Model Portfolio Update for 2017

After two years with no changes to my Couch Potato model portfolios, the 2017 edition comes with an update to the ETF version.

Before I get to the details, I feel compelled to stress that if you’re currently using the older ETF portfolio, there is absolutely no reason to change. The funds I’ve swapped here are a wee bit cheaper, but the cost of selling your existing ETFs and buying the new ones almost certainly outweighs the benefits. And if the transactions would involve realizing taxable gains, then making a switch is downright nutty. To put this in perspective, the new portfolios will reduce your management fees by 0.03% annually, which works out to 25 cents a month on every $10,000 invested.

I’ve also updated my  model portfolios page with historical returns to the end of 2016. As always, we’ve used actual fund performance wherever possible: for earlier periods we’ve used index data, subtracting the fund’s current MER to account for costs.

With that out of the way, here are the changes.

Zigging over to ZAG

First, I’ve replaced the Vanguard Canadian Aggregate Bond Index ETF (VAB) with the BMO Aggregate Bond Index ETF (ZAG). BMO’s aggressive cost-cutting has made ZAG the cheapest bond ETF in the country, with a management fee of just 0.09%. (Don’t be fooled by the old MER of 0.23% that still appears on the BMO website: the fee reduction took place in June 2016 and the fund needs 12 full months before it can report its updated MER.)

Another benefit of using ZAG is that it has a companion fund, the BMO Discount Bond Index ETF (ZDB), designed for taxable accounts. So if your portfolio includes bonds in both registered and non-registered accounts, you can use ZAG and ZDB to get similar exposure in both accounts with maximum tax-efficiency.

One small point to be aware of: VAB and ZAG have slightly different risk exposures. The Vanguard ETF is roughly 80% government bonds and 20% corporates, while ZAG is closer to 70% government and 30% corporates, which explains its slightly higher yield to maturity.

Worlds apart

The second change replaces the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) with the iShares Core MSCI All Country World ex Canada Index ETF (XAW). These funds cover the global equity markets outside Canada: they’re both about 55% United States, 35% international developed markets (Europe and the Asia-Pacific region), and 10% emerging markets.

XAW was launched just weeks after I launched my simplified ETF portfolios in 2015, and two years later it has emerged as a slightly better choice than its Vanguard counterpart. The lower fee is the most obvious advantage: with an MER of 0.22%, the iShares fund it’s five basis points cheaper. Less obvious is XAW’s tax advantage.

Although both of these funds hold several underlying US-listed ETFs, the iShares version uses a Canadian-listed ETF for international developed markets. This difference in structure means the Vanguard ETF will be subject to a greater amount of foreign withholding taxes. According to Justin Bender’s detailed analysis, this amounts to a drag of about 0.10% in an RRSP or TFSA (the difference would be smaller in a taxable account). Add that to VXC’s higher fee and the cost difference becomes significant in registered accounts.

Which option is right for you?

I haven’t made any changes to the other two model portfolio options, though I have stopped including performance data for the Tangerine Equity Growth Portfolio. This fund, which is 100% stocks, recently changed its target asset mix: it was previously 50% Canadian, 25% US, and 25% international. As of last November, it now holds equal amounts of all three asset classes. I think this makes it a more diversified fund, but the change makes its historical performance meaningless for anyone considering the fund today.

One of the age-old questions I get from readers is, “How do I know which option is right for me?” Many new investors look only at the differences in MER and immediately gravitate to the ETF version, even though one of the index mutual fund options would be more appropriate.

To help answer this question, I recently wrote a feature in MoneySense magazine that walks you through the decision-making process. It even includes a selector tool that asks you to describe your preferences and then suggests one of the three options. Both the article and the quiz are now linked on the model portfolios page.


165 Responses to Model Portfolio Update for 2017

  1. Canadian Couch Potato February 13, 2017 at 10:05 pm #

    @Nadine: Always great to hear from you. 🙂 I’m not sure what is going on here, because the return of XAW (or VCN) should be in the same ballpark as a proportional mix of VTI and VXUS. There are some differences, but they shouldn’t be large. I am wondering whether the currency conversion is throwing you off. Maybe this will add some context:

  2. Canadian Couch Potato February 13, 2017 at 10:08 pm #

    @Bev: Yes, I age (or more precisely, time horizon) affects the choice of bonds:

  3. Canadian Couch Potato February 13, 2017 at 10:10 pm #

    @Kelly: I think that strategy makes no sense for a Canadian investor (and is also a less than ideal strategy for an American investor). Remember that Buffett’s estate will be worth tens of billions and he has no real need to diversify.

