Appropriate three-fund portfolio for US citizen with Canadian investments

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overthought
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Joined: Tue Oct 17, 2017 3:44 am

Appropriate three-fund portfolio for US citizen with Canadian investments

Post by overthought » Mon Oct 30, 2017 10:43 am

In the aftermath of a previous question, it appears that I will be able to transfer my Canadian LIRA to a self-directed brokerage and implement a 3-fund portfolio. The question of general interest is: for someone required to invest in Canadian funds (in CAD$), but who lives in the US and will eventually spend the money there, what would be an appropriate Vanguard three- (or maybe four-)fund portfolio?

Vanguard Canada seems to have three general categories of funds: Canada-focused (total Canadian stock market, total world ex North America, etc.), US-focused (S&P 500, total world ex US, etc.), and US-focused but CAD-hedged ("uses derivative instruments to seek to hedge the U.S. dollar exposure of the securities included in the [index] back to the Canadian dollar").

In general, I'd be inclined to go with an un-hedged US-focused portfolio, with the idea that (a) I don't especially care how Canada's economy does when I don't live there and (b) hedging the CAD$ doesn't matter much if the plan is to convert to USD$ for spending anyway. That would translate to:
  • VDU (tracks FTSE Developed All Cap ex US)
  • VUN (tracks CRSP US Total Market)
  • VBU (tracks Bloomberg Barclays U.S. Aggregate Float Adjusted Bond, CAD hedged; no un-hedged variant available)
Does that seem reasonable? Or are there other considerations that might make me want to consider a more Canada-focused portfolio?
Last edited by overthought on Mon Oct 30, 2017 2:32 pm, edited 2 times in total.

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k66
Posts: 406
Joined: Sat Oct 27, 2012 1:36 pm

Re: Appropriate three-fund portfolio for US citizen with Canadian investments

Post by k66 » Mon Oct 30, 2017 1:23 pm

Are you sure that you have to hold investments in Canadian Dollars? In my LIRA (self-directed at "Q-trade Investor"), I hold two CAD and two USD ETFs:

VAB
VCN

and

VTI
VXUS

I don't pay any monthly fees and trades (when I need them) are $8.75 CDN. I also agree with you in that hedging any currency is a needless cost and I focus entirely on maximizing the number of index-related holdings and minimizing the MER. For those reasons I selected VTI and VXUS over, say, VUN and VDU. Obviously a LIRA is tax-advantaged and I believe that you can continue to collect dividends and interest from US-domiciled investments without cross-border tax(es) owing (pursuant to filling out a W8-BEN with the account custodian).
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

overthought
Posts: 108
Joined: Tue Oct 17, 2017 3:44 am

Re: Appropriate three-fund portfolio for US citizen with Canadian investments

Post by overthought » Mon Oct 30, 2017 2:28 pm

k66 wrote:
Mon Oct 30, 2017 1:23 pm
Are you sure that you have to hold investments in Canadian Dollars?
I thought the CRA required registered accounts to hold mostly Canadian instruments... but a quick search confirms that this is no longer the case. Good to know!

That also explains why the TD Direct Investing (**) application form I'm looking at has a USD+CAD option. I'll be sure to ask them about it...
k66 wrote:
Mon Oct 30, 2017 1:23 pm
In my LIRA (self-directed at "Q-trade Investor"), I hold two CAD and two USD ETFs

I don't pay any monthly fees and trades (when I need them) are $8.75 CDN. I also agree with you in that hedging any currency is a needless cost and I focus entirely on maximizing the number of index-related holdings and minimizing the MER. For those reasons I selected VTI and VXUS over, say, VUN and VDU.
Going by Q-trade's pricing, it looks like you lose some money on the CAD->USD conversion to buy into US equities, plus an additional loss in SEC fees when you sell them? Any idea how hard that hits?
k66 wrote:
Mon Oct 30, 2017 1:23 pm
Obviously a LIRA is tax-advantaged and I believe that you can continue to collect dividends and interest from US-domiciled investments without cross-border tax(es) owing (pursuant to filling out a W8-BEN with the account custodian).
The TD Direct rep I spoke with also mentioned that I'd need to fill out a W8-BEN, but the top of that form says prominently:
"Do NOT use this form if... You are a U.S. citizen or other U.S. person... Instead, use... Form W-9"

Anyway, thanks for the pointer to Q-trade. I'll be sure to check them out. I'll probably end up with TD Direct in the end, though: I have existing relationships with the TD family on both sides of the border, so they will let me mail in the application instead of flying back to Canada to do it in person. Trades are more expensive ($10 instead of $9), but it would take a *lot* of trades to pay for the flight.

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k66
Posts: 406
Joined: Sat Oct 27, 2012 1:36 pm

Re: Appropriate three-fund portfolio for US citizen with Canadian investments

Post by k66 » Mon Oct 30, 2017 11:58 pm

overthought wrote:
Mon Oct 30, 2017 2:28 pm
...
k66 wrote:
Mon Oct 30, 2017 1:23 pm
In my LIRA (self-directed at "Q-trade Investor"), I hold two CAD and two USD ETFs

I don't pay any monthly fees and trades (when I need them) are $8.75 CDN. I also agree with you in that hedging any currency is a needless cost and I focus entirely on maximizing the number of index-related holdings and minimizing the MER. For those reasons I selected VTI and VXUS over, say, VUN and VDU.
Going by Q-trade's pricing, it looks like you lose some money on the CAD->USD conversion to buy into US equities, plus an additional loss in SEC fees when you sell them? Any idea how hard that hits?
Yes, there is some cost, but I trade very infrequently. My only LIRA transactions are to use accummlated cash to buy the one fund currently furthest behind its target allocation. Typically that might mean two buys per year -- and more often than not lately I have been picking up VAB. The offset savings achieved from the lower MER for the US-domiciled funds is what drives my choice.
overthought wrote:
Mon Oct 30, 2017 2:28 pm
k66 wrote:
Mon Oct 30, 2017 1:23 pm
Obviously a LIRA is tax-advantaged and I believe that you can continue to collect dividends and interest from US-domiciled investments without cross-border tax(es) owing (pursuant to filling out a W8-BEN with the account custodian).
The TD Direct rep I spoke with also mentioned that I'd need to fill out a W8-BEN, but the top of that form says prominently:
"Do NOT use this form if... You are a U.S. citizen or other U.S. person... Instead, use... Form W-9"

Anyway, thanks for the pointer to Q-trade. I'll be sure to check them out. I'll probably end up with TD Direct in the end, though: I have existing relationships with the TD family on both sides of the border, so they will let me mail in the application instead of flying back to Canada to do it in person. Trades are more expensive ($10 instead of $9), but it would take a *lot* of trades to pay for the flight.
Absolutely! And for what it is worth TD does have a top-notch platform, well regarded by both the Globe & Mail rankings (B+) and Serviscor (72%):

Globe and Mail 17th Annual (2016) Online Broker Rankings

Serviscor 2016 Online Brokerage Review
LOSER of the Boglehead Contest 2015 | lang may yer lum reek

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