Today I'm cleaning up my portfolio making it slightly more tax efficient. The overall framework is the same as before. This is just a little house keeping Today I sold out of VEE and VIU in favour of XEC and XEF. Why? Tax efficiency. You see based on the video below iShares has changed the structure of XEC some 3 years ago. This fund used to be a fund of funds meaning it held an underlying fund which then held the individual stocks under it. Now XEC holds these stocks directly What does this mean? Well before XEC held a US domiciled fund under it. With a structure like this what happens is XEC needs to pay foreign withholding taxes to the US and then pay foreign withholding taxes to each other country it invests in. There are 2 layers of taxes here. Because XEC is a Canadian domiciled fund iShares automatically pays the US their taxes regardless if XEC is held in an RRSP or not. The tax is paid behind the scene whether you like it or not. This is the exact same thing that happens with VFV. Vanguard pays the US they're taxes whether you hold this in a RRSP or not. It happens at the fund level then the individual gets distributions net expense Now XEC holds it's own stocks. This eliminates the middle man being the US wrapper. So now XEC pays the foreign withholding taxes directly to each country it invests in. The US is cut out of the deal therefore XEC went from 2 tax layers down to 1. Like I said this is just house keeping. The overall framework of XEC vs VEE is still the same. I'm just getting my exposure more efficiently now. It's been 3 years since iShares made the switch in the meanwhile Vanguard has been twiddling their thumbs. I doubt they'll make any change to VEE so instead of waiting on an unknown I sold out completely and switched from Vanguard to iShares. I also like iShares as a company more than Vanguard. I see them innovating whereas Vanguard isn't so I'd rather have my money with a stronger company So now what? Well in my registered accounts XEC saves me 1 layer of taxes at the fund level. In my non registered accounts I get an added bonus. I can partially claim foreign tax benefits on my personal taxes meaning I'll get a partial tax refund on this first layer. If I was still using VEE I'd still get the partial refund but I'll have to pay full tax on the US portion. Over the years any sort of tax drag adds up This change is an optimization. The rest stays the same This post explains the nuts and bolts of portfolio construction. Everything you own should have a very specific purpose. If you own something and don't know why then it's time to take a critical look to see if it should stay or go. I strive to optimize as much as I can within my specific framework. In this case I found a small tax drag so this is the patch to the bug https://youtu.be/meW1Pf5uvNM?si=f7OuN2u4UMmPKnU2
1,488 views
5 Comments
Paul @mrwhite007 · 3mo
I don’t think I’ve ever looked at your portfolio before, until now! It’s looking good! Almost 15% all time high!
Jonathan Ward@jwardzy · 3mo
Isn’t XEC and XEF pretty much the same trends
See the full comment section 👀Sign up for the full Blossom experience!
