This post was originally posted in 2008 but was recently updated (March 2018) to include the latest low cost index ETFs available to investors.

Diversified indexing seems to be all the rage these days. To be honest, I’ve really grown to appreciate the simplicity of index investing and have used this approach for a number of my own accounts.  More specifically, I use this for our family RESP, my wife’s RRSP and a portion of my own RRSP.

After doing some research, if I were to put together a diversified couch potato’ish passive index ETF portfolio, I would choose ETF’s with broad index coverage along with the lowest MER’s possible.

Here is what I came up with which happens to be very similar to the Canadian Capitalist sleepy portfolio:

The Diversified Low-Cost ETF Portfolio (mix of CAD and USD)

Index ETF MER
Canadian Index XIC (CAD) or VCN (CAD) 0.06%
Total U.S Market VTI (USD) 0.04%
70% Europe, 30% Pacific VEA (USD) 0.07%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North America VWO (USD) 0.14%
Canadian Short Term Bond Index VSB (CAD) 0.11%

Update Jan 2017: For your international exposure, consider VXUS which also has some small cap coverage.  I like VXUS because has broad international exposure and has a low MER (0.11%), however, the drawback is that it includes some Canadian coverage (duplication).  VXUS would replace VEA and VWO above, reducing the total number of ETFs to 4.

Index ETF MER
Canadian Index XIC (CAD) or VCN (CAD) 0.06%
Total U.S Market VTI (USD) 0.04%
70% Europe, 30% Pacific VEA (USD) 0.07%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North America VWO (USD) 0.14%
Total International Index VXUS(USD) 0.11%
Canadian Short Term Bond Index VSB (CAD) 0.11%

Update November 2016, I added this table below as a lot of readers want to avoid the FX conversion from CAD to USD (needed to purchase USD based ETFs).  Vanguard and iShares have a number of ETFs that are low cost, in CAD, and non-hedged (hedging is known to underperform over the long term).

CAD only (non-hedged)  Diversified Low-Cost ETF Portfolio

Index ETF MER
Canadian Index XIC (CAD) or VCN (CAD) 0.06%
Total U.S Market VUN XUU(CAD) 0.16 0.07%
International Index (MSCI EAFE) XEF (CAD) 0.22%
Emerging Markets Index VEE (CAD) 0.24%
Canadian Short Term Bond Index VSB (CAD) 0.11%


Update January 2017
, If you would like to simplify even further, you could replace XUU, XEF, VEE with iShares All Country World ex-Canada Index ETF (XAW).  With a MER of 0.22%, you could reduce your portfolio to three ETFs and still maintain a reasonably low MER.

Simplest CAD only Diversified ETF Portfolio (only 3 ETFs)

Index ETF MER
Canadian Index XIC (CAD) or VCN (CAD) 0.06%
Total U.S Market XUU (CAD) 0.07%
Developed ex North America Index XEF (CAD) 0.22%
Emerging Markets Index VEE (CAD) 0.24%
All-World ex-Canada Index VXC XAW(CAD) 0.27 0.22%
Canadian Short Term Bond Index VSB (CAD) 0.11%

There are lots of ways to tweak the portfolio. I chose XIC over XIU because of the lower MER which is the same reason why I chose a combination of XEF and VWO instead of using VEU or XIN.

VTI, the total U.S market, is a steal in my opinion as it covers the whole U.S market without having to purchase separate funds for the Russell 2000, S&P 500, DJIA, and Nasdaq. If you’re looking for a higher potential return and willing to take on a bit more risk, you may want to purchase a U.S small cap ETF separately.

VSB, a Canadian short term bond index, was chosen because short-term bonds are known to have a lower correlation with the equity markets than long-term bonds. Having a bond portion in the portfolio will reduce volatility while only slightly reducing potential returns. The bond portion will start out small (maybe non-existent) in the early years but increase in percentage as the portfolio gets closer to funding retirement.  An alternative would be to choose the total Canadian bond index using VAB (MER 0.13%).

But what about asset allocation (the percentage of each ETF)?  It really depends on how much you can tolerate volatility in your portfolio (some would define volatility as risk).  While the higher the bond % may slightly reduce the long-term return of your portfolio, it will also dampen those big market corrections that are guaranteed to occur (remember 2008?).

