Rebalancing With A One Stop ETF?

I’ve been doing a lot of research recently on ETFs and what’s in them because I’m about to convert a good chunk of my rrsp over to ETFs. One of the new ETFs I’ve been looking at is VEU – Vanguard world equity minus the US. This ETF would replace three ETFs I was planning to buy: VKG – Vanguard European, VPL – Vanguard Pacific and VWO – Vanguard Emerging Market. At first this ETF seemed like a great idea because it would save on transaction costs and would make the portfolio a bit simpler.

Today, however it occurred to me that since that part of my investment strategy is to rebalance on a regular basis, combining different geographical and economic regions into less ETFs might reduce the benefit I can get from rebalancing. The emerging market area is one particular class that is very volatile and as a percentage of your portfolio can easily double or half depending on the markets and is a great candidate for portfolio rebalancing. According to this article by MartinGale the portion of world equity of emerging markets is around 9%. If they keep up their torrid pace then this percentage could climb quite a bit. On the other hand, they could get reduced significantly as well. With the VEU ETF I won’t be able to do anything about it except go along for the ride.

Another benefit with having more specific ETFs is that you can better control the risk level of your portfolio. For example I am thinking of only having about 6% of my equity portfolio in emerging markets since I don’t want the risk involved with the proper weighting of 9%. Another investor might want to go overweight and have 10-15% in emerging markets. Either way you can’t overweight or underweight emerging markets with VEU.

On the other hand, if someone comes out with a world equity ETF which happens to have the underlying weightings that I’m looking for…I would be tempted to buy it and be a completely passive investor.

6 replies on “Rebalancing With A One Stop ETF?”

You’re having a fantastic start with your blog. I find myself checking up on Four-Pillars every day.

According to the products sheet, VEU’s expected MER is 0.25%, which is more expensive relatively to a blend of VPL, VGK and VWO (less weight). I read about the new Vanguard MSCI EAFE ETF in Canadian Capitalist. If it gets approved, its 0.15% MER is quite compelling. The only ETFs I have are VV and VWO, so this new would make a perfect fit.

Gosh, you guys are making me blush!

FT – thanks – your blog as well as Cdn Cap were the main inspiration for starting one myself.

FJ – thanks for the compliment. Your blog is looking pretty good too. Very intelligent posts.

You’re right about the higher MER of VEU which is another negative of that ETF.

There is one problem with the VEU that makes it messy. It has a 5% exposure to Canadian equities. You’ll have to subtract the VEU’s Canadian exposure from your allocation to our stock market.

I personally like EFA+VWO because it gives me all the international exposure I want in 2 ETFs. Sometimes, you can only simplify things so much and no further.

You’re right CC – the Cdn content in VEU is just one more step to deal with.

I’m going to use the new Vanguard EAFE ETF + VWO + VTI for all my foreign, as you mentioned in your blog yesterday.

Horizon’s beta pro crude oil bull etf HOU. Yesterday Friday the 13th 2009, crude oil jumped up north of 10% (up $3.50 to $37.50 Us /barrel from its previous close of around $34). This etf is pitched to track the price of crude and double the daily move up or down . On Friday HOU actually closed down 4.2 % to settle to a new fresh 52 week low of $5.25 / share. Can anybody explain that?

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