Another new year is upon us, and it’s time review my model Couch Potato portfolios. I’ve been at pains to discourage investors from tinkering with their portfolios every time a new fund comes along, but 2013 did see the launch of some significant ETFs. In a couple of other cases, it was just time to replace the incumbents with less expensive choices. You can visit the Model Portfolios page for full details, but here’s a summary of the changes:
Global Couch Potato
- I’ve added the ING Direct Streetwise Balanced Portfolio as a simple option for the Global Couch Potato. While using individual index mutual funds allows for lower costs (especially if you use the TD e-Series option) and more flexibility, the Streetwise Portfolios are ideal for investors who have small portfolios in registered accounts.
- The ETF version of this portfolio (now Option 4) has been overhauled completely. I’ve replaced the Canadian equity and bond funds with cheaper alternatives from Vanguard. And in place of the iShares MSCI World (XWD), I’ve suggested the Vanguard US Total Market (VUN) and the iShares MSCI EAFE IMI (XEF). These changes lowered the portfolio’s overall MER by about a third.
Complete Couch Potato
- As with the Global Couch Potato, I’ve substituted the Vanguard FTSE Canada All Cap (VCN) and the Vanguard Canadian Aggregate Bond (VAB) to reduce costs of the portfolio by few basis points.
- I’ve added a note suggesting that investors who do not want to trade in US dollars should consider VUN, XEF and the iShares MSCI Emerging Markets IMI (XEC) instead. All three of these funds were launched in 2013, finally providing low-cost options for foreign equities without currency hedging. Outside an RRSP (where these Canadian-listed ETFs are less tax-efficient) the case for using US-listed ETFs is not as strong as it once was.
- I’ve replaced the iShares Canadian Fundamental (CRQ) with the PowerShares FTSE RAFI Canadian Fundamental (PXC). The two ETFs track identical indexes, but the PowerShares version has a much lower MER (0.51% compared with 0.72% for CRQ), which was reflected in its lower tracking error in 2013. It now has almost two years under its belt as well as $100 million in assets, so it’s hard to make a case for CRQ anymore.
- The Vanguard Canadian Short-Term Corporate Bond (VSC) replaces the BMO Short Corporate Bond (ZCS) thanks to a much lower MER (0.18% compared with 0.34%).
Don’t rush to make changes
I can’t stress enough that there is no need to implement any immediate changes if you happen to follow one of my model portfolios. It makes little sense to incur two trading fees to switch to a fund that has a slightly lower MER, especially in a small portfolio. Consider, for example, the cost of switching to VAB from the iShares DEX Universe Bond (XBB). The difference in MER is seven basis points, or just $7 annually on a $10,000 investment. Meanwhile, the switch may cost you $10 per trade, and perhaps a couple of cents per share on the bid-ask spread.
In a taxable account it is almost certainly a mistake to swap out an equity ETF now. Given the markets’ performance over the last couple of years, you’d likely incur a significant taxable capital gain. For example, XWD has risen in price almost 45% over the last two years. Taking a huge tax hit to save 0.22% in MER is madness. If a tax-loss harvesting opportunity arises in the future, that’s the time to make any switches in a non-registered account.
That said, many people will be making RRSP and TFSA contributions this time of year. And since 2013 was a huge year for stocks and a lousy one for bonds, chances are it’s time to rebalance your portfolio. If you’re planning to make a few trades in your account anyway, that’s a good time to make any product switches you’ve been considering.