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.

97 Comments

  1. Ruth on April 11, 2011 at 4:43 pm

    Amit: Thanks for the great information. I have one last question (for now!).

    Since pharmaceutical patents are expiring left and right, do you have any info on ETF’s that include those who are about to benefit the most, so: pharmacies, generics, medical/pharmaceutical wholesalers…

  2. Amit on April 11, 2011 at 4:48 pm

    @Ruth: IHE, PJP, and XPH might be the best way to hedge against the patent expiration. Check out this article:- http://money.msn.com/business-news/article.aspx?feed=IVPL&date=20110224&id=13048616

  3. Clay on October 16, 2011 at 12:23 am

    If you don’t like the MER of XRE just buy the index. It’s only 13 stocks!

  4. Sean on September 8, 2012 at 3:19 am

    I’m relatively new to the million dollar journey site but I have thoroughly enjoyed reading through the discussion and recommendations of other investors. One thing I noticed is that the purpose of this article is for a low cost, diversified ETF portfolio and not to fault other investors out there but I see many of you who have portfolios that extend above 10 and even 15 ETF’s and comments have been made that this can be very costly to maintain on an annual basis due to all the brokerage fees and I completely agree.

    To give a little bit of background, I will start off by saying that I am by no means a professional when it comes to personal investment however I do try to take a simple, methodical approach. At the end of the day you have to factor in ALL costs and fees associated with trading to determine net portfolio gains and it’s easy to lose sight of that. KISS… remember that from grade 8 science? Keep it simple s*****. I’m 31 years old and just purchased my first home with my wife in the GTA. We managed to put 20% down to avoid high risk mortgage fees and as we currently stand today, we have over $150K equity in our home and just over $100K in our RSP.

    The breakdown and strategy is about as simple as it gets. Hold 4 ETF stocks and 3 TD eFunds at an annually expense of only $40. Is there a better way? Perhaps, but I also don’t have time to follow the daily movement, nor the need to deal with the added stress that market volatility can bring. Therefore my portfolio breakdown is as follows:

    40% – VCE – Vanguard Canadian Index (Canada)
    30% – VTI – Vanguard Total US Market Index (US)
    15% – VEU – Stable World Markets (in theory) (World)
    15% – VWO – Emerging Markets (World)

    Throughout the duration of the year I contribute my money to TD eFunds that carry no fees on a weekly basis. The purchase can be automated for each week to reap the benefit of dollar cost averaging.

    40% – TDB900 – Canada
    30% – TDB902 – US
    30% – TDB911 – World

    Every quarter or 6 months I make sure my ratios are still matched (40% Can, 30% US and 30% World) and then at the end of the year I make one set of trades to convert all the eFunds into their equivalent Vanguard funds. Tracking the ratios is as simple as downloading your portfolio from TD into CSV format and creating a quick pie chart for easy visibility. The simple reason that I chose Vanguard over iShares is that their funds all have lower MER’s than iShare equivalents.

    I’ve also noticed that many of you like to have bonds for fixed income. Since i’m not planning on using this money for another 20 years, we don’t mind all our money being in stocks. It’s slightly higher risk than bonds but when you’re dealing with ETF index funds, that’s about as low risk as it gets when trading stocks.

    As I mentioned, there are definitely other approaches but I find this is simple and works for me.

    -Sean

  5. Elbyron on November 24, 2014 at 2:28 pm

    I’m surprised there’s been no mention of the fact that several discount brokerages offer free ETF purchases. Some only offer a specific subset of ETFs but Questrade and Virtual Brokers have all of them available to buy for free. Going back to sid’s comment earlier, this means you can invest monthly and not have to pay $9.99 per purchase. While you do still have to pay brokerage fees to sell the ETF shares, you probably won’t be doing that regularly, as you can usually manage the re-balancing by simply adding more to the underperformers. Since MERs on ETFS are lower than TD e-series, it’s definitely going to save you more than $10 per fund/ETF even if you’ve only got a few thousand to invest. Really the only reason I still recommend e-Series to my friends is because it’s a lot simpler to setup than getting a brokerage account and figuring out which ETFs to buy (though articles like this are a great help).