As a rule of thumb, beginner investors who are a little more aggressive may want to start at a bond allocation at 25% of their portfolio and those a little more conservative 40%.  There are a number of “balanced” mutual funds that hold 40% bonds.  As another example, Canada Pension Plan holds 30% bonds with a “retirement” timeline of 75 years.  Bond allocation typically increases with age to reduce the impact of a large market correction when you are withdrawing from your portfolio during retirement.

To see the latest of the “easy” ETF portfolios, check out Vanguards newest products, VGRO and VBAL. Essentially all in one balanced ETF portfolios that have very low MERs.

How does the portfolio look to you? What would be your picks for a diversified low-cost ETF portfolio?

For those of you just starting out on your investing journey, you can see my list of discount brokers that offer commission-free ETF transactions to further reduce your investing fees.

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Thanks for the link. As you know, XIC is better in my opinion because it is more diversified and avoids concentration (which might be a real problem with our stock market). Having said that buying a few stocks to represent the Canadian portion is a viable alternative.

I’d love to see what allocation you’d choose. We had a bit of a discussion at CC’s blog about this not long ago.

FT

Great idea.

What are the historical performance numbers on these funds vs their equivalent indexes? Was this part of your selection process?

I use the following allocation:

Canada – total 20%
20% – XIC

US – total 30%
20% – VTI – total market
5% – VBB – small cap
5% – VRB – small cap value

International – total – 30%
20% – VEA
10% – VWO

Fixed – 20%
5% – XRB – Real Return Bonds
5% – XSB – Short Bonds
10% – XRE – REITs

The biggest downside is the currency risk as 60% of the portfolio is in US dollars. Also – I would like to find a replacement for XRE as the MER is 0.55%.

There’s not a right or wrong allocation, only one that is suited for each individual.

As for bonds, I noticed you are looking at short-term bonds. What about long-term bonds? In US you could check out BLV or TLT. What about foreign bonds exposure? Check out BWX.

Also have you thought about real-estate? Some people say that real estate investment trusts are a separate asset class, just like stocks, bonds, commodities. IYR for US and RWX for international could be a good starting point.

You might also add some small-caps and mid-caps as well. IWM is the russell 2000 index etf, so it should be ok.

A very good starting ETF list for US investors could be found form Yahoo! finance:

http://finance.yahoo.com/etf/browser/mkt?k=3&c=0&f=0&cs=1&ce=794

There’s 794 ETF’s in the US. I just got a headache simply by opening the list..

Debating allocation decisions is always fun. I use the following:

Canada – 20% total
XIC – 20%

US – 30% total
VTI – 20% – total market index
VBB – 5% – small cap
VBR – 5% – small cap value

International – 30% total
VEA – 20% – Europe and Pacific
VOW – 10% – Emergying Markets

Fixed Income – 20% total
XSB – 5% – short bonds
XRB – 5% – real return bonds
XRE – 10% – REITs

The main disadvantage of my allocation is that so much of it is in US$ and therefore there is alot of currency risk. I would also like to find a replacement for XRE as its MER is much to high.

I am not a believer in market timing but if you are I would suggest sticking with short bonds at this point. That way you wont be hurt when interest rates start to rise.

I like this allocation. There have obviously been some changes since it was posted (10 years ago!) – how did it work out for you Ryan and what changes have you made to your allocation since?

Since these are all ETF’s, brokerages treat these as buying stocks. How would you buy into these each month to minimize your trading fees? With 5 ETF’s at $9.99 per trade that’s $50 a month or $600 a year. If you invested in mutual funds with no loads with 1% MER’s, you’d break even at $60,000. I know I don’t have that much to invest every year and I can find mutual funds with no loads and MER’s less than 1%. So is there any advantage with these?

What’s your opinion on Horizon’s Beta ETF? Their MER is higher, but the potential return might be better.

I took a look at the Beta Pro’s perfomance vs. the underlying indices and it shows within a year that they don’t come close to 2x the performance. It was enough to convince me to pass on them.

(please delete if this posts twice)

Ryan, your VEA and VWO holdings may be priced in US dollars, but they do not represent US dollar exposure because those funds are not hedged to any currency. Rather, they represent exposure to global currencies, namely whichever ones the underlying companies do business in. So that 30% of your portfolio has some US exposure (foreign companies who do a lot of US business), some Euros, some Pounds, some Yen, and a smattering of others.

