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Index fund portfolio.

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Member
Apr 21, 2010
271 posts
39 upvotes

Index fund portfolio.

Hi All,

I'm building a relatively hands off index fund portfolio and had a couple questions regarding the global component.

First to answer the "why not go the ETF route" the portfolio is just too small now (under 20K). I do plan to convert at the end of the year i.e. transfer the majority of the funds into an ETF plan and continue this cycle.

As to not violate the 'no stock pick' rule I'm not listing the specific funds rather the category they fall under:
30% Canadian Index
25% US Index
20% Canadian Bond Index (medium term dex universe bond index).
05% Inflation-Linked Bond
20% International Index

Just a few notes:
- I personally prefer short term bonds but there's no 'cheep' index fund with a low initial contribution limit - so I was forced to go with the above (DEX universal index) which I consider medium term.

My issue is it seems there's no good emerging market index fund that's cheep (i.e. with a low MER) anyone have any good suggestions here?

I was also curious what your take is on currency hedging for the international funds (i.e. US / other)? I plan on getting the hedged versions but I've been flip flopping on this decision as of late.

Thanks!
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Deal Addict
Apr 1, 2004
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taal wrote: Hi All,

I'm building a relatively hands off index fund portfolio and had a couple questions regarding the global component.

First to answer the "why not go the ETF route" the portfolio is just too small now (under 20K). I do plan to convert at the end of the year i.e. transfer the majority of the funds into an ETF plan and continue this cycle.

As to not violate the 'no stock pick' rule I'm not listing the specific funds rather the category they fall under:
30% Canadian Index
25% US Index
20% Canadian Bond Index (medium term dex universe bond index).
05% Inflation-Linked Bond
20% International Index

Just a few notes:
- I personally prefer short term bonds but there's no 'cheep' index fund with a low initial contribution limit - so I was forced to go with the above (DEX universal index) which I consider medium term.

My issue is it seems there's no good emerging market index fund that's cheep (i.e. with a low MER) anyone have any good suggestions here?

I was also curious what your take is on currency hedging for the international funds (i.e. US / other)? I plan on getting the hedged versions but I've been flip flopping on this decision as of late.

Thanks!

My back of the envelope math tells me that the MER of your emerging market fund probably doesn't matter. <20K * <20% * (< 1% delta) * 1 year = less than a $40 difference, and that's with some pretty generous assumptions of what you're going to do.

Re. currency hedging, I personally use it, but only because I'm leveraged and I'm borrowing in Canadian dollars. If I was not leveraged, given the 50% Canadian content in your portfolio, I would not otherwise hedge the international component.

Finally, how old are you? I'm guessing mid 20s, and my gut has always been that 25% bonds is too high for that age group, but that's just me.
Sr. Member
Nov 8, 2010
963 posts
214 upvotes
taal wrote: - I personally prefer short term bonds but there's no 'cheep' index fund with a low initial contribution limit - so I was forced to go with the above (DEX universal index) which I consider medium term.
There are short term bond funds available as ETFs. If you are planning to switch to an ETF after a year just use a regular bond fund for now. It won't make a huge difference.

My issue is it seems there's no good emerging market index fund that's cheep (i.e. with a low MER) anyone have any good suggestions here?
Once again, if you are planning to switch after a year, you could just stick the money as part of your International fund. Once you switch there are a number of choices from ETFs.

I was also curious what your take is on currency hedging for the international funds (i.e. US / other)? I plan on getting the hedged versions but I've been flip flopping on this decision as of late.
Hedging tends to add to the costs of the fund. As well, it makes them less accurate in tracking the index.

Over the long term it's nearly impossible to determine what currencies are going to do, so there is likely very little to be gained by hedging over the long term.

And finally, many people prefer to use unhedged to have a bit of currency diversification.


So for these reason, many people including myself prefer to avoid hedging. But do whatever will make you more comfortable.
Member
Apr 21, 2010
271 posts
39 upvotes
Icedawn wrote: My back of the envelope math tells me that the MER of your emerging market fund probably doesn't matter. <20K * <20% * (< 1% delta) * 1 year = less than a $40 difference, and that's with some pretty generous assumptions of what you're going to do.

Re. currency hedging, I personally use it, but only because I'm leveraged and I'm borrowing in Canadian dollars. If I was not leveraged, given the 50% Canadian content in your portfolio, I would not otherwise hedge the international component.