    FT, I believe you actually wrote about the free ETF trading a while back… maybe you could edit this article to include a link to it? https://milliondollarjourney.com/top-canadian-discount-brokerages-with-commission-free-etfs.htm

    • FrugalTrader on November 24, 2014 at 2:43 pm

      Thanks for the feedback Elbyron, I will update the article.

  6. Gail Bebee on November 26, 2014 at 12:03 am

    To my mind, this article misses a major ingredient in portfolio building.
    Asset allocation is one of the main factors in determining returns. it deserves more attention than MERs. What is your asset allocation?

  7. SST on November 27, 2014 at 9:56 am

    @Gail — Ibbotson’s research found that asset allocation ultimately accounts for 100% of the absolute level of portfolio returns. Make of that what you will.

  8. FrugalTrader on November 27, 2014 at 10:39 am

    @Gail, thanks for stopping by and good point about asset allocation. I’ve written about bond allocation in the past which ultimately depends on the risk tolerance of the individual (for new investors, higher bond allocation theoretically equals lower volatility of your portfolio). We have about 10% bond allocation in our total investable assets. What about yourself?

  9. SST on November 27, 2014 at 10:02 pm

    re: “…the risk tolerance of the individual (for new investors, higher bond allocation theoretically equals lower volatility of your portfolio).”

    Except that risk and volatility are not the same thing.

  10. RealTonyYoung on December 2, 2014 at 11:45 pm

    Hey all, I’m relatively new to all this, but, I’m 33 and just starting out. I’m investing heavily into the equity market and not afraid of the risk – I’m in for the long haul. I use 25% equal weighting into each of VDY, VUS, TDB905, TDB638. What are people’s thoughts? Is there a better way? Everything I’ve been reading and researching is telling me to index, and low-MER ETF’s seem to be the way to go

  11. Sampson on December 3, 2014 at 11:11 pm

    @ SST,

    Actually risk IS defined as portfolio variance (volatility) by the CFA institute.

    It is the true definition of risk in this context.

  12. FrugalTrader on December 4, 2014 at 9:48 am

    @RealTonyYoung, So you are using VDY as your Canadian exposoure, VUS for your US coverage, TDB905 (mer: 0.53%) for international, and TD638 (mer 2.88%) for your emerging markets. My opinion is that if you are already using ETFs, why not replace your mutual funds with equivalent ETFs?

  13. Al on December 4, 2014 at 10:44 am

    @Sampson

    I agree with SST despite the edicts coming out of the CFA Institute. Who cares about volatility if the business you are invested in is sound – wouldn’t you rather have a choppy and volatile 25% than a completely stready 5%?

    Why not go ask someone who actually runs a business, you’ll get a very different definition of risk. An, of course, stocks are fractions of businessess.

  14. SST on December 5, 2014 at 10:41 am

    Volatility is the consistency of expected returns.

    It is not risk but a measurement of the effects of fundamentals, the source of most risk. Volatility always comes after the fact, thus it is not risk; at the very most it is tail-end risk.

    In this context — bond allocation — bonds have low volatility because there are few fundamental events which can put the expected return at risk.

    Then again, as one CFA article states, “it is impossible to operationally define risk. At best, we can operationally define our perception of risk. There is no true risk.”

  15. Sampson on December 5, 2014 at 10:07 pm

    When constructing a portfolio, you do not believe in assessment of volatility as an important metric?

    For an individual investor building a ‘simple low cost diversified ETF portfolio’ and considering when monies from the portfolio will be harvested, volatility and sequence of returns risk are of predominant importance.

  16. SST on December 6, 2014 at 10:10 pm

    As yet another CFA states, volatility is “not a measure of investment risk but a measure of behavioural risk.”

