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.


295 Responses to Model Portfolio Update for 2017

  1. Ed May 13, 2017 at 11:25 pm #

    Just a comment on this approach from someone that has been using it for quite awhile; KEEP IT SIMPLE!!

    As time progresses your life gets more complicated and you end of with more accounts than you know what to do with. Currently my Portfolio has 14 accounts split between myself and my wife. That includes Brokerage accounts, TFSA’s , RRSP (Personal and spousal),(Cdn and $US) and LIRA’s. In our case we started out with RRSP’s first as that was the only retirement savings vehicle at the time. Then we ended up with a LIRA from one of our employments. Then TFSA’s came along. Brokerage accounts were small at the start but now are growing larger as TFSA’s and RRSP’s are maxed out. I’m sure this will happen to many of you and maybe some new savings vehicles will be introduced.

    Trying to rebalance with 14 accounts is really fun especially with $US accounts and lack of transfer into many of the accounts.

    I’ve been trying my best to reduce the number of ETF’s and upgrade the ETF’s as needed. With larger $ values I see that it is more worth my while to do it. For example, originally I had XSB and have been coverting it over to VSB in some accounts. The approx 0.2% difference in MER means a savings of about $20 / year on $10,000 of investment so it breaks even the first year and then saves $20 each year there after. Generally I wouldn’t do this with on $10,000 but some of the accounts have $50,000 in XSB so they were changed and saved me $100 per year. That is significant enough for me to make the change.

    That being said, flipping to the lowest ETF should only be done if there is a significant benefit after brokerage fees and spread are taken into consideration.

    Just a question for Dan; how would you best deal with this number of accounts as assets with respect to working your way to having mostly bonds in RRSP’s , equities outside of them?


  2. Sue May 19, 2017 at 12:25 pm #

    Hi Dan,

    I have a question about VIU in a taxable account- are the quarterly distributions treated as capital gains? income or dividend income or a mix?

    I called Vanguard Canada and they are not licensed to tell individual investors this information.

    I would appreciate it if you know and can share this info as I was on their website and I could not figure it out myself.

  3. Canadian Couch Potato May 19, 2017 at 12:30 pm #

    @Sue: The quarterly distributions will almost all be considered foreign dividends (i.e. fully taxable, not eligible for the dividend tax credit), as the ETF holds foreign stocks. Some amount may be return of capital or capital gains, but this will not be known until the end of the calendar year and will be indicated on the T3 slip you get in the spring.

    You can see the breakdown for past years at the bottom of this page:

  4. Sue May 19, 2017 at 2:37 pm #

    Thanks for your message.

    In a corporate account would this etf still be a viable option if you didn’t want or needed any more North American exposure. It sounds like there is really no appreciable advantage apart from owning it if you needed/wanted some ex-North American exposure as part of a taxable account if you had the option to place it in a corporate account and not your personal non-tax account. I think though you would get the foreign withdrawal tax credit applied so that would be good since the stocks are held individually and not part of a Wrap?

  5. Sujith Rajan May 24, 2017 at 4:27 pm #

    Hi Dan
    I have finally woken up from my slumber and have decided to invest the money lying around in my chequing and savings account. I started off by reading about you couch potato portfolio method and narrowed down my choices to TD eseries and ETFs on Questrade.
    I am not able to decide which is more suitable for me. To give you an idea about my financial plan, I’ll be starting with a lump sum contribution of 20k and I plan to invest around $1200 per month by pre-authorized debit.
    Now I know that with Questrade ETF I’ll have to manually buy ETFs every month and with eseries it’s all automated. This is the biggest plus point in favour of e-series for me. But with e-series there are very few funds to chose from where as with ETFs the choices are endless. So my thinking is, as and when I learn more about investing I can customize my portfolio much more in ETFs than in e-series. Am I correct in thinking this ?
    I have also come up with my own portfolio for both e-series and ETFs.
    ETFs –
    ZAG – BMO Aggregate bond – 15%
    VCN – 30%
    VUN – 35%
    XEF – International – 20%

    e-series –
    US Index funds – 35%
    Canada Index funds – 30%
    Bonds –
    15% International -20%

    The couch potato inside me tells me that e-series is best as I can set up the pre-auth debits and forget about it other than re balancing once or twice a year. Whereas the “new excited investor” inside me tells me ETFs gives me much more flexibility and is much better in the long run when my portfolio gets bigger.

  6. Canadian Couch Potato May 24, 2017 at 4:58 pm #

    @Sujith: I understand your eagerness, but the endless variety of ETFs available is more of a obstacle than a benefit at this point. I’d suggest the e-Series are the way to go for now, and if you use TD Direct you an always add ETFs later if you want:

  7. Wynn June 2, 2017 at 9:53 pm #

    If you have a larger amount to work with, say $500,000 do you recommend a different approach to etf investing. The fee differential factor is likely more of an issue? Semi-retirement funds.

