XAW or 3 ETFS?

If you’ve been following my financial freedom updates, you’ll see that I’m a fan of global index ETFs (ex-Canada).  Two of my favorites are XAW from iShares and VXC from Vanguard. I like them because they provide diversified exposure to the largest companies in the world (outside Canada) through a single ETF, they are on the Toronto Stock Exchange (TSX) which means they trade in Canadian dollars (CAD), and they have relatively very low management expense ratios (MER).

Both have similar global coverage, but I like XAW  little more because it’s slightly cheaper 0.22% MER vs 0.27%, and it’s slightly more efficient in an RRSP with regards to withholding taxes (a topic for another day).  For a more comprehensive portfolio, you can view my simple index ETF portfolios here.  If you are a U.S resident, you can view a recent article on a super easy indexing solution with Vanguard.

I like XAW so much in fact that it’s a dominant portion of Mrs. FT’s RRSP.  It’s a simple all-in-one solution for indexed global exposure to the markets (outside of Canada). We have plenty of Canadian exposure held within TFSAs and our non-registered joint dividend portfolio accounts.

Breaking Down All-World ETFs

Let’s get into a little more detail about XAW and VXC, and what they actually hold.   As mentioned earlier, both ETFs are a one-stop shop for exposure to the largest markets in the world.  In terms of percentages they are both fairly similar, however, here is an approximate breakdown for XAW:

  • U.S Index: 53.5%
  • MSCI EAFE International Index: 35%
  • Emerging Markets Index: 11.5%
  • Overall cost: 0.22% or $22/year/$10,000 invested.

Are Three ETFs Better than One?

For 0.22%, XAW seems like a pretty good deal!  But what if you want to get super efficient and lower your MER even more?  Essentially, as you can see from the bullet points above, XAW or VXC can be broken down into three separate ETFs.  Doing a search for the lowest cost ETFs available for Canadians and staying in CAD, they can be broken down into:

  • U.S Index: XUU (MER: 0.07%)
  • MSCI EAFE International Index: XEF (MER: 0.22%)
  • Emerging Markets Index: VEE (MER: 0.24%)
  • Overall cost: Assuming 55% U.S, 35% MSCI International, and 10% Emerging Markets, the portfolio MER of using three separate ETFs would be: 0.14% (or $14/year/$10,000 invested).

Although there is 0.08% savings by using 3 ETFs instead of a single XAW, there is the trade off of having to rebalance the portfolio yourself to maintain percentages of each index (55%/35%/10%).

Conclusions

As you can see, if you buy the super convenient XAW, you are looking at a MER of 0.22% which is $22 per $10k invested per year.  Not too bad!  If you break up XAW into individual ETFS with appropriate proportions, the portfolio MER would be about 0.14%, about a $8 savings per $10k invested.  Not a big deal if you have $10k invested, but a portfolio worth $100k it’s $80 savings annually, $500k it’s $400/year, and $1M it’s $800/year.  Again, very small relative numbers, but it can be significant savings depending on the size of your portfolio and your investment timeline.

To shave costs even further, you could pick a discount broker with commission-free ETF trading, which would save you about $10 per buy or sell.  As Mrs. FT’s portfolio gets larger, I may initiate the move from a single all-in-one ETF to separate individual ETFs.

For ETF investors, what are your thoughts on XAW vs individual ETFs?

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