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.


324 Responses to Model Portfolio Update for 2017

  1. Mike January 21, 2017 at 10:41 pm #

    Why is there no international bond exposure? I take it you have no concerns having your entire bond portion in Canadian assets? …. <5% of the global economy and only 1 national government.

    We spend so much time trying to allocate between Canada, USA, International and Emerging for equities and then on bonds it's all in on Canada. Seems odd.

  2. Jerry January 21, 2017 at 10:47 pm #

    I have a question regarding the return of couch potato portfolio. With the return of bond so low, what is the return we can expect for a portfolio with 40% of bond? How could it align with market?

  3. Lt Mat January 22, 2017 at 1:28 am #


    I cannot decide if I should implement the model 2 or model 3 given that >80% of my investment will be in a taxable account.

    (I feel capable of managing ETFs through a broker and want to invest >50k)

    I don’t want to use an RRSP and my contribution room on my TFSA is pretty small.

    I have tried for two weeks to estimate how much taxes I would have paid this year with each model butI have hard time coming up with meaningful to back up the comparison.

    Would Model 3 (with ZDB instead of ZAG) be more tax efficient than Model 2?

    Also, can you confirm that bond should go first in my TFSA? (TDB909 or ZDB)

    Thanks for this blog, it has been a lighthouse in an ocean of information 🙂

  4. Canadian Couch Potato January 22, 2017 at 4:10 pm #

    @Bob: Thanks for the comment. The VXC/XAW question is totally up to you. I see virtually no benefit to switching a large holdings. In a corporate account you will probably realize a capital gain to do so, which makes little sense to me. Switching out of a traditional bond fund (such as VAB or ZAG), however, is likely to be a good long-term decision as these funds a poor choice in a taxable account.

  5. Canadian Couch Potato January 22, 2017 at 4:12 pm #

    @Matt: VIU is very comparable to XEF and a perfectly good choice. I am not sure what you mean by it being “diversified in only 10% of the index.” The key idea here is that Vanguard and iShares use different index providers, so to get proper diversification without overlap, it’s best to use either XEF + XEC or VIU + VEE, but not one from each provider.


    @Jerry: The best predictor of the return on bonds is their current yield to maturity. For a broad-based bond fund (such as ZAG or VAB) that’s just over 2% these days.

  6. Canadian Couch Potato January 22, 2017 at 4:19 pm #

    @Lt Mat: I’m not sure your decision should be based on taxes: the e-Series and ETF model portfolios are very similar in their tax-efficiency. So don’t spend any more time thinking about that. The most important issue for you is, given that you will almost certainly need to hold fixed income in your taxable account, how should you do that tax-efficiently? Both the e-Series bond fund and ZAG are a poor choice here.

    The easiest solution is to swap ZDB for ZAG. Here are some other options:

  7. Fred January 22, 2017 at 4:31 pm #

    I opened a TFSA account with an online broker and plan to follow the model ETF portfolio with it. Just wondering, when the ETFs payout dividends and/or automatically reinvests to buy more ETFs at the end of the year, do those amounts count against my TFSA limit?

  8. Canadian Couch Potato January 22, 2017 at 5:52 pm #

    @Fred: No, income and capital gains earned inside a TFSA do not affect your contribution room.

  9. Mike January 22, 2017 at 10:46 pm #

    Thanks for the link to the debate on international bonds. The last paragraph, regarding portfolio size affecting the type of bond diversification you do/don’t need was excellent.

  10. Tripp January 23, 2017 at 3:40 pm #

    Hi Dan. I want to deploy a large sum into the assertive etf portfolio in the near future. The volumes on these etfs are really low. If I want to get into these etfs in a single trade each but I think that might be difficult to do. I am sure you encounter this on a regular basis. What do you do? Thanks!

  11. Canadian Couch Potato January 23, 2017 at 3:59 pm #

    @Tripp: The volumes are not low, and we trade large amounts of these ETFs all the time with no problems. Just use limit orders at the ask price (or perhaps a penny above) and your orders should be filled promptly without surprises.

  12. Son January 24, 2017 at 12:52 pm #

    Hi Canadian Couch Potato, thank you for your updated model and insights. what’s your opinion about VCN vs XIC? thank you

  13. Canadian Couch Potato January 24, 2017 at 2:37 pm #

    @Son: They are essentially identical. Take your pick.

  14. Christina a January 24, 2017 at 5:11 pm #

    Just a note that you need less for a drip for xic if that is a factor.