  8. Canadian Couch Potato June 4, 2017 at 11:52 am #

    @Wynn: If you have a portfolio over $500K then, yes, you probably should do more than simply rely on a model portfolio. You could certainly do a lot worse than the simple solutions presented here, but once you have a large portfolio across multiple accounts there are ways to lower costs and taxes by using different products and paying more attention to asset location.

  9. LL June 5, 2017 at 4:12 pm #

    Hi Dan,

    Can you please elaborate more on @Wynn’s question? I’m in a similar situation. $500k+ in assets in a mixture of registered and non-registered accounts. Would you recommend working with a broker at this point, or is there a specific portfolio suggestion you can recommend for sums of this money and up.

    Thank you

  10. Canadian Couch Potato June 6, 2017 at 3:26 pm #

    @LL: In general, once a portfolio reaches $500K and is spread across multiple accounts (some of which are taxable), it makes sense to move beyond the simplest solutions, such as model portfolios. Now keeping fees very low becomes more important: every basis point you save is $500 a year. You should also start thinking about tax-efficient asset location (which fund goes in which account), which is not a significant issue in a modest RRSP or TFSA.

    Unless you’re willing and able to put in the effort to do DIY, this is also the point where a good advisor can make sense. At $500K you can find a good fee-based advisor who uses ETFs and offers planning services as well as investment management. With smaller portfolios, it’s harder to find this kind of advisor and investors often find themselves using a commission-based mutual fund salesperson. Moreover, the advisor’s fee in non-registered accounts is tax-deductible, so paying for advice is a better deal than it would be if all of your accounts were registered.

  11. LL June 6, 2017 at 9:12 pm #

    Thanks Dan. Your advice is always spot on, and much appreciated.

  12. JG June 21, 2017 at 11:34 pm #

    Hi Dan, I visit your site on and off, and this is my first post. Great sensible advice all-round. My portfolio is also closing in on $500k total but its all in RRSPs split evenly between my wifes account and my account. I think it would make rebalancing (and income splitting when I start withdrawing in 10+ yrs) much simpler if I had the same ETF investments in both accounts. Would a model portfolio still make “money” sense? Perhaps a more complex one with the same ETF’s in each account. Any recommendations? Thanks!

  13. Canadian Couch Potato June 22, 2017 at 10:28 am #

    @JG: I would agree it makes sense to hold the same ETFs in both RRSPs in your situation (i.e. the RRSPs make up the whole portfolio). If you are comfortable converting currency and trading in USD, it could also make sense to use US-listed ETFs for the foreign equities rather than an all-in-one fund such as XAW or VXC.

  14. Richard24156 June 24, 2017 at 10:18 am #

    On the comment that the ETF ZAG MER’s is actually .09% and not .23%. Could it be that the .23% counts the fees charged by the ZAG ETF holdings. ZAG is made up of other BMO ETFs that in turn charge fees.

  15. Canadian Couch Potato June 24, 2017 at 1:18 pm #

    @Richard24156: No, there is no double-charging of fees on “wrap” ETFs. The 0.23% fee reflects the higher fee charged on the fund before it was reduced last year.

  16. Gregory July 3, 2017 at 10:33 am #

    I have started a ‘Couch Potato’ portfolio for an inheritance and because it is for life savings I wonder if you could give me feedback. What do you think of the following portfolio, taking into consideration the Couch Potato portfolio but adding one or two ETF’s to the mix. It is in a fully taxable account because I received the funds all at once so will take years before I can get it into TFSA/RRSP:
    15% VCN
    15% VFV
    15% ZEA
    14% VEE
    3% Fairfax India Holdings
    3% Fairfax Africa Holdings
    20% Corporate Bonds (bought individually)
    6% ZDB
    5% XSB
    4% GLD

    I am wondering now whether 26% in corporate bonds and ZDB with avg maturity of 5-6 years is too much. Do I need more cash in XSB?
    Feedback welcome !

  17. Matt July 10, 2017 at 9:42 am #

    Hi Dan. I’m about to become an ETF couch potato with my RDSP. I notice in your late December Moneysense article you recommend a four fund mix (ZAG, VUN, XIC, XEF). Here you recommend a three fund mix (ZAG, VCN, XAW). Can you explain the difference. Thanks from a newbie for your work putting this site together!

  18. Canadian Couch Potato July 10, 2017 at 10:30 am #

    @Matt: Thanks for the comment. The four-fund version was just to make the ETF portfolio equivalent to the mutual fund options I was comparing it to in that article. The three-ETF version is easier, as it combines US, international and emerging markets into a single fund. Good luck!

