Introducing the Cheapskate’s Portfolio

We all know that Canadians pay much higher investing costs than our neighbours to the south, and the gap is widening. Just last week, TD Ameritrade became the fourth online brokerage in the US to offer its clients ETF trades for free. Meanwhile, the big-bank brokerages here at home continue to charge $29 per trade, lowering that to $9.95 only for accounts over $100,000.

But even if we can’t trade ETFs for free, Canadians can certainly build a well diversified portfolio at extremely low cost. In my most recent article for Canadian MoneySaver, published earlier this month, I set out to learn just how much of skinflint I could be.

My starting point was The World’s Cheapest ETF Model Portfolio, created by Matt Hougan of Index Universe. Hougan tracked down the US-listed ETFs with the lowest management fees in six asset classes and assembled a portfolio with a total cost of 0.125%. That’s $12.50 for every $10,000 invested.

Canadians can’t invest that cheaply if we want to include domestic stocks and bonds in our portfolios, but we can get surprisingly close. Here’s what I came up with — I’ve dubbed it the Cheapskate’s Portfolio:

Asset class % Exchange-traded fund MER
Canadian equity 20% iShares S&P/TSX 60 (XIU) 0.18%
US equity 15% Vanguard Total Stock Market (VTI) 0.07%
International equity 15% Vanguard Europe Pacific (VEA) 0.15%
Emerging markets 5% Vanguard Emerging Markets (VWO) 0.27%
Gold 5% iShares Gold Trust (IAU) 0.25%
Corporate bonds 20% Claymore 1-5 Yr Laddered Corp Bond (CBO) 0.27%
Government bonds 20% Claymore 1-5 Yr Laddered Gov’t Bond (CLF) 0.17%
100% 0.183%

I explain my methodology fully in the Canadian MoneySaver article, but here are a couple of other points worth mentioning:

  • Matt Hougan’s super-cheap portfolio includes an allocation to real estate through the Vanguard REIT ETF (VNQ), which carries a fee of just 0.13%. Nothing in Canada comes anywhere close to that: the REIT funds from  iShares (XRE) and BMO (ZRE) both have MERs of 0.60%, and Claymore’s (CGR) is even pricier at 0.70%. To keep the Cheapskate’s Portfolio true to its name, I had no choice but to exclude real estate.
  • Because its trading volume is so much lower, I did not use the BMO Dow Jones Canada Titans 60 (ZCN) for the Canadian equity portion, even though it is a couple of basis points cheaper than XIU. Within days of filing the piece, Horizons announced the S&P/TSX 60 Index ETF (HXT), which sports an MER of just 0.08%. Using HXT would bring the cost of the Cheapskate’s Portfolio down to 0.163%.

My own ETF portfolio isn’t quite this cheap. I use the slightly more expensive (but more diversified) XIC rather than XIU, I hold XRE for real estate exposure, and I don’t have any gold. Yet the weighted MER of my retirement portfolio is still just 0.26%, or about one-tenth what many mutual fund investors pay.

If you’ve got a Cheapskate’s Portfolio of your own, post a comment below with the details and the bottom-line cost. How low can you go?

Asset class Allocation Exchange-traded fund MER
Canadian equity 20% iShares S&P/TSX 60 (XIU) 0.18%
US equity 15% Vanguard Total Stock Market (VTI) 0.07%
International equity 15% Vanguard Europe Pacific (VEA) 0.14%
Emerging markets 5% Vanguard Emerging Markets (VWO) 0.27%
Gold 5% iShares Gold Trust (IAU) 0.25%
Corporate bonds 20% Claymore 1-5 Yr Laddered Corp Bond (CBO) 0.27%
Government bonds 20% Claymore 1-5 Yr Laddered Gov’t Bond (CLF) 0.17%
100% 0.182%

29 Responses to Introducing the Cheapskate’s Portfolio

  1. Money Smarts Blog October 15, 2010 at 10:26 am #

    I definitely have a cheapskates portfolio. I don’t know what the weighted MER is, but I’m sure it’s very similar to your 0.26%.

    FYI – MER for ZRE and XRE is 0.55%, not 0.60%

  2. Canadian Couch Potato October 15, 2010 at 10:36 am #

    @MoneySmarts: The management fee for XRE and ZRE is 0.55%, but the full MER, which includes taxes and some other small expenses, is 0.60%. I discuss this issue in the MoneySaver article: it’s one of the most irritating practices the in ETF industry.

    See also this post:

    At the time I wrote the past, only Claymore was using this deceptive practice. Now they all do it.

