Under the Hood: Claymore CorePortfolios

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: The Claymore Balanced Growth CorePortfolio ETF (CBN) and Claymore Balanced Income CorePortfolio ETF (CBD), a pair of ETF wraps made up of equity, fixed-income and commodity ETFs and designed to serve as complete portfolios.

The indexes: Both ETFs track versions of the Sabrient Global Balanced Index, a custom benchmark created for Claymore. The index “comprises a mixture of approximately 10-20 (or more) existing ETFs selected, based on investment and other criteria, from a defined set of exchange-traded funds trading on the Toronto Stock Exchange.”

There are Growth and Income versions of the index, each specifying a range for each asset class. For example, in the Growth index, Canadian, US and international equity must all make up 15% to 20% of the portfolio. The Income index must include 20% to 25% government bonds and 17.5% to 22.5% Canadian dividend stocks.

According to the funds’ literature, “weightings are adjusted and rebalanced quarterly to the optimal asset class mix depending on economic conditions and relative value of income and equity securities.” Translation: the fund uses tactical asset allocation, albeit based on quantitative rules and not a manager’s own forecasts.

The cost: The MERs of the CorePortfolios are 0.68% for CBD and 0.82% for CBN. This includes the cost of the underlying ETFs as well as an additional management fee of 0.25%.

The CorePortfolios are also available through advisors—indeed, more than 40% of their assets are in “advisor class” shares, which add an extra 1% trailer fee. This advisor fee will wipe out any cost advantage the ETFs would have had over balanced mutual funds.

The details: Like a balanced mutual fund, these Claymore ETFs are suitable for investors who want a globally diversified portfolio without having to select a number of individual funds.

Claymore’s Balanced Growth CorePortfolio is currently made up of 14 other Claymore ETFs, plus two iShares ETFs that cover REITs and real-return bonds. It’s most significant holdings are international, US and Canadian equity ETFs, each of which makes up about 17% of the portfolio. CBN also includes an allocation to emerging markets (9%), real estate (8%), government and corporate bonds (13%), and a trivial smattering of infrastructure, water and agriculture. The one significant commodity allocation is 8% to gold, via the Claymore Gold Bullion ETF (CGL). Overall, it is an aggressive fund with about 75% in equities.

The 11 ETFs that make up the Balanced Income CorePortfolio have a more Canadian and more conservative focus. The fund holds 20% in short government bonds, another 10% in real-return bonds and more than 12% in corporate bonds. Almost 50% of the fund is in dividend-paying stocks, more than half which are Canadian.

You can criticize the narrow sectors in the Growth fund (why does anyone need 2.5% in a global water ETF?) and question why there’s gold in the Income fund (last time I checked, bullion pays no income), but these are quibbles. Overall the asset allocations are sensible: well diversified, but not overly complex. The indexes prescribe narrow ranges for each asset class, so the asset allocation should not change much from quarter to quarter.

Claymore launched the CorePortfolio ETFs in June 2007, which was terrible timing. That turned out to be the 10-year peak for the US and international stocks, and while the TSX eventually climbed a bit higher before the crash, global stock  markets are still way below where they were in mid-2007. So you can’t be too hard on CBN for posting a return of –9% since its inception. The more conservative CBD managed to eke out a tiny gain (less than 0.2%) over the same period.

The recent performance of both funds has been outstanding. In 2009, the Growth ETF returned 29.2%, while the Income ETF returned 25.6%. (By way of comparison, the Mawer Canadian Balanced Retirement Savings Fund, perhaps the best balanced mutual fund in Canada, returned 16.4% last year.) And that doesn’t include their distributions: currently CBN yields about 2.5%, while CBD throws off an income of more than 4%. Distributions are paid monthly and can be reinvested using Claymore’s DRIP plan.

The alternatives: The most direct competitors of the Claymore CorePortfolios are the similarly named iShares Conservative Core Portfolio Builder Fund (XCR) and iShares Growth Core Portfolio Builder Fund (XGR). I have reviewed these ETF wraps in a previous post — suffice it to say I don’t like anything about them, despite their low MERs (0.63%).

The bottom line: There is a lot to like in Claymore’s CorePortfolio ETFs, and I think either one would be an good choice for do-it-yourself investors who want an all-in-one solution at low cost compared with a balanced mutual fund. However, if you’re working with an advisor who is using the advisor-class shares, he or she is skimming 1% of your assets in return for buying one ETF. That’s not a good deal.

