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.


256 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:

Leave a Reply