This is a multi-part series exploring in-depth each of the individual allocations I have in my B&D investment portfolio.
In today’s post, I’ll dig into VCN which is the stock ticker symbol for the Vanguard FTSE Canada All Cap Index ETF. I’ll talk about:
- what it is
- the actual allocation in the portfolio
- why I hold this in my B&D portfolio
- fees/costs to hold it
- the income it pays me
- its growth potential
- which investment vehicles (TFSA, RRSP, LIRA, non-registered account) I put this ETF in
- Alternative ETF(s) for tax loss harvesting purposes
- the future of it in my B&D portfolio
Information provided is considered accurate and up to date at the time this post was published.
What is it?
VCN is a broad based index ETF that is managed by Vanguard (Please note I have no affiliation whatsoever to them, I just hold it as part of my portfolio. I just chose this one to invest in it). They define it as follows in their Fact Sheet and on their website:
Vanguard FTSE Canada All Cap Index ETF seeks to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment return of large-, mid- and small-capitalization, publicly traded securities in the Canadian market. Currently, this Vanguard ETF seeks to track the FTSE Canada All Cap Domestic Index (or any successor thereto). It invests primarily in large-, mid- and small-capitalization Canadian stocks.
At the time I write this, there are 185 different securities that make up this passively managed index. Mind you, banks and the energy sector make up about 50% of this index. As well as commodities. The Canadian economy is not as diversified or deep as the U.S. but still not a reason to not to invest in it when holding a B&D investment portfolio.
Vanguard defines the risk for this ETF as follows:
Vanguard has rated the volatility of this ETF as medium. This rating is based on how much the ETF’s returns have changed from year to year. It doesn’t tell you how volatile the ETF will be in the future. The rating can change over time. An ETF with a low risk rating can still lose money.
THE PORTFOLIO ALLOCATION
Why Hold it in my b&D portfolio?
I grew up in Canada and my tax residency continues to be there as well. In many cases, an investment portfolio will typically hold a certain percentage of its portfolio in investments from their home country. Typically, that’s called having a home country bias. Especially when there are tax advantages to doing so.
When it comes to holding Canadian equities, I get to take advantage of the Canadian Dividend Tax Credit which was previously discussed in prior posts in this series related to VSB, MFT, and ZPR. Done correctly, taking advantage of this tax credit equates to paying no income tax whatsoever on around $50,000 if your only income was from eligible Canadian dividends.
I will note that the distribution (dividends) for VCN can normally also include a smaller percentage of the total through capital gains, return of capital, foreign income (along with foreign tax paid) and other income. That means that you don’t get to claim 100% of the distributions from this ETF using the Canadian Dividend Tax Credit. It’s still a sizeable tax advantage that is well worthwhile.
Even though a Canadian index ETF like VCN cannot compete with the likes of an index ETF tracking the S&P500 in terms of long term capital growth, it does hold its own when it comes to its favourable tax minimization benefit.
Having said that, if the Canadian dividend tax credit disappeared, I’d be reconsidering holding something like VCN. I don’t personally see any major tax changes occurring ongoing though. If that happened, people would not want to continue investing in Canada when they have easy access to U.S. equity markets. That would likely cause a great deal of harm to the Canadian economy if it did occur. No politician in their right mind would risk their own skin on doing something like that.
Well, let’s hope no one has that level of ego. Lol.
the associated fees/costs
The one fee I always look at is the MER (management expense ratio) and the ETF provider, like Vanguard, has an obligation to provide what it is so investors understand the total cost of owning this type of investment. It’s defined as follows:
The management expense ratio (MER) is an annualized measure of the cost charged to investors, to invest in a fund. It is calculated by dividing the total of the expenses charged to manage and operate the fund by the total assets of the fund. The expenses include the management fee paid to the fund manager and operating expenses (taxes and administrative costs). The MER is calculated as a percentage of the total assets under management for the fund (AUM).
For VCN, the MER comes in at 0.05%. Therefore, for every $1,000 invested, they charge me $0.50 annually. Compared to many index ETFs, this is a pretty competitive MER, especially when considering the favourable tax treatment on its dividends. Versus a potential MER of 2%-3% on many mutual funds translating to $20-$30, $0.50 is a worthwhile cost.
income Received from this etf
As mentioned earlier, VCN mainly pays out Canadian dividend income which is normally the majority of the distribution. That means for most of every dollar earned (assuming it’s in your non-registered account), you get a Canadian Dividend Tax Credit and reduce the amount of income tax owing.