  19. Gavin July 14, 2017 at 12:15 pm #

    The profiles you link to suggest that the management fee for ZAG is 0.09% but the MER is now 0.14%. Meanwhile, VAB’s management fee is 0.12% and the MER is 0.13%. Is ZAG really cheaper?

  20. Canadian Couch Potato July 17, 2017 at 8:57 am #

    @Gavin: The 0.14% figure is a legacy of the older, higher fee ZAG carried last year. When the fund is next audited, the new lower MER will be reflected.

  21. Gavin July 17, 2017 at 1:53 pm #

    @Canadian Couch Potato: Great, thanks for clarifying. Maybe in the 0.10 or 0.11 range?

  22. Frederick Pinto July 25, 2017 at 6:19 pm #

    Hi Dan,

    I am reading Millionaire Teacher-The Nine Rules of Wealth You Should Have Learned in School by Andrew Hallam in which you and your Couch Potato method of investing has been mentioned quite often. This is my first visit to your website and I would like to learn about investing in index funds, Canadian, US and International. I have invested 20K in TD Balanced and TD High Income Mutual funds and after reading this book, I wouldn’t want to continue with it as the MER’S are high and I would like this money to grow for my daughter’s(14 yrs old) education or for my retirement which will be due in another 10 years.

    Kindly advise me about opening an account with the right bank or brokerage and which index funds to buy?

  23. Canadian Couch Potato July 25, 2017 at 7:58 pm #

    @Frederick: Welcome to the blog. I would advise you to take your time and understand the options before jumping in. This article should help:

  24. Julia July 28, 2017 at 5:46 pm #

    Hi Dan, thank you for the informative posts on this blog! I’ve tried to make sense of the various articles you have about investing in taxable accounts but am getting a bit lost.

    I’m currently using the old ETF model portfolio with VXC, VAB, and VCN and I’ve maxed out my non-taxable accounts. In the interest of keeping things simple but tax efficient, would it make sense to continue investing in these three ETFs in a taxable account with the same allocation, or would you recommend a different way? One thing I can think of is to replace VAB in the taxable account with ZDB based on this article. Is that enough?

    Thanks in advance!

  25. Canadian Couch Potato July 30, 2017 at 9:30 am #

    @Julia: Replacing VAB with ZDB in a taxable account is definitely a good place to start. Beyond that, the “asset location” question is more complicated, as it depends on a number of factors.

  26. Jim Skippen August 2, 2017 at 10:47 am #

    In a Canadian taxable account would you recommend BXF or ZDB for bond exposure? Kindly explain why because the tax approach on ZDB is opaque in the literature.

    Thanks so much


  27. Canadian Couch Potato August 2, 2017 at 11:30 am #

    @Jim: Either fund may be appropriate depending on your tolerance for volatility. BXF holds short-term bonds only (one to five years, with a duration of 3.5), while ZDB holds all maturities (average of about 10 years, with a duration of 7.4). So ZDB will be more sensitive to interest-rate movements, but should also be expected to compensate investors with higher returns. The yield to maturity on BXF is 1.7%, compared with 2.3% for ZDB.

    The strategy in both funds is based on a similar principle: bonds that trade at a discount to their par value are more tax-efficient than bonds trading at a premium. Most traditional bond ETFs are filled with premium bonds.

    BXF holds only strip bonds which, by definition, trade at a discount at mature at their face value:

    ZDB does not use strip bonds: instead it selects traditional bonds that happen to trade at a discount or a very slight premium. The goal is to create a fund with characteristics very similar to that of the broad bond market (maturity, risk, duration) but that pays out less in interest income and more in the form of capital gains. The pre-tax return of ZDB should therefore be comparable to that of a traditional bond ETF (such as ZAG, XBB or VAB) but the after-tax return should be higher.

    Hope this helps! Here’s some more background:

  28. Jeremy August 10, 2017 at 9:29 am #

    Dan – I’ve got all my fixed income in a taxable account under ZDB, approximately $145,000 and 25% of my portfolio. I’m still employed. Is this the best fixed income approach for a couch potato strategy?

  29. Canadian Couch Potato August 10, 2017 at 7:39 pm #

    @Jeremy: Without knowing any other details, it sounds fine.

  30. Jeremy August 15, 2017 at 11:29 am #

    Hi Dan,

    One more question if you have time. If bonds are lending money to govs and companies, is my bond ETF losing money because interest rates are rising? Seeing a $1000 drop in a couple days has me concerned that ZDB is more volatile than I thought. Just want some confidence that buying and holding bonds is not a poor strategy for being defensive.

