Friday, October 28, 2016

Update on My Passive Investing Experiment

In early May of 2016, I made my initial foray into passive investing by purchasing two ETFs in my son’s Registered Education Savings Program (“RESP”).  My primary objective of undertaking this experiment was to determine if the often-cited benefits of passive investing (i.e. low time commitment, low cost, low maintenance, etc.) were realizable. Six months into the experiment, the benefits of passive investing are becoming evident and are causing me to question if I should expand the experiment.

Low Time Commitment

After initially suffering from analysis paralysis when trying to figure out which ETFs to buy for my son’s RESP, I finally decided on two: Vanguard FTSE Canada All Cap Index (VCN) and Vanguard FTSE All-World Ex Canada Index (VXC).  The initial selection of ETFs was the only significant amount of time I spent on this experiment, and I feel it was time well invested.

Low Cost

One of the sole benefits offered by my brokerage is an offering of about 50 ETFs which can be bought and sold commission free. That said, VCN and VXC are not part of that list, and thus my two purchases cost me $20 in commissions, or 0.27% of the amount invested. The management expense ratios of VCN and VXC are 0.06% and 0.27% respectively.  

Low Maintenance

Very proud to say that I have not spent any material amount of time maintaining my son’s RESP. Re-balancing the positions next year will likely only take a couple minutes. It helps for me to know that the largest positions of VCN (Royal Bank, TD Bank, and Bank of Nova Scotia) and VXC (Apple, Alphabet and Microsoft) are all companies with great management who are focused on the long-term.

Market Returns

Since purchasing VCN, the ETF has risen about 7% and paid dividends totaling an additional 1.2%. VXC has risen approximately 8.6% and paid dividends (less with-holding taxes) totaling an additional 0.9%. My son’s RESP is up a little over 9%, a very respectable short-term gain reflecting the continued bull market in North America, and decent performance in Europe (VXC holds a number of large European companies).

Downside

The main downside that I see so far in my passive investing experiment is that I am knowingly invested in some companies that I feel are expensive at this point in time. For example, Suncor represents 3.3% of the total holdings of VCN. There is no way I would choose to allocate 3.3% of my portfolio to a company with declining revenues, net losses for the past two years, worrying cash-burn and CEO who seems to be more concerned with empire building than focusing on his core assets.

Final Thoughts

Six months into my passive investing experiment, it seems to be a great success. That said, it has only been half a year, and I prefer to judge the success of my investing by assessing long-term returns. I will admit that I’m considering expanding the experiment to a portion of my non-registered account in 2017.  The long-in-the tooth bull markets in North America and relative high weights of comparatively expensive companies are holding me back at the moment.


In your opinion, what are the disadvantages of passive investing? 

2 comments:

  1. Have you had a look at LICs? I think the key advantage they have over ETFs is that they are actively managed.

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    1. LICs seem to be much more prevalent in Australia than in North America. In general, active managent isn't a selling point for me.

      Thanks for stopping by and commenting. Definitely a blast to see you come from the land down under :)

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