  3. Glenn October 15, 2010 at 11:46 am #

    Why focus on MER? Isn’t the whole picture the better way to build a portfolio? I am more interested in total return on investment measured against risk. I don’t care is MER is 10% if the risk/reward on the investment meets criteria.

  4. Canadian Couch Potato October 15, 2010 at 12:07 pm #

    @Glenn: When you select a fund, how do you measure risk versus expected return? I realize there are metrics like the Sharpe ratio, but these are only backward-looking. I would love to know how any fund that charges 10% (or even 3%) could meet anyone’s criteria for a good investment.

    MER is not the only factor to consider when choosing an investment fund, but it is one of the most important. All of the research suggests that the best predictor of higher future returns over the long term is low cost. Even Morningstar makes this argument, and much of their business is based on ranking funds according to other criteria:

  5. W. Bernstein October 15, 2010 at 12:48 pm #

    Any time you’re including NYSE-traded ETFs in a Canadian portfolio, you also need to consider the hefty fees that your broker will charge you for converting your C$ funds into US$ in order to buy the securities.

    Assuming a total portfolio of $100,000 and a currency conversion fee of 1.5%, you’re paying an additional 100,000 x 35% x 1.5% = $525 just to purchase the VTI, VEA and VWO in the above portfolio, representing 0.525% of the total portfolio value.

    If I did the math correctly, this is 3x the annual cost of the portfolio’s MER.

    This doesn’t even consider the eventual cost of translating these $US securities back into C$.

  6. Canadian Couch Potato October 15, 2010 at 1:00 pm #

    @W: Thanks for your comment. These are valid points, but there are other factors to consider. First, some discount brokerages now allow you to hold USD even in an RRSP, which eliminates these conversion fees. Even if you do pay a forex fee, the lower MER and the tax advantages of the US-listed ETFs more than make up for that added cost very quickly.

    For example, if you replace VTI, VEA and VWO with their Canadian iShares equivalents in an RRSP, you will pay annual fees that are more than three times higher every year, as well as withholding taxes on the dividends, which adds another 30 basis points or so to the annual cost. For the long-term investor, the US funds are much cheaper.

    See this post for more info:

  7. Corey October 15, 2010 at 4:52 pm #

    So why not use VNQ for the real estate (RE) component? After all, you are using other NYSE-traded ETFs in the portfolio, aren’t you? Is it because VNQ focuses solely on US real estate? I know RE has taken a beating in the US recently, but is it better to leave it out altogether, despite it being an American-traded ETF? A contrartian might look at an approaching bottom in the American RE market and eye an opportunity…

    I am just wondering if the high MERs of Canadian REIT ETFs are reason enough to ignore RE in your portfolio altogether.

  8. Canadian Couch Potato October 15, 2010 at 5:53 pm #

    @Corey: I agree that adding an allocation to REITs is worth the relatively high MER. In a very large portfolio I suppose you could hold both Canadian and US REITs, but for most Canadian investors, I think just XRE or ZRE makes more sense. My reasoning has nothing to do with short-term performance our the outlook for the US real estate market. Canadian REITs are subject to different tax rules, which encourages them to pay out higher distributions. There’s also the currency risk, which seems unnecessary in this asset class.

  9. Johny_come_lately October 16, 2010 at 6:49 am #

    Hi CCP,
    Could you do an article on the May Flash Crash and its relevance to the EFT market, please. I need a laymans understanding of the event. Could it happen again?


  10. qasimodo October 16, 2010 at 7:39 am #


    While I focus on ETFs, I also sprinkle in some e-Series index funds from TD. The absence of trading fees ($9.99) and the flexibility that provides make up for the marginally higher MER

    Enjoy your blog

  11. Farhan Thawar October 16, 2010 at 8:56 am #

    Do you add all of these portfolio’s you come across to the models page? You should!

  12. Canadian Couch Potato October 16, 2010 at 9:32 am #

    @Farhan: I am thinking about updating the model portfolios page — stay tuned!

  13. W. Bernstein October 16, 2010 at 12:36 pm #

    Dan, it’s true that some discount brokerages now allow their customers to hold USD in an RRSP. But that doesn’t really help most of us avoid the relatively ENORMOUS cost of currency exchange when investing in US-listed ETFs.

    The fact is that most Canadians only have $CDN to invest, and most Canadians will be retiring in Canada with $CDN. So to not consider the relatively humungous cost of 1.5% in currency exchange in EACH direction ($CDN–>$US and $US–>$CDN) in a cost analysis like this is misleading.

    For example, even when you amortize the 3% round-trip currency exchange loss over a long long period like 25 years, the currency exchange fees make the total cost of owning VTI (Vanguard Total US Market, MER=0.07%) *MORE* than the total cost of owning XIU (iShares TSX 60, MER=0.18%).

