VXC vs. XAW – The battle of ex-Canada international index ETFs

If you’re a long time reader, you know that we deploy a hybrid investment strategy – we hold both individual dividend-paying stocks and index ETFs in our dividend portfolio.

When it comes to an international index ETF, we hold VXC. Lately, I have been wondering if it makes sense to sell VXC and purchase XAW because of XAW has a lower MER fee and higher distribution yield.

History of VXC and XAW

In July 2014, Vanguard Canada released the Vanguard FTSE All-World ex Canada Index ETF (VXC). This international ETF gave Canadians exposure to large and mid-sized companies outside of Canada. Most of VXC’s underlying holdings are existing US-listed Vanguard ETFs. VXC has an extremely low MER of 0.27%.

In Feb 2015, iShares released the iShares Core MSCI All Country World ex Canada Index ETF (XAW) which mimics VXC closely but at a slightly lower MER of 0.22%. Similar to VXC, most of XAW’s underlying holdings are existing US-listed iShares ETFs with one exception. I’ll discuss this exception later.

VXC vs. XAW sector allocation

Below is the sector allocation breakdown for VXC and XAW. As expected, they are very close to each other.

Sectors VXCXAW
Financials21.4%16.15%
Technology14.5%15.12%
Industrials13.6%11.45%
Consumer Services 11.7%10.91%
 Health Care 11.6%11.64%
Consumer Goods 11.2%7.93%
Oil & Gas 5.5%5.46%
Basic Materials 4.4%5.05%
Utilities 3.3%3.32%
Telecommunications2.8%8.29%
Real Estate 0.0%4.09%
Other0.0%4.00%
Cash and/or Derivatives0.0%0.55%

VXC vs. XAW country allocation

Below are the country allocation breakdown for the two ex-Canada international index ETFs. Once again, the two index ETFs are very similar.

CountriesVXCXAW
United States55.90%56.03%
Japan8.20%7.82%
United Kingdom 5.50%5.45%
China3.70%3.70%
France3.00%3.16%
Germany 2.70%2.61%
Switzerland 2.60%2.54%
Australia 2.30%2.21%
South Korea 1.70%1.65%
Taiwan1.50%1.44%
Hong Kong 1.20%1.18%
India 1.20%1.17%
Netherlands 1.10%1.07%
Cash and/or Derivatives 0.00%0.55%
Other9.40%9.42%

Why we own VXC

Now you are probably wondering, why the heck did we purchase VXC when XAW appears to be a better product due to its lower MER and higher yield? Well, when Dan Bortolotti and his team at Canadian Couch Potato constructed the ETF model portfolio a number of years ago, VXC was the recommended international ETF to use. So when we wanted to increase our international diversification, naturally, we picked VXC. Throughout the past number of years, we have been adding VXC shares in lumped sum transactions as well as a few shares every other month to take advantage of Questrade’s no commission ETF purchase. We own hundreds of shares of VXC across our RRSPs and taxable accounts.

When you look at Canadian Couch Potato’s model portfolio now, VXC is no longer the recommended international index ETF. Instead, XAW is the recommended international ETF. According to Justin’s analysis at Canadian Portfolio Manager, he noted that XAW has a lower overall fee because XAW holds iShares Core MSCI EAFE IMI Index ETF (XEF). XEF is a Canadian-listed ETF that holds the underlying stocks directly. Because XEF is a Canadian-listed ETF, it is expected to create a lower overall cost for XAW, compared to VXC.

In fact, according to Justin’s calcuation, the estimated cost of VXC increases to 0.66% (from 0.27%) while the estimated cost of XAW increases to 0.56% (from 0.22%).

In addition, XAW has a slightly higher distribution yield than VXC. XAW has a trailing12 months yield of 2.13% while VXC has a trailing 12 months yield of 1.93%.

As a result, XAW has a 0.10% fee advantage and a 0.20% distribution yield advantage over VXC. Or an overall advantage of 0.30%.

Putting numbers into perspective

What do the 0.10% fee and 0.20% distribution yield advantages mean? We need to put this into a bit of quantitative perspective. Let’s imagine different portfolio values, starting at $5,000 to $3,000,000.

International Portfolio SizeVXC 0.66%XAW 0.56%Annual Fee DeltaVXC Yield 1.93%XAW Yield 2.13Annual Yield DeltaTotal Delta% of Porfolio
$5,000$33$28$5$97$107$10$150.30%
$10,000$66$56$10$193$213$20$300.30%
$50,000$330$280$50$965$1,065$100$1500.30%
$100,000$660$560$100$1,930$2,130$200$3000.30%
$250,000$1,650$1,400$250$4,825$5,325$500$7500.30%
$500,000$3,300$2,800$500$9,650$10,650$1,000$1,5000.30%
$1,000,000$6,600$5,600$1,000$19,300$21,300$2,000$3,0000.30%
$3,000,000$19,800$16,800$3,000$57,900$63,900$6,000$9,0000.30%

Note 1: We are assuming that the two ETFs have exactly the same rate of return

Note 2: The last column is a bit unnecessary but I wanted to show that the overall % as part of your international portfolio is 0.30% regardless what the dollar amount is.

