Simple Low Cost Diversified Index ETF Portfolios 2018

This post was originally posted in 2008 but was recently updated 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)

IndexETFMER
Canadian IndexXIC (CAD) or VCN (CAD)0.06%
Total U.S MarketVTI (USD)0.04%
70% Europe, 30% PacificVEA (USD)0.07%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North AmericaVWO (USD)0.14%
Canadian Short Term Bond IndexVSB (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.

IndexETFMER
Canadian IndexXIC (CAD) or VCN (CAD)0.06%
Total U.S MarketVTI (USD)0.04%
70% Europe, 30% PacificVEA (USD)0.07%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North AmericaVWO (USD)0.14%
Total International IndexVXUS(USD)0.11%
Canadian Short Term Bond IndexVSB (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

IndexETFMER
Canadian IndexXIC (CAD) or VCN (CAD)0.06%
Total U.S MarketVUN XUU(CAD)0.16 0.07%
International Index (MSCI EAFE)XEF (CAD)0.22%
Emerging Markets IndexVEE (CAD)0.24%
Canadian Short Term Bond IndexVSB (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)

IndexETFMER
Canadian IndexXIC (CAD) or VCN (CAD)0.06%
Total U.S MarketXUU (CAD)0.07%
Developed ex North America IndexXEF (CAD)0.22%
Emerging Markets IndexVEE (CAD)0.24%
All-World ex-Canada IndexVXC XAW(CAD)0.27 0.22%
Canadian Short Term Bond IndexVSB (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?

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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Mike
2 years ago

Hi FT,

I’ve been following your site for years and I was hoping to get your opinion on the performance of ETFs vs index mutual funds like TD e-series. ETF MERs are definitely attractive and this is a fund and period dependent question, but how does the net return of ETFs compare to equivalent index mutual? Have you posted anything doing a side by side comparison?

Based on a quick review some ETFs look to be performing returns at or below some of their equivalent index mutual which would erode the MER advantage. Anyhow, this wasn’t an exhaustive analysis on my part so I’m curious on your thoughts. Given how popular ETFs have become, I have to think the data shows they are the clear winner for investors.

Are you aware of some good articles or analysis on this topic?

Thanks in advance.

Mike
2 years ago
Reply to  FT

Thanks for the explanation, that makes sense. Mike

Mike B
3 years ago

Great article, as always! I took a closer look at the “CAD only (non-hedged) Diversified Low-Cost ETF Portfolio” and noticed that neither iShare XEF (Developed) or Vanguard VEE (Emerging) include South Korea. Seems like a bit of a gap in the worldwide coverage (missing companies like Samsung and LG). It looks like this is because iShares considers Korea an “emerging” economy while Vanguard considers them “developed.” So, I switched Vanguard VEE to iShares XEC instead.

GeoNomad
4 years ago

I see you updated the recommendation in September 2017.

Next time you travel to the future, can you please bring back some more recommendations. It would help a lot!

Grant
4 years ago

Mawer is not a bad option, but I wouldn’t go that route due to active manger risk, and, in fact Mawer funds do not actually outperform their proper risk adjusted benchmarks, as explained here.

http://www.canadianportfoliomanagerblog.com/active-funds-exposed/

If you wanted a one fund option, which is certainly a good idea, than I’d go with Tangerine Index Funds. Better to have the certainty of market returns (less fees), rather than the remote hope of outperformance.

Bernie
4 years ago

Why not just invest in Mawer Funds? Mawer Balanced Fund would be an easy one stop solution rather than a mix of ETFs. MAW104 has beaten the index benchmarks 90% of the time and is ahead by a substantial percentage over the long term.

Cameron
5 years ago

I have opted to use the “The Diversified Low Cost ETF Portfolio (mix of CAD and USD)” in my RRSP but since I had started over a year ago the canadian dollar has lost ground against the USD. Would it be wise to start to contributing to the “CAD only (non-hedged) Diversified Low Cost ETF Portfolio” and still keep my USD etfs. I would use XUU in replacement of VTI, XEF for VEA and VEE for VWO. Obviously I would keep the same allocation and would resume contributing to my USD etfs when the candian dollar strengthens against the american dollar. Or is the conversion difference trivial in the long term over my investment life time?

Also I’m going to start investing in my TFSA since I will be maxing out both accounts this year. Would the “CAD only (non-hedged) Diversified Low Cost ETF Portfolio” be appropriate in my TFSA??

Thanks

Mark Kantor
5 years ago

I would like to ask you for help: software itself (I don’t deal this} put request for disability tax credit. I don’t know hov to fix it. Please help me.
Best Regards, M. Kantor.

Grant
5 years ago

Nice article. I’m interested in your comment that short term bonds have a lower correlation to the stock market than long term bonds. I think that would depend on whether the crash was in an inflationary environment (more common), or a deflationary environment (like 2008). Could you refer me to a resource that discusses this issue? Thanks.

Sam B
5 years ago

Since Vanguard recently decided to include Canada in their VEA investment strategy, it became less of a good choice for diversification if you already own VCN. I moved to iShares’ IEFA instead, which excludes US and Canada, at a reasonable 0.12% MER.

P
5 years ago

Hello,
I am just looking up these ETFs at morningstar.ca
And many of them’s MER much higher than your data:
XIC 0.1% Vs 0.05%
http://quote.morningstar.ca/quicktakes/etf/etf_ca.aspx?t=XIC&region=CAN&culture=en-CA

VCN 0.11% Vs 0.05%
http://quote.morningstar.ca/quicktakes/etf/etf_ca.aspx?t=VCN&region=CAN&culture=en-CA

VSB 0.15% Vs 0.1%
http://quote.morningstar.ca/QuickTakes/ETF/etf_ca.aspx?t=VSB&region=CAN&culture=en-CA

Did they increase MER recently?