So really, only 30% is exposed absolutely to the US dollar; another 30% is exposed to a total coin-toss of currency fluctuations; and 40% is in your home currency. That’s not too bad at all. When you calculate rebalancing, remember to convert everything to CDN$ at the prevailing rate and you may even profit from currency swings over the years.

Sid: A hybrid approach is also possible. One need not make 5 trades per month. One could:
a) Add to the ETFs monthly, but only one trade at a time. Each month you add your entire contribution to whichever ETF is most underweighted. Over the course of the year you will stay approximately within your target allocation.
b) Collect your monthly contributions in a high-interest savings account, money market fund or in no-load funds matching the underweighted category (e.g. if VEA is underweight, buy into a no-load EAFE index fund). Then you can make a small number of annual or quarterly trades with that money when it makes sense.
c) Same as b, but set a threshold amount – e.g. tell yourself that if any ETF is underweight by more than $1500 and you have that much in cash or a no-load fund of the same category, you will make one trade.

With an annual-hybrid approach you could make as few as 3-5 ETF trades (this is my preferred strategy). Now the break-even point slides lower.

Does anyone know a good low cost dividend paying etf? Ive seen CDZ with a mer .60%.
Thx

Hi Sid – The way I reduce brokerage fees is to only make one ETF purchase every year. My strategy is to automatically purchase TDeFunds (using dollar cost averaging) every two weeks. Once a year I sell my TDeFunds to purchase ETFs from TD Waterhouse. I do use 9 ETFs but because I only make one transaction a year this costs me less than $100 in brokerage fees.

Charles – thanks for the info on VWO and VEA.

Almost There,

There are several dividend ETF’s out there. The ones worthwhile in my opinion are SDY and DVY. I do have some problem with the weightings in SDY according to yield though..

FT,

Short-term bonds will let you maintain some flexibility if interest rates rise. With longer term bonds however you earn higher current interest. If interest rates do not increase a lot or decrease you will be better off with longer-term bonds; If interest rates increase however, like they did in the 1970’s then sticking to short term maturities will be the way to go..

William Berstein looking at the trade-off between short-term and long-term bonds in his book the Four Pillars of Investing. He found that short-term bonds offer very similar returns as long-term bonds. If thats true than there is little reason to purchase long duration bonds because long bonds are more risky then short bonds.

Alos – with interests rates this low I would suggest buying short bonds because there value will be less effected when interest rate rise.

FT, is this all hypothetical or are you planning to start investing in these? And would you borrow to invest, to get the tax write-off?

FT, Ryan and Charles, thanks for the replies. I’ll stick with mutual funds for another year or two when my portfolio’s a little bigger and then reconsider the ETFs.

I just noticed that three out five of the funds you listed were in USD. Do you do anything to “hedge” against the change in currencies?

Dividend Growth Investor,
Those 2 look good but they are both american which would have a non-resident withholding tax for Canadians.
Do you know of any good canadian efts??
I saw this on TMF.

Weighing yield
To distinguish themselves from their competition, dividend ETFs put together their portfolios in different ways. Let’s look at some of them:

The WisdomTree LargeCap Dividend Index Fund (DLN) uses a simple approach, choosing the 300 largest stocks from its dividend index and weighting them by the total amount of dividends each company pays.

The iShares Dow Jones Select Dividend Index Fund (DVY) includes dividend-paying stocks that have maintained or increased dividends in each of the past five years, have a payout ratio of 60% or less, and trade an average of at least 200,000 shares daily.

The PowerShares Dividend Achievers ETF (PFM) screens for companies that have increased dividend payouts for at least 10 straight years and then chooses the highest-yielding stocks among them.

The SPDR S&P Dividend ETF (SDY) picks 50 high-yielding companies that have raised dividends consistently over at least a 25-year timeframe.

The First Trust Value Line Dividend Index Fund (FVD) uses Value Line’s safety rankings to screen for stocks it deems safer than average and then takes above-average dividend yields with market caps of more than $1 billion. Unlike most other dividend ETFs, this fund gives each stock equal weight in its portfolio.