    Unless you know some way that individual investors can convert $CDN to $US and back without paying 1.5% in each direction? (I don’t.)

  14. Money Smarts Blog October 16, 2010 at 6:44 pm #

    @Bernstein – I use Questrade and they charge 0.5% each way on currency exchange – not 1.5%.

    I agree that time invested should be considered for short investment horizons. A short term investor might be better off with a Canadian based ETF.

    I’m a long term investor, so it’s a no brainer that the US ETFs are cheaper.

    Also – what’s with comparing VTI and XIU? They aren’t the same thing. 🙂

  15. Canadian Couch Potato October 16, 2010 at 6:56 pm #

    @Bernstein and Money Smarts: I am currently working on a spreadsheet that determines the break-even point of US-listed ETFs versus Canadian listed ETFs with lower fees but the added cost of currency exchange. Watch for the results next week!

  16. Money Smarts Blog October 16, 2010 at 9:19 pm #

    Dan, don’t forget that the Canadian-listed ETFs also have to pay currency exchange fees as well, which won’t be included in the MER. I’m sure iShares and Claymore get a much better deal than us, but there is still a cost.

  17. W. Bernstein October 16, 2010 at 9:38 pm #

    Money Smarts, I just browsed over to Questrade, and — holy smokes you’re right: Questrade says that they charge only 0.5% each way for USD/CDN currency conversion !

    Seems I’ve been getting completely hosed by Scotia iTRADE ; time to move my RRSP to Questrade.

  18. dave October 17, 2010 at 12:07 pm #

    Once the U.S. buys more treasuries and puts more $ into the economy, should this keep the party going ie increased stock prices and increased hi yield corporate bond funds?

  19. Simon October 19, 2010 at 3:33 pm #

    @W. Bernstein, you’re still getting hosed (albeit less) with Questrade. Interactive Brokers will allow you to convert from USD/CAD and vice versa for 0.01%, a fraction of even Vanguard’s MERs.

    Even under their non-professional rates, they only charge 0.01% on the conversion, with a minimum charge of $2.50. You can then transfer this USD into Questrade directly, avoiding the FX fees.

  20. rmch October 20, 2010 at 9:38 pm #

    Any particular reason to go with two Claymore bond funds vs one iShares XBB?

  21. Canadian Couch Potato October 20, 2010 at 9:46 pm #

    @rmch: Only one reason: the Claymore funds are cheaper, and that was the point of the exercise.

  22. rmch October 20, 2010 at 10:15 pm #

    @Money Smarts and Bernstein

    What am I missing here?

    -Open $US account at my bank (free + $2/mo charge)
    -Transfer $CAD to my $US bank account (free + current exchange rate = pick a good day)
    -Transfer $US from my bank to my $US Questrade account (margin, TFSA or RRSP, etc) via Pre-authorized deposit. No fee.
    -Trade US ETFs at Questrade in $US (no conversion fees)
    -Sell US ETFs at some point and transfer back to my $US bank account.

    Any thoughts?

  23. NorthernRaven October 22, 2010 at 10:43 am #

    @rmch: Isn’t the problem in your second step? I would assume that when you transfer from your $CAD account to you $US account, the bank is going to charge its hefty forex commission at that point. If they were giving you the market rate, people wouldn’t have to do all these gambits and break-even calculations.

    I don’t know about the other bank brokerages, but TD Waterhouse seems to have a sliding rate on converting CAD/US between their accounts. It may be a bit under 1.5% for smaller amounts, but somewhere around $30,000 it has kicked down to 0.8%, and at around $65,000 it seems to shrink to 0.67% or so. Apparently for US$60,000 or more, you can call and get slightly better rates directly. For those doing a large lump conversion to $US ETFs instead of monthly additions, this may get low enough to be worth avoiding the more exotic ways of sourcing $US.

  24. wendi1 October 22, 2010 at 11:26 am #

    The large Canadian REITs are small in number – you could just add one or two of them to your portfolio. Some of them are already geographically diverse, and if you own the top two representatives (RioCan and H&R block), you already own a third of the index. Add a couple more, and you are at 50% of the index.

    I think the MER on REIT ETF is crazy high, considering the small number of players. Mind you, I still own the iShares REIT ETF, myself….

    For small sectors, an ETF is not necessary – own the stocks themselves. This probably applies to the Gold ETF, too.

  25. wendi1 October 22, 2010 at 11:30 am #

    Ooops – just looked at the gold ETF – it is actually gold, not gold mining stocks.

    Belay that….


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