The CorePortfolios are especially appealing for small accounts: building a portfolio with ETFs is not usually cost-effective with less than $30,000 to $50,000. But these wraps allow you to get an instant portfolio with one initial purchase (maximum price $29), and you can set up preauthorized contributions and a dividend reinvestment plan and avoid all further brokerage fees. The ETFs rebalance themselves quarterly, which also saves brokerage commissions and makes life easier. All considered, you’ve got an extremely simple and inexpensive way to become a Couch Potato.

If you’re considering investing in either of these ETFs, first read the prospectus.

Disclosure: I do not own CBN or CBD in my own portfolio.

20 Responses to Under the Hood: Claymore CorePortfolios

  1. Maxwell July 27, 2010 at 4:02 pm #

    Great post! I have been intrigued by the CorePortfolios after they were recommended in Rob Carrick’s last book (which I bought after reading your review).

    This is by far my favorite Canadian investing blog.

  2. Financial Cents July 28, 2010 at 7:19 pm #

    Nice post Dan. Sounds appealing for the starter ETF investor. Are you considering any of these wrap ETFs?

  3. Canadian Couch Potato July 28, 2010 at 8:42 pm #

    @Maxwell: Thanks, and glad you’re finding the blog helpful!

    @Financial Cents: Personally, I’m not considering them, but that’s simply because I already have a multi-ETF portfolio and no need to unwind it.

  4. Bruce July 29, 2010 at 8:09 pm #

    I have been considering these ETF’s for a LIRA I have of approx. 100k. But every time I look at the trading volumes I get cold feet. In 3 years there has not been a lot a growth in liquidity. Do you think this will change anytime soon?

  5. Canadian Couch Potato July 30, 2010 at 12:29 am #

    @Bruce: This is an excellent point: I hadn’t noticed that the bid-ask spreads on these ETFs are unusually high. If you’re thinking of using them as a long-term investment for a lump sum and don’t plan on adding new money to them, it shouldn’t be a major concern. You could place a limit order at the NAV price when you buy and again when you sell to protect yourself.

  6. Flagen August 8, 2010 at 12:28 am #

    Isn’t rebalancing every quarter a bit much? Could this be a problem in certain markets?

  7. Canadian Couch Potato August 8, 2010 at 10:14 pm #

    @Flagen: Rebalancing every quarter is pretty typical for an index. It’s true that rebalancing can raise returns in a choppy market but lower them in a steadily rising market. However, the whole idea of Couch Potato investing is that the strategy needs to be mechanical and not based on a manager’s forecasts. The only decision that should come into play when rebalancing is cost: trading costs and taxes may be too high to make it worthwhile.

  8. Kris August 10, 2010 at 5:01 pm #

    Thanks for a great website. I’m making the leap from my (expensive and not that great) advisor to dyi couch potato. I have an excellent pension so feel I can be quite aggressive in my investing even though I plan to retire in about 10 years.

    Right now, I have about 120 k in my rsp – I would like to sell my mutual funds, buy the Claymore Balanced Growth Core portfolio so that I can add to my holdings monthly and reinvest any dividends without cost, add another 10% or so to a bond fund, as well as 5-8% in cash holdings – while I know you can’t give individual advice, I’d love to hear from you/your readers. Does this approach make any sense? Or would I be better off pursuing my other idea – which is the Sleepy Portfolio recommended by the Can. Cptlist?

    Thanks again for a great site –

    Kris

  9. Canadian Couch Potato August 10, 2010 at 5:57 pm #

    @Kris: Many thanks for the kind words. In general, if you want to make regular contributions to your portfolio then, yes, something like the Claymore CorePortfolio will allow you to do this at lower cost. Do make sure you visit Claymore’s site to make sure your discount broker supports its PACC program:
    http://www.claymoreinvestments.ca/en/investment-options/exchange-traded-funds/etf-drip/investment-services

    The Sleepy Portfolio has a much lower MER, but it would clearly be more costly and unwieldy if you’re adding money every month.

    Hope that helps.

  10. Kris August 17, 2010 at 11:00 pm #

    Thanks for the very helpful information.