  31. Canadian Couch Potato August 15, 2017 at 7:14 pm #

    @Jeremy: Bond funds will always lose value during periods when interest rates rise. As you’ve found, bond funds like ZDB (with a duration of about 7.5) can easily fall 2% or 3% with a relatively modest increase in interest rates. If you are very averse to volatility, then a short-term bond fund or GICs might be a better choice.

  32. Bruno Alves August 16, 2017 at 2:41 pm #

    @CPP: You mentioned in previous comment: “If you’re comfortable with a little credit risk, use short-term investment-grade corporate bonds to get a little more yield”.

    I did some research, but haven’t found specific recommendations for short-term corporate bonds? Any advice here? I am investing both in registered and non-reg accounts.

    Thank you in advance 🙂

  33. Kev August 28, 2017 at 4:35 pm #

    @CPP Started my TFSA with XUU , XIC , and VSB about 5 months back – not too much movement other than 2- 5% drops for each, not sure if there is anything else I should look into offsetting these for the moment or just to sit tight. I know its only been a short while, but not sure if the low fees are worth the wait. thoughts?

  34. Canadian Couch Potato August 28, 2017 at 4:42 pm #

    @Kev: Long-term investments cannot be judges over periods of a few months. You just had the bad luck of investing just before we experienced a period of negative returns for both stocks and bonds.

  35. Nic August 30, 2017 at 9:32 am #

    Hey dan, just started making the switch to an all etf portfolio.

    I was wondering how do you know when an etf is us-listed or not? I know depending on the etf thay have tax advantages, but I find it a bit confusing for the moment. I know Justin recommended using the 3 etf portfolio until I’m a bit more at ease with all of this and may be switch to the 5 etf portfolio later on (VCN,VAB,VUN,XEF,XEC).

    Sorry for the noobie question but I was also wondering if we you recommend having the same 3 etf (ZAG, VCN,XAW) in all accounts (TFSA,RRSP,RESP) or across the accounts?

    thank you!

  36. Canadian Couch Potato August 30, 2017 at 9:53 am #

    @Nic: You can tell whether an ETF is US-listed by looking at the exchange when you get a quote on your brokerage’s site. But as a new investor I would not recommend using US-listed ETFs at this time. For maximum tax-efficiency it can make sense to use US-listed funds in RRSPs (as Justin recommends in his model portfolios) but these advantages can easy be overwhelmed by the additional costs of trading them. So for simplicity I suggest sticking to the Canadian-listed versions in TFSAs, RRSPs and RESPs.

  37. Jeremy September 4, 2017 at 1:29 pm #

    Hi Dan,

    Responding to your comment about ZDB: if I can handle some short-term volatility, it’s safe to use ZDB as a the foundation of a long-term taxable fixed income strategy? I’m holding 95% of my fixed income in this fund within a taxable account.



  38. Canadian Couch Potato September 5, 2017 at 8:10 am #

    @Jeremy: ZDB is certainly suitable as long-term core bond holding in a taxable account.

  39. Que September 7, 2017 at 3:33 pm #

    @Dan: Can you please help clarify the actual MER for ZAG?
    From their website:
    Maximum Annual Management Fee=0.09%
    Management Expense Ratio=0.14%

    Would this mean, that VAB is still indeed cheaper, at 0.13%?

  40. Canadian Couch Potato September 8, 2017 at 8:03 am #

    @Que: That higher MER is a backward-looking measure that includes a period when ZAG’s fee was 0.20%. When the fund next publishes its audited MER I would expect it to be closer to 0.10% (0.09% MER plus a basis point or so for taxes).

  41. JamesB September 10, 2017 at 8:53 pm #

    @Dan: As part of my portfolio I want to keep some cash as emergency fund. Do you have recommendations on where/what form to park this cash – any short-term bond ETF, money market ETF?

  42. Canadian Couch Potato September 11, 2017 at 7:48 am #

    @JamesB: A high-interest savings account will get you the best rates and CDIC protection. If you are holding the cash within an investment account, these products are useful:

  43. Kevin September 11, 2017 at 6:02 pm #

    @Dan: I am new to index investing and have been following your E-Series model portofolio. Recently I noticed that some of the e-series funds were not tracking the index very well. For example, the S&P 500 is currently at record levels, however the TDB902 US Index Fund that tracks it has dropped significantly during the last three months. I was wondering what the explanation for this is? Thanks.

  44. Canadian Couch Potato September 12, 2017 at 11:45 am #

    @Kevin: Thanks for the question. This causes confusion for a lot of people. The S&P 500 reports its returns in US dollars, while TDB902 and other Canadian funds tracking this index report in Canadian dollars. The exchange rate can make big difference: in recent months, the S&P 500 has risen in USD terms, but the sharply rising Canadian dollar has caused the returns to be lower (or negative) for Canadians. These may help: (the opposite satiation from today)

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