So when the international portfolio size is relatively small (say less than $100,000), you’re talking a $100 annual difference in fee and a $200 annual difference in distribution. That’s $300 in total or 0.30% of your international portfolio. And if you’re using a balanced portfolio approach (40% bonds, 20% Canadian, 40% international), that means your overall investment portfolio is $250,000. The $300 cost difference is 0.12% of your overall portfolio.

When the international portfolio size is large (say $500,000), the total difference is $1,500. Again that’s merely 0.30% of your international portfolio or 0.12% of your overall portfolio (again, assuming the balanced portfolio approach). Below are the respective overall fees as part of the overall portfolio.

ConservativeCautiousBalancedAssertiveAggressive
Bonds70%55%40%25%10%
Canada10%15%20%25%30%
International20%30%40%50%60%
Overall Portfolio, at $500k international$2,500,000$1,666,667$1,250,000$1,000,000$833,333
$1,500 fee as % of overall portfolio0.06%0.09%0.12%0.15%0.18%

If you look at the “big” picture, the fee is a very small fraction of your overall portfolio value.

What should we do – some thoughts

I get it, nobody wants to pay extra fees when you don’t have to. But let’s put the total amount into perspective, it’s a very small fraction of your overall portfolio value. If your overall portfolio is $1.25M, paying an extra $1,250 each year is probably not going to cause you to lose sleep. Similarly, an extra $30 on a $25,000 portfolio ($10,000 international, balanced approach) probably won’t cause you to lose sleep at night either.

Heck, if we had $100k in international ETFs, the time it took me to analyze the data and write up this post has already exceeded $300 fee & distribution difference between holding VXC vs. holding XAW!

Given all the data available, what should we do moving forward?

As mentioned already, we hold a large quantity of VXC shares across different accounts (RRSPs & taxable accounts). So if we were to liquidate all of our VXC shares and replace them with XAW shares, we would need to do a total of 4 transactions. At $4.95 per transaction for Questrade and $9.99 per transaction for TD Waterhouse, this means we’d have to pay $24.84 to sell everything. We would need to spend another $9.99 to purchase XAW shares with TD Waterhouse (buying ETFs are free for Questrade). That’s a total of $34.83 in commissions for switching the international ETF, not to mention we’d have to pay taxes for the capital gains too.

In the end, I have to ask myself, does it make sense to switch from VXC to XAW and take the commission hit for the long term gain? After examining all the factors and considering that we plan to hold international ETF for the next 20, 30 years or longer, it makes sense to switch from VXC to XAW.

Conclusion

Does it make sense for us to switch from VXC to XAW given we own a large quantity of VXC? Considering the commission cost and capital gain tax to switch and the long term gain after switching, I believe the answer is yes.

Going through this exercise made me wonder about this question – how far do you go to save a few percentages? What happens if in the near future another company (say Horizons) releases an international ETF with an even lower overall fee than XAW? Do we switch again? When will the chase for a lower fee ETF end?

Dear readers, do you hold VXC or XAW? Have you made the switch?

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22 Comments

  • Reply
    Mr. Tako
    April 1, 2019 at 8:51 am

    I’m not buying Canadian Index Funds (for obvious reasons), but I concur with your reasoning. If the stocks held are largely similar, and there’s very low frictional costs to changing funds, why not take the lower fee version!

    Makes sense to me!

    • Reply
      Tawcan
      April 1, 2019 at 10:35 am

      Exactly! That’s why we decided to take the short term pain (selling) for the long term gain.

  • Reply
    Gofi
    April 1, 2019 at 10:06 am

    Did you consider VYM?

    • Reply
      Tawcan
      April 1, 2019 at 10:36 am

      No we have not considered VYM. Generally speaking I don’t like dividend index ETFs. 🙂

  • Reply
    Grow My Money Tree
    April 1, 2019 at 10:50 am

    You could also hold your existing VXC shares, and switch to XAW for future purchases. This may complicate your allocation tracking though. Either way, XAW sounds the best going forward. I’m actually in the process of helping my parents switch over to XAW from their overpriced mutual funds!

    • Reply
      Tawcan
      April 1, 2019 at 1:22 pm

      True that’s definitely another method to incorporate XAW into our portfolio.

  • Reply
    Eric
    April 2, 2019 at 6:29 am

    Well done! Very nice post with good analysis. Thanks.

    As we discussed earlier, I also own XAW. I’m with National Bank Direct Brokerage, where they don’t charge anything to buy or sell ETFs as long as you buy/sell more than 100 shares. It’s easy there to switch from one fund to the other.

