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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