Again all american, but there is some good info as to the differences in the various etfs.

For what it is worth, here is what CIBC Wood Gundy recommended in their July 2008 Monthly World Markets Report:
Growth Aggressive Growth
Cash 0% 0%
Fixed Income ETFS
XBB 20% 0%
Equity ETFs
XIC 22% 27%
XTR 8% 8%
IVV 16% 17%
EFA 19% 25%
EEM 9% 17%
VNQ 6% 6%

Meanwhile, RBC recommends the following asset allocation in its Summer 2008 edition of Direct Investor. Unfortunately, they do not make Index fund recommendations, only asset classes.

Growth Aggressive Growth
Cash 4.1% 3.3%
Fixed Income 19.5% 0.0%
Canadian Equities 23.8% 34.3%
US Equities 31.8% 33.2%
Int’l Equities 20.8% 29.2%

The big difference between the two seems to be the CIBC thinks that oil is going to rise to $200/bbl and therefore has placed heavy emphasis on big energy producing countries like Canada, Russia and Arabia. It also likes the trends in the economies of Brazil, China and India.

RBC, on the other hand, thinks that US stocks are really undervalued now, and has placed heavy emphasis on US equities.

Great foundations for a solid portfolio, but I’d also recommend adding a diversified commodities element, as well as a handful of currencies. For commodities, I highly recommend a broadly diversified ETF such as GSG. It tracks the performance of the GSCI Excess Return Index, which tracks 24 different commodities. It is weighted with approximately 67% invested in energy, 16% in agriculture, 7% in industrial metals, 7% in livestock and 3% in precious metals. The index is production weighted to reflect the relative significance of those commodities to the world economy.

It’s possible to get into specific commodities, such as oil (USO), natural gas (UNG), agricultural commodities (DBA), and precious metals (XME), to name a few. Still, unless you have reason to be particularly bullish on any of these I’d recommend the far more diversified GSG.

As far as currencies are concerned, I recommend adding a selective group to your portfolio using ETF’s: FXE, FXF, FXC, FXA, FXM, FXS, FXY, and FXB. I’ve written a more detailed article on how to choose the right currencies: http://www.thefreedomfactory.us/portfolio-considerations-for-currency-investing/

Two things to consider are how currencies correlate to other assets in your portfolio, namely stocks and bonds (and hopefully commodities), as well as relative income yields. Currency ETF’s pay dividends that are representative of interest rates in their respective countries. It would be prudent to add currencies that have both high yields as well as negative correlation to major assets currently in your portfolio.

so much for simple…

Would you guys still reccomend the above portfolio? I’m looking to start mine this year

Ok thanks FT, It gives me some further insight into other areas I can be looking at.

Mark, I think the most important thing you have to consider is your target asset allocation.

I typically use a couple of pie charts
– one based on asset classes (equity vs. fixed income etc.)
– next based on breakdown within those assets (large vs. small cap, sector allocations etc.)
– finally. one based on regional allocations (Canada vs. US vs. Emerging Markets vs. EAFE etc.)

Just draw these out, then slow decide how to fill each of those categories by comparing various ETF’s offered by different companies. Make sure the indexing method is accurate, make sure it isn’t particularly biased (e.g. market cap weighted indices etc.).

Good luck!

Thanks Sampson thats really useful, The first two I’m relatively comfortable with, BUT how do you decide on distribuition of the first two in the third. If any of you guys can reccomend some good books/online resources for this I would appreciate it. I’ve read some basic stuff But I’m still not comfortable I totally understand diversification at this detail

thanks

With a ETF like CDZ or XDV would it be advantages to DRIP to reduce fees. I guess the same would go for any high dividend paying equities in a RRSP account.

thanks

FT et al,

Instead of VEA, what about XIN which trades on the TSX? Pros and cons?

Hi all, great discussion.

I’m researching to replace many high MER funds with an asset allocation for long term investing and rebalancing once a year. I’m already using ETFs in my son’s RESP, but I’m currently wondering if I’m not going to buy individual stocks instead of ETFs given the somewhat large dollar amount that’s going to go in index ETFs.