    Talking about Dan Bortolotti and Justin Bender, have you seen the youtube channel of their colleague Ben Felix? He has a great series covering many many personal finance topics, and he goes into more depth than most. Check it out.

    https://www.youtube.com/channel/UCDXTQ8nWmx_EhZ2v-kp7QxA

    There is one video he made on the problems of investing in dividend giving stocks:

    https://www.youtube.com/watch?v=9j6DInAMMaM

    Cheers

    • Reply
      Tawcan
      April 2, 2019 at 9:00 am

      Thanks for the video, will take a look.

      • Reply
        Eric
        April 5, 2019 at 7:06 am

        Ben also published another video talking about dividend giving companies, very interesting:

        https://www.youtube.com/watch?v=UpXI_Vd51dA

        Ben also started a podcast. I started catching up with it, and there are many interesting discussions. In his latest podcast (https://rationalreminder.ca/podcast/2019/4/4/episode-40-five-factor-thinking-using-factors-to-spot-trends-and-guide-decision-making) he talks about budget 2019, but more interestingly, about factor investing with ETFs. He just published a white paper on it:

        https://www.pwlcapital.com/wp-content/uploads/2019/04/PWL-WP-Felix-Factor-Investing-with-ETFs_03-2019-Final.pdf

        Check them out, really interesting stuff. So glad that so many of the PWL managers such as Bortolotti, Bender and Felix dedicate time to youtube, podcasts, blogs, white papers, etc for all of us to learn from.

        • Reply
          Tawcan
          April 5, 2019 at 10:11 am

          Some good points in the video on dividend investing. Dividend investing isn’t perfect, that’s why we utilize index investing as well.

        • Reply
          Ben Felix
          April 8, 2019 at 6:42 am

          Thanks for sharing this here, Eric! Great to know that you’re enjoying the content.

          • Eric
            April 8, 2019 at 9:23 am

            Yes Ben, I just discovered your channel/blog/podcast and slowly but surely catching up. Thank you so much for the great work you and the folks from PWL are putting on educating the public about investing. Many of us have been following Dan Bortolotti and Justin Bender for years. The articles that Bob cites from Dan and Justin have been used to make financial decisions by many of us. You are also now on my list of people to follow.

            Thanks again Bob for responding to our comments, and for the great analysis of XAW vs VXC.

          • Tawcan
            April 8, 2019 at 11:42 am

            Listened to a few episodes so far, very interesting stuff. Would be cool to appear on the podcast if you guys are looking for some FIRE contents.

  • Reply
    Gruff403
    April 2, 2019 at 6:32 am

    Great article and very timely as I help my son switch from his expensive mutual fund to ETF’s. I did a similar comparison of VXC and XAW two days ago, not as detailed as yours, and came to same conclusion. Thanks for confirming my thought process.

    • Reply
      Tawcan
      April 2, 2019 at 9:01 am

      Glad to have helped. 🙂

  • Reply
    Tom B.
    April 2, 2019 at 12:10 pm

    Hi – I’m a long time reader following a similar strategy to your dividend investment approach and like you have a growing annual passive income in my RRSP, TFSA, and taxable accounts…thanks for all your informative posts! I’ve own the ishares Canada ETF CUD (US Divd Grower Index) for a few years now. Every March, I receive a sizable “Capital Gains Dividend”. Did not realize till this year (duh!) that, although this CG dividend increases the Adjusted Cost Base (ACB) of my holdings, it does not translate into actual cash into my account. So my actual annual passive income from dividends in cash is a thousand or two lower than the amounts I previous just recorded off of the monthly broker statements. A bit of a downer but at least I understand now. Just wondering if you ever made the same mistake early on?

    • Reply
      Tawcan
      April 2, 2019 at 1:22 pm

      Hi Tom,

      Thank you for being a long time reader. 🙂

      That’s another reason why I don’t utilize dividend index ETFs. I’d rather build “my own” dividend index ETFs to avoid paying for these capital gains dividend.

  • Reply
    Chris @ Mindful Explorer
    April 3, 2019 at 9:00 am

    Great post Bob and your chart showing the cost savings possible with larger holdings across retirement funds really makes it visual to see the benefit of the change. I made the move in early 2018 I believe and of course won’t really notice the difference without doing the homework you did. Awesome in depth review of why it makes sense to go with XAW.

    • Reply
      Tawcan
      April 3, 2019 at 10:08 am

      Thanks Chris. For long term investors, makes sense to go with XAW.

  • Reply
    JamesB
    April 5, 2019 at 4:09 pm

    I just threw them both on a chart, and it seems that XAW has outperformed VXC by ~2% overall during the past ~3 years. Pay the $5-10 and make the switch…it will be worth it!

  • Reply
    ram mar
    April 11, 2019 at 3:27 pm

    is there a chance that Vanguard could reduce the fees and increase the distribution in order to be competitive ?

    if so it is not worth the fees to change and the extra taxes

    • Reply
      Tawcan
      April 11, 2019 at 4:10 pm

      Hmm good question, they might if they’re losing a lot of customers. My guess is that they probably won’t reduce the fees and increase the distribution. The fees are already very low to begin with. We are talking a difference of 0.30%. That’s really small.

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