the Canadian market, which will hopefully provide Canadians with more choice as they will compete with iShares, which is the current powerhouse in the Canadian ETF market.  As this ETF is traded on the New York Stock Exchange (NYSE), I have to be aware of how strong our Canadian dollar is compared to the US dollar.  This is an additional fee to keep in mind when building your investment portfolio, as your broker will charge you a fee to purchase US shares with Canadian dollars. There is some overlap of the companies that are held by both XSP and VTI, but the difference with VTI is that this ETF currently holds over 3,300 US companies! And they boast an amazing MER of 0.07%! Needless to say, about 2/3 of my US equities portion is in VTI, and with the Canadian dollar continuing to rise against the US dollar, I will choose to add VTI if I need more US equities in my portfolio.

International equities

My target allocation for International equities is 25%. To satisfy this portion of my investment portfolio, I am currently invested in XIN and VEU.

XIN – iShares MSCI EAFE Index Fund (CAD-Hedged)

This ETF is managed by iShares, and seeks to replicate the performance of the MSCI EAFE, which includes securities from Europe, Australasia and the Far East. By investing in XIN, I own shares in companies located in Australia, UK, and Japan. (This is just an example; there are a lot of other companies represented in this ETF!) Examples of companies that I own shares in include Nestle, Toyota, Shell (Royal Dutch Shell), and L’Oreal. XIN has shares in over 900 companies world-wide, and owning XIN provides me diversification at a fraction of what it would cost to buy all these shares individually. Boasting a MER of 0.50%, I get decent exposure to well-known companies that produce products that we purchase and use every day in Canada, even if their headquarters are situated internationally. As a result of the international quality of this ETF, iShares takes care of all the currency conversions as this ETF is 100% fully hedged to the Canadian dollar. In other words, you can purchase this ETF with the money you contribute into your investment accounts.

VEU – Vanguard FTSE All-World ex-US ETF

This ETF is managed by Vanguard. There is some overlap of the companies that are held by both XIN and VEU, but the difference with VEU is that this ETF currently holds over 2,300 companies world-wide! And they boast an amazing MER of 0.18%! Needless to say, most of my International equities portion is in VEU (almost 90%), and with the Canadian dollar continuing to trade strongly against the US dollar, I will choose to add VEU if I need more International equities in my portfolio.

Hopefully the above information, in conjunction with my post in regards to my current portfolio, explains the types of companies I am invested in, as well as the diversification I am able to achieve with ETFs. I will go into fixed income ETFs in a subsequent post.

What do you think? Were you previously aware of the types of companies you could be invested in if you choose to purchase ETFs?

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