I’ve read that a good diversification is attained for an allocation class with “only” 20 stocks. So lets say you have 100,000$ to put in one sector (for example large caps canadian stocks), that would mean 5000$ per stock with a 10$ commission (0.2%) and no other fees (except when selling of course). For a long term buy and hold investment, saving fees charged by ETFs would be a bonus at the expense of additional research on my part (even though I must admit these fees are tiny compared to what we were paying before).

I’m also not considering buying bond ETFs, but investing directly into bonds to build a bond ladder.

I’ll probably consider ETFs for overseas investments though. It will just be easier that way.

Essentially, how big do you think a portfollio should be before buying individual stocks makes sense? Or do you think picking stocks individually is not worth the trouble giving the low MER of ETFs?

One advantage I see for individual stocks is that you don’t have all your eggs in the same basket, namely the fund company.

So what do you think?

Hi guys,

Great discussion. Honestly I frequently read about finance, but have been a little slow jumping into the pool. I’ve taken my first steps in opening a discount brokerage account with Questrade thanks to MDJs article.

So the plan is to buy ETFs now (and once a year thereafter) and continue to buy group RRSPs at work which I plan to open an account with TD to buy e-funds by-weekly following FTs RESP strategy & follow Ryan’s suggestion to sell them off each year to buy more ETFs.

I know I’m not starting out with much (just a little over 15K) but I think it will be the least amount I will be contributing each year & I believe we may be selling our house soon (which means I may pay back the money from the HBP of 40K between my wife & I)

By mixing & matching info I’ve gathered on many MDJ threads I will probably shoot to allocate my money as follows (though I’m an avid follower of MDJ I will make an excellent couch potato candidate since I don’t really follow the markets all that much):

Canada – total 30% $4,500
20% – XIC $3,000
10% – XIU $1,500

US – total 30% $4,500
20% – VTI $3,000
5% – VBB $750
5% – VRB $750

Internat. – total 30% $4,500
20% – VEA $3,000
10% – VWO $1,500

Fixed – 10% $1,500
5% – XSB $750
5% – XRE $750

Any feedback would greatly be appreciated. Maybe buying so many different stocks/ETFs is ill advised with such small funds? or I’m really missing some fundamentals? I just don’t know… I read the article about when’s best to switch from e-series to ETFs, but then with many other comments (like Ryan mentioning that buying everything all at once can really cut down on the costs) & ETFs low MER over the long haul, I thought it might be best just to jump in!

I’ve also been thinking about investing inside of a TFSA & have also been thinking since I plan to join the OPP in the near future (with an amazing pension plan) I should consider cutting back a bit on investments inside my RRSPs. Any thoughts?

What ETFs, if any, would you guys recommend for a TFSA???

Seems like it would be a good choice to “plunk” a few thousand into ETFs into your TFSA in 2010…

Thanks FT for your response,

All of my choices are based on what I’ve read from your website, but perhaps my conclusions are funny to some but as a novice investor (no previous experience) I chose what I thought to be logical, but please feel free to share your opinions.

1st off, I don’t hold anything today, so why did I think it best to hold XIC & XIU?;

1 – I see that you like XIU because of the low MER & I also noticed in your RESP post you like to put 30% in Canadian Equity (which I’ve come to the conclusion these are?)
2 – Other posters explained why they prefer XIC (and they allocate 20%) So I thought 10% XIU & 20% XIC was a good compromise, but maybe not…

VBB (US small cap) & VRB (US small cap value) where what Ryan listed higher in this post which I assume are (US Equity) which you also like to allocate 30% to.

As per XRE, guess I missed the boat on that one, but it was also taken from Ryan’s portfolio.

Though I try to be informed about finances I guess the old saying (knowing the path & walking the path are 2 different things) stays true to me. I thought it might be a good time to get my feet wet & join the game.

I’m also thinking of waiting till mid October before I do any buying, after reading your last net worth update I decided to search the internet about a possible market correction in Sept. & Oct. & it sounds like there might be a drop of a good 10% (any thoughts?) I’d hate to jump in and instantly loose 10% on my investment…

I recently visited http://finance.yahoo.com/etf to try and track down the ETFs in what could possibly become my 1st portfolio, but I wasn’t able to find all the ETF symbols (including VRB nor VBB) & there are others like VEA which don’t even look like they’ve made any money since they began & I wonder why someone would like this one… is it because it pays dividends?