    We all have our biases. :)

  17. Jozo on December 30, 2014 at 5:51 pm

    I am absolute beginner who is planning to invest some money into ETFs. I have small amount of money 5k. First I was thinking to go with TD e Series and than after doing some research I changed my mind due to low fees at Questrade and due to recognition that one day with more money available will be more beneficial for me to trade independently through some brokerage firm. I would honestly appreciate if somebody could specify some ETF portfolio which would be adequate for me to start.
    Thank you in advance.

  18. Peter Saumur on February 2, 2015 at 12:16 am

    @Jozo

    I’m assuming you are Canadian. You have choices but the biggest question is: are you saving for retirement (RRSP) or tax-free dividends (TFSA) ?

    With 5k, I would keep things simple and start your portfolio with a Tax-Free Savings Account and with Canadian ETFs.

    XIC a broad exposure ETF to Canadian market
    XBB as stable Canadian bond ETF

    And the twist:

    The new VXC ETF for exposure to all markets excluding Canada in one investment. Since it’s relatively young (a year?) it’s uncertain where it will go. Pays quarterly dividends are around $0.11 / share.

    BUT…

    I opted out since I had international investments in my RRSP and, instead, bought into EWU

    EWU is an ETF for the total UK market, which suffers none of the withholding tax issues you get with other nation ETFs in a TSFA. Currently rated 4 stars by Morningstar and has a Dividend Yield 7.59% and MER of 0.4%. It complements XIC nicely in that it diversifies into markets not covered in Canada (strong in Financials and Consumer Products).

    Your *aggressive* weighting (again I am assuming long-term and you are young) :D

    40% – XIC ($2000)
    40% – EWU ($2000)
    20% – XBB ($1000)

    This would be a very reasonable, simple to manage start to your investments.

  19. Curt on February 27, 2015 at 1:35 pm

    I may be the only Canadian using ETFs as a part of my investment portfolio who did not appreciate the technical difference between “Global” and “International” exposure in ETFs and Mutual Funds. So far it has been a relatively inexpensive lesson and a bit of a frustration when attempting to use an online analysis and rebalancing tool. The tool classifies “Global” as Other and “International” as “International”. An excellent example is Vanguard’s VXC. The consequence is that the Canadian rebalancing tools only address the conventional distribution Fixed, Canadian, US, and International. I think the distinction between Int’l and Global and the implications can be significant if not understood by those of us learning as we go.

  20. SST on March 4, 2015 at 12:55 am

    re: “Except that risk and volatility are not the same thing.” ~ SST

    “Actually risk IS defined as portfolio variance (volatility) by the CFA institute.” ~ Sampson

    “That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.” ~ Warren Buffett (2014 Letter to Shareholders)
    http://www.berkshirehathaway.com/letters/2014ltr.pdf

    When the CFA Institute hits multi-billionaire status (or starts generating 1.8 million percent 50-yr returns), I’ll start listening. ;)

  21. Evelyn on March 26, 2015 at 12:18 am

    I am considering to switch VXC and VSB into XAW and XQB to save MER for 0.03%. Please advise whether the new ETFs are good or not.

    • FrugalTrader on March 27, 2015 at 3:15 pm

      @Evelyn, if you’ve already started a portfolio with vanguard products, then I probably wouldn’t switch unless your portfolio is very large. However, for someone just starting out, I like XAW and XQB. However, i’m thinking that it’s only a matter of time before Vanguard drops their prices to match.

  22. John on April 4, 2015 at 7:29 pm

    I have been putting off rebalancing my non registered account because of possible tax implications.

    Today I called to and the agent thought that there was no issue with rebalancing from 1 index found to another, and that there should not be any taxes due…

    Can anyone confirm?

  23. across on April 27, 2015 at 3:04 pm

    Why are you not concerned with liquidity and ease of trade? For example, XUU is so thinly traded. The spread is so wide compared to more popular XSP. So you lose a lot of value when buy in and sell. In the event of crash, you can’t even get out fast enough.

  24. Ryan on May 14, 2015 at 11:55 pm

    This is my first post but have been reading million dollar journey very intensely for about 4 or 5 months now and have found this way of investing to be extremely exciting. It has really encouraged me to ramp up my savings. Putting a spare $1000 into a mutual fund was never all that exciting but transferring it into my brokerage account and putting in an order for some etf’s is just plain fun.