    If I do create a “Sleepy” portfolio with my RSP, will the cost of the rebalancing trades once/year (say 8 trades @$29 each) effectively wipe out any advantage to the lower ETF fees? My pension is excellent, so I have limited room each year to make RSP contributions (about $3500).

    I remember reading elsewhere on your blog that to be cost-efficient, your trading costs should stay below 1%?

    Many thanks for the help you’re providing us newbie do-it-yourself investors!

  11. Canadian Couch Potato August 17, 2010 at 11:12 pm #

    @Kris: Glad you’re enjoying the blog. With eight ETFs at $29 per trade, yes, you’re probably spending too much to rebalance every year. Your portfolio would have to be about $250K to make this efficient, based on the 1% rule of thumb.

    Don’t feel you have to rebalance automatically every year. Being off your target allocations by 2% or 3% is meaningless. If you’re adding a few thousand dollars a year, you may just want to top up the two or three ETFs that have underperformed in the last year.

  12. Michael Davie October 25, 2010 at 4:59 pm #

    When I switched our investments to a couch potato strategy earlier this year, I (naively) allocated a 75% equity portion to our RRSPs (in CRQ, CLU and CIE) and a 25% bond portion to our TFSAs (in XBB). This worked well at the time, but as the time for new lump sum contributions draws closer, the idea of adding to each fund while maintaining our allocation and minding contribution limits is making my head spin.

    Instead, I am considering simply adding a lump sum contribution of CBN to each account. I believe that this will minimize our transaction costs, roughly maintain our allocation, and certainly simplify things going forward. Does this sound like a reasonable approach? Will the higher MER eat up any savings in transaction costs? Thanks for your help.

  13. Jaz April 6, 2012 at 10:19 am #

    Another alternative would be Dimensional fund advisors “global funds”.
    For example, DFA Global Balanced Class-A has a 1.3 MER which include 1% fee to the advisor. It has 60/40 equities/bonds allocation. They also have a 100% equities global portfolio “DFA Global Equity Fund”

    http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/summary/?id=86388
    http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/summary/?id=86386
    http://www.dfaca.com//downloads/ca/pdf/prospectus/prospectus_en.pdf

  14. Canadian Couch Potato April 6, 2012 at 10:21 am #

    @Jaz: This is true, but unfortunately DFA funds are available only through advisors and off-limits to DIY investors.

  15. Jaz April 6, 2012 at 10:28 am #

    Concerning my last comment, as you said in your text, if you pay a 1% fee to your advisor to invest only in one balanced mutual fund that may not be the best deal you can get…But still, a MER of 1.3 for a balanced index fund is just a little more expensive than ING Streetwise funds for example Mer 1.07) but you get an advisor for almost the same price… also some may consider DFA funds as more “advanced” index funds (with small cap/value tilt). Unfortunately, it is true that most DFA advisors only accept clients with at least 100-250k of initial investment.. I hope one day we will have access in Canada to l0w-fee DFA advisors with sites similar to assetbuilder.com in US.

  16. Canadian Couch Potato April 6, 2012 at 11:03 am #

    @Jaz: I couldn’t agree more. :)

  17. Brian June 18, 2013 at 6:09 am #

    Hi Dan,

    A question for you as I am still learning the investment game. What does low liquidity indicate as to risk of these efts? CBD currently has only 69 million in assets and trades lightly. Does this speak poorly as to the long term viability of the fund? (I wod consider this for a LIRA)

    Thank you

  18. Canadian Couch Potato June 18, 2013 at 9:11 am #

    @Brian: $69 million is actually not that small for a Canadian ETF. And with ETFs low trading volume does not necessarily mean low liquidity:
    http://canadiancouchpotato.com/2012/09/10/etf-liquidity-and-trading-volume/

  19. Brian July 24, 2014 at 5:56 pm #

    Hi Dan,

    Have you heard anything new on whether a company like Vanguard will finally introduce a low-MER index mutual fund like those sold in the States? Any idea why none have emerged yet in Canada?

    Thanks

  20. Canadian Couch Potato July 24, 2014 at 10:32 pm #

    @Brian: I had been hoping for the same thing, but Vanguard has told me they have no plans to launch index mutual funds in Canada. The fact is, direct-sold mutual funds (i.e. not sold by an advisor) are just not that popular in Canada and ETFs are where all the growth is.

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