For the rest of the distribution from VCN, it’s a combination of capital gains, return of capital, foreign income (along with foreign tax paid) and other income. This is due to internal shuffling of the ETF. As much as it’s a passive index, some equities fall off and others are added to the index and the ETF has to match all this. Also, some of those equities pay interest income (like REITs) so that’s also factored. Capital gains still have a favourable tax treatment so as much as I avoid unnecessary selling of securities in my non-registered account, I accept that ETFs need to be doing this type of shuffling each year and that it has an impact on my overall taxable income.
Please note that taxation does change if the dividends/distributions from VCN are tax sheltered or tax deferred. The investment vehicle (e.g.: TFSA, RRSP, LIRA, non-registered/cash/margin account) that houses the ETF will determine which tax situation applies.
Growth potential for this etf
From my personal experience, VCN has been a medium growth ETF.
Placement in Investment vehicles
I’m a Canadian with tax residency in Canada so investment vehicles and tax treatments are related to Canada. I currently have a TFSA, RRSP, LIRA, and a non-registered account which is also known by many as a cash account or a margin account.
Legally minimizing and/or deferring the greatest amount of taxes possible is the primary criteria I use to decide which investment vehicle to house an ETF. Since I have a TFSA, RRSP, LIRA and a non-registered account, I use a 3 level filter which is below.
PRIMARY: TFSAs are for investments with the highest capital growth potential as it offers tax-free compounding and any withdrawals made are tax free as well.
SECONDARY: The non-registered account takes up any of the surplus that doesn’t fit in the TFSA. Also, any investment income that has preferential tax treatment such as capital gains (as I write this, only 50% of capital gains are taxable) or is eligible for the Canadian Dividend Tax Credit should be going in this account.
TERTIARY: RRSPs/LIRAs take up any of the surplus that doesn’t fit in the TFSA and the non-registered account. Therefore, the lowest growth investments would be found here as well as investments with the heaviest taxable income generated (in most cases, that would be bonds). The benefit of an RRSP/LIRA is that any income taxes owing are deferred until I decide to withdraw from them. The full amount withdrawn is taxable in the same way as employment income. Any taxes paid at withdrawal are based on whatever tax bracket I fall into for that particular calendar year. Therefore, compounding can occur tax free until then.
Based on the above criteria, in which investment vehicle(s) do I currently have VCN?
I actually hold this ETF in my non-registered account. Three reasons for that.
First, I have the room in my non-registered account.
Second, it’s a medium growth ETF and therefore I would not hold it in my TFSA as I have higher growth ETFs house there.
Third, the favourable tax treatment when it comes to the dividend. Same goes for any capital gain that could occur (e.g.: if I need to sell a portion of it for rebalancing purposes).
tax loss harvesting strategy
Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada. You can then use these losses to offset your taxable capital gains. This applies to the non-registered account only. The other investment vehicles (TFSA, RRSP, LIRA) are not eligible for this.
In Canada, the last day in a calendar year for tax-loss selling is typically the third to last business day of the year (not counting any statutory holidays that could happen between then and the end of the year). If you sold at a loss on or before that date, you’re able to deduct your loss against your gains in that calendar year. However, you can also carry your loss back for the previous three years to offset capital gains or carry it forward indefinitely to offset future capital gains.
Also, beware causing a wash sale. This can also be called the superficial loss rule. What this means is that if an investor buys back a security within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed for tax loss harvesting. To avoid this, I would buy an ETF similar to the one sold but measured on a slightly different index. A wash sale can also occur if you sell in one investment vehicle (e.g.: your non-registered account) and buy that same ETF in another (e.g.: your TFSA) so be careful to not do that within the 30 day period.
As mentioned earlier, VCN is an ETF that tracks the FTSE Canada All Cap Domestic Index.
Therefore, I would consider XIC that is an ETF managed by iShares which tracks the S&P/TSX Capped Composite Index ETF.
The future of this etf
This a core holding in my B&D portfolio. As mentioned above, so long as the favourable tax treatment continues to be available, no changes for VCN within the asset allocation of the portfolio is being considered.
So that’s my overview of the ETF VCN that currently holds an allocation in my B&D portfolio. Please let me know what you think. Was the overview useful? Was anything missing? I’m happy to hear all feedback.
About the picture: Enjoying some flowering lily pads July 7, 2022 near lake Scugog just outside Port Perry, Ontario.