  4. Landon February 14, 2017 at 1:15 am #

    Hi Dan,

    I’m currently using your ‘aggressive’ strategy allocation from the 2017 model portfolios, using both registered and non-registered accounts. After listening to the podcast with Lars Kroijer, the one thing that stuck out to me is the bit on ‘home country bias’. In the CCP portfolio using 10% bonds, 60% XAW, and 30% VCN, you do mention that there is a little bit of Canadian market bias in the portfolio. Would it be slightly less bias to take Lars suggestion and add more allocation to XAW to get a more global exposure? For instance, I know it’s not a huge difference but I was considering 10% bonds, 70% XAW, and 20% VCN. Your thoughts would be much appreciated. Thank you.

  5. Canadian Couch Potato February 14, 2017 at 7:22 am #

    @Landon: Sure, as long as you don’t second-guess your decision the first time Canada outperforms the rest of the world:

  6. Cam February 14, 2017 at 6:55 pm #

    Hey Dan! I have a long-term investment horizon and want to follow your aggressive strategy in all equity. Might you have a suggestion on allocation between VCN and XAW? Thx!

  7. Tim February 14, 2017 at 8:42 pm #

    Thanks for the recommendation on ZAG, Dan. I never thought of BMO as possibly being an ETF provider able to complete with Vanguard or Blackrock in terms of expense ratios.

  8. Canadian Couch Potato February 15, 2017 at 8:23 am #

    @Cam: in line with the other portfolios, consider one-third Canada and two-thirds US/international.

  9. Blair T February 16, 2017 at 8:58 am #

    Hi Dan. I’ve been a following of CCP for several years and have fully subscribed to the investing my registered account in index funds. I’m a conservative 48 year old and my current asset mix is 15% in each of the TD e-series Can/US/Inter stock index funds and 55% BMO ZAG bond index (recently switch from TD e-series Can Bon TDB909). My question to you is….given the current finanacial environment, (strong indicators of upcoming increases in interest rates ) have you changed you recommendations at all with regard to bond investing? I understand that these are long term investments but I can help but wonder if I’ve got the right mix with the duration of ZAG being around 10 years and i recently seen much of the bond gains generated over the past few years reduced or eliminated in a very short time. Would it be prudent to switch to a bond etf with a shorter duration or consider a different fixed income investment?

  10. Canadian Couch Potato February 16, 2017 at 9:18 am #

    @Blair: I suggest approaching this question by trying to understand the risk/reward trade-off inherent in the choice of fixed income investments, and then deciding where you are most comfortable. Don’t approach it my trying to forecast interest rates, because this is futile. And don’t be seduced by so-called alternatives to traditional fixed income. In every case, these alternatives just have different risks.

    This should help:

  11. Bryan February 16, 2017 at 10:02 pm #

    Hi Dan,
    Thanks to this article you have motivated me to switch my VXC to XAW. Being 30 means those extra costs for VXC could really add up for me since I’m not touching this money until retirement. I have a question about when to switch though.
    VXC has an ex-dividend date of June 21, record date of June 23, and payment date of June 30.
    XAW has an ex-dividend date of June 23, record date of June 27, and payment date of June 30.
    Is there a “best” time to sell VXC and sell XAW? Should I just switch when they are both cum dividend so I don’t DRIP the VXC accidentally and keep it simple? Or do I wait and see which dividend has the best yield once they both declare on June 14? If there is a way to squeeze a few extra bucks in this situation, then great. I am just more concerned with switching them at the wrong time and screwing myself out of some hard-earned cash. Thanks!

  12. Canadian Couch Potato February 17, 2017 at 7:56 am #

    @Bryan: There’s no reason to try to time this switch. I might try to avoid making the trades during the few specific days in June that you mention, especially if you have a DRIP set up. But otherwise I would just make the switch on the same day and be done with it. Remember you are going to lose a bit on the two bid-ask spreads.

  13. Mid February 20, 2017 at 6:14 pm #


    I have a couple of RRSP accounts (one for me and one for my wife) where I’ve been using your older portfolio recommendations of XIC, VTI, VXUS, ZRE, XRB and XBB. Each account has over $100k in it. Going to rebalance this week and I’m wondering if I should switch to your new portfolio recommendation and simplify to just ZAG, VCN and XAW. Any advice?

    -thanks and keep up the great work!

  14. Dan Lynch February 20, 2017 at 6:43 pm #

    Looking more closely at VAB vs. ZAG, it seems that VAB holds various bonds directly, whereas ZAG holds shares of other bond ETFs, each of which has a higher management fee than ZAG (and also higher than VAB). Isn’t the lower fee of ZAG just an illusion, because we still have to indirectly pay the management fees of the underlying funds as well?

  15. Canadian Couch Potato February 21, 2017 at 7:56 am #

    @Dan Lynch: Not to worry, there is no “double-dipping” when BMO funds use other ETFs as their underlying holdings. The fees on the underlying funds are rebated and only the 0.09% fee is charged to investors.

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