  15. Fil B January 24, 2017 at 7:29 pm #

    Not sure if this was answered or not, but if I don’t sell my VXC and VAB shares and leave it as is, next time I have funds to invest, should I put them in the new ETF’s (ZAG and XAW)??? Or should I just keep investing in the old three ETF’s (VXC, VCN, VAB)? Thanks

  16. Jerry January 24, 2017 at 8:31 pm #

    Thanks Canadian Couch Potato.
    I own both VSP and ZSP in different accounts. ZSP is hedged and VSP is not hedged. I am wondering if XAW is hedged or not. Thanks

  17. Canadian Couch Potato January 25, 2017 at 7:24 am #

    @Jerry: XAW is not hedged.

  18. Adrian P January 25, 2017 at 1:55 pm #

    A question I’ve always had about bond ETFs. Do “typical” bond ETFs (e.g. VAB & ZAG) always hold their bonds to maturity?

  19. Daniel January 25, 2017 at 2:05 pm #

    Hi Dan,

    Thank you so much for all the great advice and insight, very easy to follow and I truly enjoy reading it. The paper regarding ETF tax implications in Canada was particularly helpful. Just wanted to ask you for a quick advice. I do have a background in finance but it’s my first time actually investing. I’ve looked around at the different core ETFs and found no real reason to deviate from your model portfolio at 10% FI, 30% CDN, 60% INTL, for the time being anyway. The only change is ZDB instead of ZAG as I will be holding it in a non-reg account.

    – TFSA – XAW, VCN (max out)
    – Non-registered – VCN, ZDB

    I’m 23, relatively fresh out of undergrad, and have a LOT of tuition tax credits as I paid high tuition. That’s the reason I’m not using an RRSP for the time being, as I want to exhaust those credits first before making RRSP contributions. I have a group RRSP with SunLife through work anyway and it accumulates handsomely since my contributions are matched.

    Does this portfolio set-up make sense? any tips for improvements? also, when is the best time to place trades? first thing as markets open? and is the best way to use limit orders at the current market prices?

    again, thanks a lot,


  20. Daniel January 25, 2017 at 2:11 pm #

    Also, another thing I was hoping you could clarify for me, as it’s been throwing me off for the past few days. Every time I’ve checked, the price change in XAW is always much much lower than those of it’s constituent ETFs. For example, looking at current price change since the start of the day:

    XAW: +0.00%


    IVV: +0.79%
    XEF: +0.11%
    IEMG: +0.73%
    IJH: +0.76%
    IJR: +1.07%

    Has the Canadian dollar really depreciated that much against the USD, GBP, EUR, AUD, etc…? or am I missing something here?!

  21. Canadian Couch Potato January 25, 2017 at 2:53 pm #

    @Adrian P: Bond ETFs generally don’t hold any bond to maturity: the bonds get sold at least one year before. Bonds with a term shorter than one year are actually considered money-market instruments (i.e. cash equivalents).

  22. Canadian Couch Potato January 25, 2017 at 3:01 pm #

    @Daniel: Without knowing anything else about your situation, your proposed setup for the portfolio seems fine.

    Other than avoiding the first and last few minutes of the trading day it doesn’t make much difference when you place trades. Just use limit orders within a penny or two of the bid or ask:

    Regarding the differences between XAW and its underlying components, you can safely ignore short-term price movements, especially intraday changes. Most of the time the data is wrong or incomplete. Part of the issue here is that some of the components are traded in USD while XAW’s price is expressed in CAD. In your example, if XAW is showing +0.00% it’s almost certainly because there were no trades in the ETF to that point:

  23. Daniel January 25, 2017 at 9:41 pm #

    Dan, I just want to make sure I’m understanding it right and not missing anything. As of end of day today (Jan 25), the above-mentioned ETFs closed as follows:

    XAW: +0.18%

    XEF: +0.37%
    IEMG: +0.93%
    IVV: +0.81%
    IJH: +0.85%
    IJR: +1.12%

    So the reason the return for XAW isn’t the WA of the constituents is the fluctuation in foreign exchange rates between CAD and the currencies of the underlying holdings, correct? No other factors are skewing the figure?

  24. Canadian Couch Potato January 26, 2017 at 9:06 am #

    @Daniel: It’s impossible to know all of the factors that might affect the short-term price movements of an ETF but in general, yes, the currency movements must be the major factor. The return of all of the underlying holdings are given in US dollars and the US dollar weakened significantly over the last few days, so the return in CAD terms will be lower than this. The bottom line is, don’t get too wrapped up in trying to deconstruct one-day returns if it’s making you second-guess your strategy. The ETFs works as advertised.

    @Arthur: My thoughts on robo-advisors:

    @Jacky: Glad you liked the podcast, thanks. XAW is fine in a taxable account.