    My question is this: (but first a little background) I am using Questrade and using sleepy 5 etf portfolio very similar to those discussed above. I make regular contributions every month as well as some lump sum deposits throughout the year. Monthly contributions are currently $200/month (and could be significantly more if I gain the confidence to pull my contributions from my advisor and the mutual funds I purchase through him – as I said I’m less than 6 months into index investing). Being self employed in a seasonal industry, my income is also variable throughout the year so I make additional lump sum deposits of a few thousands dollars here and there as things allow. Okay, finally the question: how should I make my etf purchases (as part of the sleepy portfolio) throughout the year? I was thinking I would determine my desired asset allocation and then as cash is transferred into my account I would make the appropriate etf purchases to balance the desired asset allocation. In many cases the monthly contributions may not actually balance it (especially as it grows to a larger balance), but it would at least steer it in the right direction. This should remove the need to really re-balance it very often since it should be continually balanced, correct? Correct me if I’m wrong, but shouldn’t this also result in some dollar cost averaging too, since my regular purchases should be the “cheapest” of the etfs in the portfolio, relatively speaking?

    As I said, I’m very new to this and 6 months ago had never even heard of an etf or index investing whatsoever, so I would love any input or suggestions. Thanks in advance.

    • Le Barbu on May 15, 2015 at 9:19 am

      @Ryan, since you are self employed, I suggest to keep all your RRSP contributions in cash/equivalent until the limit date for yearly contribution. This mean you’re short only few weeks/year (depending of your tax filling/return). Forget the dollar averaging and buy/sell to rebalance, it’s trivial on the long run. Just buy the lagging asset to meet your goal.

      • Grant on September 20, 2015 at 9:49 am

        Le Barbu, I disagree. You should put the money on the market into the worst performing etf(s), (buy low), when you have it, not hold in cash. As the market goes up the majority of the time you incur opportunity cost if you hold in cash.



    • FrugalTrader on May 15, 2015 at 2:50 pm

      Ryan, congrats on taking control of your finances. You could do as you say and simply use the new cash contributions to rebalance. Or you could build your cash balance and deploy semi-annually or annually. Another option is to actually sell a portion of your position to formally rebalance, but I would avoid that as it incurs commissions.

  25. P on June 26, 2015 at 2:48 am

    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?

    • FrugalTrader on June 26, 2015 at 8:53 am

      Hi P, upon further inspection, you are right. The vanguard products “management fee” is what I quoted, but the overall MER is what you quoted. I did not notice this before, perhaps it could be new?

  26. Sam B on July 8, 2015 at 10:46 am

    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.

  27. Grant on September 20, 2015 at 9:43 am

    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.

  28. Mark Kantor on March 9, 2016 at 2:46 pm

    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.

  29. Cameron on March 9, 2016 at 10:22 pm

    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

  30. Bernie on September 19, 2016 at 5:17 pm

    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.

  31. Grant on September 19, 2016 at 6:39 pm

    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.

  32. GeoNomad on June 4, 2017 at 11:06 am

    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!

    • FT on June 4, 2017 at 6:41 pm

      I laughed out loud when I read your comment. Fixed the date. :)

  33. Mike B on March 31, 2018 at 10:58 pm

    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.

    • FT on April 3, 2018 at 9:03 am

      Good tip about South Korea Mike. XUU/XEF/XEC is the combo that I’m using for my wife’s LIRA.

  34. Mike on February 3, 2019 at 1:49 am

    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.

    • FT on February 4, 2019 at 9:35 am

      Good question Mike. I haven’t done a direct comparison of TD e-series Canadian index vs shares Canadian index ETF (or other indices). They should be close when you include the dividend providing that they are tracking the exact same index (some track TSX60, others the entire index). Providing that they are tracking the index and have low tracking error, the ETF should outperform by a bit due to the lower MER.

      • Mike on February 6, 2019 at 2:17 pm

        Thanks for the explanation, that makes sense. Mike



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