Finally, how old are you? I'm guessing mid 20s, and my gut has always been that 25% bonds is too high for that age group, but that's just me.

Regarding the MER, you're right that's a really good point - if one was planning to stick with these index funds over the long term then that would be a different situation.

And yep, mid 20's is correct (25 to be exact) - I've debated about that a little and may bring it down to 15/20 but I do like some fixed income. In the current environment it may seem high but there have been a few times (in the recent past) where the opposite would have been said.
Member
Apr 21, 2010
271 posts
39 upvotes
FlyingOctopus wrote: There are short term bond funds available as ETFs. If you are planning to switch to an ETF after a year just use a regular bond fund for now. It won't make a huge difference.



Once again, if you are planning to switch after a year, you could just stick the money as part of your International fund. Once you switch there are a number of choices from ETFs.



Hedging tends to add to the costs of the fund. As well, it makes them less accurate in tracking the index.

Over the long term it's nearly impossible to determine what currencies are going to do, so there is likely very little to be gained by hedging over the long term.

And finally, many people prefer to use unhedged to have a bit of currency diversification.


So for these reason, many people including myself prefer to avoid hedging. But do whatever will make you more comfortable.

Thanks for all your suggestions! You've convinced me that the unhedged approach is better suited - interestingly enough RBC's own website claims with a time frame of 15+ year it basically cancels out entirely so is completely useless. Now I may keep the hedged version of these funds and switch over when using the ETFs.
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Sep 26, 2007
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i generally agree with the other posters on hedging and to etf to get the international exposure.
it appears you are aiming for a balanced growth kind of portfolio with the lowest MER possible.

but your not investing for 15 years. your converting by the end of this year so up to you to take the gamble on it.
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
Jr. Member
Oct 20, 2006
124 posts
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xlfe wrote: i generally agree with the other posters on hedging and to etf to get the international exposure.
it appears you are aiming for a balanced growth kind of portfolio with the lowest MER possible.

but your not investing for 15 years. your converting by the end of this year so up to you to take the gamble on it.
I notice your quite experienced with index funds, I dont understand how there can be such a big discrepancy when you hedge the funds in cdn $, theres some instances where you see 19% gains in 3/4 of the components and 0 in the last one, yet the ING growth fund shows only + %4.9/5.0 gains

http://www.google.com/finance?q=NYSE:EF ... _CA:INI130
Sr. Member
Nov 8, 2010
963 posts
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akutsu wrote: I notice your quite experienced with index funds, I dont understand how there can be such a big discrepancy when you hedge the funds in cdn $, theres some instances where you see 19% gains in 3/4 of the components and 0 in the last one, yet the ING growth fund shows only + %4.9/5.0 gains

http://www.google.com/finance?q=NYSE:EF ... _CA:INI130
Do the ING mutual funds hedge the currency?

I did a quick search of the prospectus and didn't see any indication that they do. Although it was only a quick search, so I may have missed it.
Member
Apr 21, 2010
271 posts
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akutsu wrote: I notice your quite experienced with index funds, I dont understand how there can be such a big discrepancy when you hedge the funds in cdn $, theres some instances where you see 19% gains in 3/4 of the components and 0 in the last one, yet the ING growth fund shows only + %4.9/5.0 gains

http://www.google.com/finance?q=NYSE:EF ... _CA:INI130

Yea I noticed this ... just comparing the two Altamira International (839 is hedged):
http://www.google.com/finance?chdnp=1&c ... _CA:AIS932&

For a couple reasons why have a look at:
http://canadiancouchpotato.com/2010/05/ ... or-part-3/
Jr. Member
Oct 20, 2006
124 posts
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FlyingOctopus wrote: Do the ING mutual funds hedge the currency?

I did a quick search of the prospectus and didn't see any indication that they do. Although it was only a quick search, so I may have missed it.

it says foreign currency risk - The net asset value and unit price of a fund is calculated in CDN dollars, value of foreign investments will be affected by the value of the cdn dollar
Sr. Member
Nov 8, 2010
963 posts
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akutsu wrote: it says foreign currency risk - The net asset value and unit price of a fund is calculated in CDN dollars, value of foreign investments will be affected by the value of the cdn dollar
That would appear to mean it's not hedged. Here's an extremely simplified explanation:


Hedged means that if the US market went up by 20%, then the US portion of the fund would also go up 20%. It doesn't matter what's been happening in the exchange rate between Canada and the US.