  25. Daniel January 26, 2017 at 9:17 am #

    Thanks again Dan. I also really enjoyed the podcasts as well. My daily commute to work is an hour subway ride (no internet) and I usually just play useless games on my phone, the podcasts are a much better alternative 🙂

  26. gsp January 26, 2017 at 9:29 am #

    @Daniel, it’s the strengthening of the CAD vs USD. The fact 3 of the 4 USD denominated ETFs invest in the US seems to have lead you slightly astray. It’s the denomination currency that is creating the disparity, not the currency of the underlying holdings. This only applies to IEMG here, it matters not how the CAD$ did vs the EM currencies as the relative strength of these currencies would be reflected in their valuations vs the USD and in the USD vs CAD rate.

    XEF is of course not impacted in this comparison as both are denominated in CAD.

  27. Daniel January 26, 2017 at 12:01 pm #

    @gsp, yeah, I’m only really confused about IEMG. Wouldn’t the return to XAW from it be affected by the exchange rates of CAD to the EM currencies (China, South Korea, Taiwan)? As in CAD/USD (exposure in XAW) and USD/EM currencies (exposure in IEMG), resulting in USD being cancelled out of the equation, hence the end result being CAD/EM exposure? Sorry for being a total noob, just want to have a complete understanding of how prices are affected.

  28. Jacky January 27, 2017 at 8:11 pm #

    Quick question:

    The answer is probably in the question, but would a 80/20 portfolio based on your model look like this:
    20 ZDB / 27 VCN / 53 XAW?

    (I know, at the end of the day those little percentages do not matter as much as sticking to the plan, asset allocation and rebalancing.)


  29. Canadian Couch Potato January 28, 2017 at 2:09 pm #

    @Jacky: Yes, that sounds right on for an 80/20 portfolio.

  30. Fred January 29, 2017 at 12:56 pm #

    I’m trying to choose between VCN and XIC and have been doing some research. They both seem very similar but I just have 2 questions.

    1. I looked at the price graph for VCN for 2016 and it looks like it increased from around $25 to $35:
    XIC looks like it only increased from about $20 to $25 in 2016:
    Why did VCN increase more than XIC? Does that mean VCN is a better option?

    2. Both XIC and VCN pay roughly $0.16 per share in dividends. XIC costs about $25 per share. VCN costs about $31 per share. Since XIC is cheaper, I can buy more units and get paid more dividends. So does that make XIC a better option?

    I’m totally new to all this and have been reading a lot about these 2 ETFs but can’t find any answers to the above. Any information would be appreciated. Thanks.

  31. Joe January 30, 2017 at 8:25 am #

    Looking at selling all my current investments and switching over to a total Couch Potato Portfolio. When using Justin’s model to buy the ETFS ,would I combine all of our RRSP’S , TFSA’S and NON Registered accounts into one total amount and divide the total amount by the 5 percentage’s of Justin’s model ?

    Or would I have to separate RRSP’S & TFSA’S and NON Registered accounts into separate accounts and treat them as separate entities .It would be less money only buying 5 ETFS instead of 15 if they need to be seperated.

  32. Canadian Couch Potato January 30, 2017 at 8:53 am #

    @Fred: VCN and XIC are virtually identical: they just track slightly different indexes.

  33. Canadian Couch Potato January 30, 2017 at 8:58 am #

    @Joe: It usually does not make sense to simply replicate the same portfolio in all of your accounts, but the key issue is not trading commissions but tax efficiency. These may help:

  34. Kevin January 30, 2017 at 5:47 pm #

    @CCP – Thanks again for all the information Dan.

    I’ve been using the CCP ETF model portfolio since 2012. Whenever there are some changes to the model portfolios, I’ve only ever prospectively followed the new portfolio and left the historical holdings.

    The result is a myriad of Canada/US/Foreign ETF’s held across multiple accounts. It’s a little “messy” but I know the portfolio works as intended. I’ve mostly ignored small percentage differences and go for a general approximation of the target allocations.

    I’ll be rebalancing again in a week or two and just wanted to clarify something. Because of caps on contribution room to my TFSA/RRSP accounts, it’s looking like I’ll need to purchase three separate tranches of the same ETF (VCN) across my non-registered, TFSA, and RRSP accounts. Each purchase is between 5 and 10K. I’m hesitant to pay the trading commissions on these and wanted to see if you had any thoughts. Would you recommend I use the e-series funds as a “placeholder” until a build up additional room?