What would be nice is if there were an article for someone who is just starting out who knows they will never be a REAL stack trader & believes in ETFs. With a few pics of what one should choose & if they wanted to get into the market, should they start now? or wait till mid October in the event of a market adjustment? & if he/she wanted to invest all year, should he/she open an account with TD to buy e-funds by-weekly following your RESP strategy & sell them off each year to buy more ETFs.

Thanks in advance ;-)

Great information about an ETF portfolio.

Can you help me out. Is it possible to hold VBR or VTI within my Canadian RRSP account?

is there an open platform to trade ETF’s ? kinda like the platforms to trade forex ?

I am looking to start a low cost diversified ETF portfolio for retirement income from a locked-in account. I have two questions:
(1) Where do you buy your ETFs at those MERs? I’ve looked at the on-line discount brokerages for RBC, TD Waterhouse & Scotia i-Trade, and none of these carry all the funds you list, or at the MERs you list. For example, Scotia i-Trade lists VTI, but at .15% (not .07%), and does not list either VEA or VWO. (The Canadian ETFs are not a problem, only the international ones.)
(2) For a retirement portfolio, would you change the ETFs? I understand that the portfolio would be weighted differently, with more cash & fixed income, but what about the actual equity ETFs?

For those who are new be aware that the Vanguard ETF’s all trade on the NYSE so you will be charged currency exchange fees which can be up to 2.05% depending on your brokerage. This would take away from the savings you’re getting from the lower MER.

Of course there is a way around this by doing Norbert’s Gambit

http://www.finiki.org/index.php?title=Norbert%27s_Gambit

http://www.financialwebring.org/forum/viewtopic.php?t=198

With certain brokerages it is actually quite easy to do in your SDRSP account.

My etf portfolio (not so low-cost) is as follows:-

In RRSP:
Developed: Large Cap: DND, EWP
Developed: Large Cap Value: EFV, EWG
Developed: Mid Cap: EWO
Developed: Mid/Small Cap Value: DLS, DGS
Developed: Real Estate: DRW
Developed: Fixed Income/Bonds: FXA (using currency ETF for my fixed income portion)
Emerging: Large Cap: VWO, DWX
Emerging: Large Cap Value: DEM
Emerging: Mid Cap: GULF
Emerging: Small Cap: BRF
Emerging: Fixed Income: PCY, FXM

US: Large Cap Value: VPU
US: Mid Cap Value: CVY
US: Small Cap Value: IWC
US: Real Estate: VNQ
US: Fixed Income: BIV, TLT, BND, TIP, IEF, JNK, HYG

Non-RRSP
Canadian: Large Cap: XMA, XIU
Canadian: Large Cap Value: XCV, XDV
Canadian: Mid Cap: XMD
Canadian: Mid Cap Value: CDZ
Canadian: Real Estate: XRE
Canadian: Fixed Income: XRB, XSB

I’m 29 years old, and my RRSP portfolio is in the $40-$50k at this point. I plan to be invested for at least another 25 years, and have a relatively high risk-tolerance. I like the couch potato philosophy, and plan to rebalance once or twice a year as nescessary.

I’m planning to build with 90% equities, and 10% bonds. I also like the idea of earning dividends and utilizing DRIPs where available. The following is what I’m currently thinking:

20% CDZ
20% XDV
20% VTI
20% XIN
10% XGD
10% XBB

This should leave my MER <0.5%, give me exposure to most of the major indicies, decent diversification, as well as some growth from dividend income.

Comments?

Wow, what useful information!
I am just jumping into ETF’s and reading all of this really confirmed my choices.
I have 1 question. Do environment or alternative energy based ETF’s exist, Would anyone have some info and names.

@Ruth: In Canada, there’s XEN – http://ca.ishares.com/product_info/fund/overview/XEN.htm – by iShares.

In USA there’s EVX, PBD, PBW, GEX, PZD, PHO to name a few.

But, I have noticed that they trail the performance of the market as a whole. You do get the peace of mind that you are investing in green etfs, but you may not be able to get a good performance. However, things may change in the future as more and more people decide to go green or the natural resources such as water and clean air become a rarity with the ever-increasing population on our planet.