Non-hedged means if the US market went up by 20%, how much the US portion of the fund depends on the change in the currency exchange. If the US dollar got stronger over the year, the amount the US portion of the fund would go up would be by more than 20%. And if the $US got weaker, the amount of the fund would go up would be by less than 20%


Over the past couple of years the $US has been weakening against the Canadian dollar. So the gains in an non-hedged fund would be less than they appear on the surface.
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Sep 26, 2007
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akutsu wrote: I notice your quite experienced with index funds, I dont understand how there can be such a big discrepancy when you hedge the funds in cdn $, theres some instances where you see 19% gains in 3/4 of the components and 0 in the last one, yet the ING growth fund shows only + %4.9/5.0 gains

http://www.google.com/finance?q=NYSE:EF ... _CA:INI130

ya i don't think they hedge the currency..

i've done my research on ing funds, if we disregard MER their balanced growth fund and balanced fund was between 0.5-5% off from their respective benchmarks.
Which is pretty close. if their benchmarks were to return 10% in a given year i would expect the return on the fund to be about 9.95%-9.5% or 8.95%-8.5% (after MER).

technically it's not benchmarked to the sp/tsx composite rather they use sp/tsx 60.
it could be a bit off because of distributions but certainly not like 300+% off lol.
you have to remember their growth fund is still 25% bond.
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
Jr. Member
Oct 20, 2006
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so the actual returns the fund is off by, will be returned at a later date?
Sr. Member
Nov 8, 2010
963 posts
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akutsu wrote: so the actual returns the fund is off by, will be returned at a later date?
No, you don't understand. Here's a simplified example:
  • Today you have $10 Canadian.
  • You exchange it to $US and get exactly $10 US.
  • You buy a stock for $10 US. (I'm ignoring commission here).
  • A year later, the stock is worth $20 US.
  • You sell it and have $20 US in your brokerage account.
  • You convert it to Canadian dollars and get ?????
The amount of Canadian dollars you are going to get depends on the exchange rate a year later. There is no guarantee you are going to end up with $20 Canadian.



It's the same with a non-hedge mutual funds, such as ING.
  • They took some Canadian dollars and exchange them for US dollars.
  • They bought US stocks.
  • They waited a year and the price of the US stocks gone up 25%.
  • If the sell the US stocks and convert the money to Canadian dollars, the gain in Canadian dollars will be ????
It all depends on how the exchange rate has changes during the year the money was invested in Canadian stocks.
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Nov 26, 2005
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20k?
you dont need to diversify that much with that kind of small money. dump it all in one s&p etf or bond etf...
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Sep 26, 2007
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I think hedge may be a confusing word.

basically ing mutual funds have a currency risk.
if it was currency neutral (it's not) then it is using some strategy to reduce effects of such currency exchange differences.
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
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Apr 21, 2010
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ccyk wrote: 20k?
you dont need to diversify that much with that kind of small money. dump it all in one s&p etf or bond etf...

I see your point but it's going to grow quite quickly and there isn't too much in the way of extra costs when were talking about mutual funds (i.e. having 1 verse say 10).
i.e. I'd rather have it setup from the start.
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taal wrote: I see your point but it's going to grow quite quickly and there isn't too much in the way of extra costs when were talking about mutual funds (i.e. having 1 verse say 10).
i.e. I'd rather have it setup from the start.

theoretical question.
after a year your overall is down 10%.
you notice 1 of your funds is -XX%.
while another is +xx% and you think this fund will rise even more.

do you adjust or keep the allocations the same?
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis
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Apr 21, 2010
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xlfe wrote: theoretical question.
after a year your overall is down 10%.
you notice 1 of your funds is -XX%.
while another is +xx% and you think this fund will rise even more.

do you adjust or keep the allocations the same?

Just to be clear I meant the fund will grow due to contributions on my part - not that I'll make money :)

Playing it by the books (i.e. a very hands off approach) I'd re-balance to obtain the original asset allocation (whatever that may be) or the desired allocation at the time.

So that'll entail contributing more to the fund that is down i.e. rewarding the poorer performing fund and punishing the other (on a quarterly / semi-annual basis).
Of course that's the completely hands off approach : ) - well I guess that'd be to simply contribute the same way actually.

Any thoughts on the matter?
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well it's really more of a question of investor discipline.

i've seen some who see their investments not doing anything so they start thinking they should change their original plan.
are you also doing the dollar cost averaging?
"We don't have a soul... We are a soul. We have a body." ~C.S Lewis

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