    At some point I do see a requirement to do a “restructuring” in order to maximize tax efficiency and balance, but to date i’ve just not felt the need to do this given my total portfolio is in the $250k range. At what point would you recommend eating the trading costs to achieve a restructuring for simplicity?


  35. Canadian Couch Potato January 31, 2017 at 9:28 am #

    @Kevin: This is really a personal decision, but if it were me I would not add any additional holdings and would start paring things down. The portfolio as a whole and the individual trades ($5K to $10K) are definitely large enough to justify a few trading commissions, especially of you are adding new money and need to make some transactions anyway.

  36. Rob January 31, 2017 at 2:13 pm #

    Hi, I’m reorganizing a $60,000 TFSA on behalf of my 81-year-old mother and wondering how to divvy up the investments based on the model portfolio. She has other revenue streams so isn’t reliant on these funds to provide a regular income.
    Thanks for any suggestions you can offer.

  37. Wes February 1, 2017 at 11:47 am #

    What is the reason for each “type” of model portfolio to be separate from each other.
    Is it inadvisable that we mix some ETFs with some TD e-series funds?
    Is it for simplicity?

  38. Canadian Couch Potato February 1, 2017 at 12:00 pm #

    @Wes: You can only mix e-Series funds and ETFs if you have an account at TD Direct Investing. But this is certainly an option:

  39. Rich February 4, 2017 at 2:32 pm #

    Dear Dan,

    Thanks for a great post. I’ve enjoyed reading through your responses.

    Do you have any suggestions for how to incorporate a defined contribution pension plan (RPP) into a couch potato portfolio? I read through your links in the response to Joe, and it sounds like you would recommend considering the RRP as one part of the entire portfolio (as opposed to having the RRP replicate or mirror the portfolio’s allocation).

    In my specific case the RRP is about 1/4 of the total portfolio amount, the rest of which is spread over an RRSP and taxable account. Annual contributions to the RRP will be low (about 1/4 of the RRSP contributions). MERs in the RRP are low, about 0.3% for an equity index fund and 0.4% for a bond fund. In this case, would a bond fund in the RRP be the way to go for a balanced portfolio?

    Thanks in advance,

  40. Canadian Couch Potato February 5, 2017 at 1:26 pm #

    @Rich: I generally recommend setting up a workplace plan to match your overall asset mix (e.g. 60% equities and 40% bonds) and treating it somewhat separately from your self-directed account. This is because you have much less flexibility when it comes to rebalancing an employer-sponsored plan.

    This may help:

  41. Jason February 5, 2017 at 9:41 pm #

    Hi Dan,

    I’ve been recently pouring over your posts, thanks for all the great information. I was looking further into ZAG, and from the bmo page on it it says “…ZAG is a fund of fund, the management fees charged are reduced by those accrued in the underlying funds.”

    By looking at the holdings, it looks like the various bmo federal and provincial bond funds account for the majority of them, all of which have MERs over 0.20%. I was wondering then how the fee for ZAG works out being less. Is it some internal bmo magic?


  42. Canadian Couch Potato February 6, 2017 at 8:22 am #

    @Jason: When ETFs use the fund-of-funds structure, all management fees of the underlying funds are rebated, and then the wrapper fund charges its own management fee. No magic: consider it a kind of “bulk discount.”

  43. Jeffery Ha February 8, 2017 at 7:53 am #

    Hi Dan,

    Are there any tax advantage for switching to XAW from VXC in non registered accounts?

    As well, I’m planning to report a capital loss on selling VAB to buy ZDB? Because they track slightly different index, there’s no superficial loss correct?

  44. Canadian Couch Potato February 8, 2017 at 9:09 am #

    @Jeffrey: There’s no meaningful tax advantage for XAW in taxable accounts: it’s only in RRSPs. A switch from VAB to ZDB would not trigger a superficial loss.

  45. Bob February 11, 2017 at 11:40 am #

    Hi Dan,

    With respect to your updated ETF’s portfolio, you suggest VUN and XEF. Both of these funds offer comparable CAD hedged funds. Would it be better to eliminate the currency exposure by hedging or did you have a specific reason for going non-hedged?


  46. Nadine February 12, 2017 at 6:00 pm #

    Hi Dan, Hi from snowy Lake Louise.

    Hope you are happy and well! One can never say “thank you” enough to you for the time and effort you’ve put into helping others. Thank you, again!!

    So, maybe this is the same question as Daniel’s above, but I’m struggling to be clear about what I might be about to do. 🙂

    We (long ago now!) originally bought US-listed etfs to cover our US/International holdings. We currently own VTI (15%) and VXUS (16%) of our overall portfolio.

    Despite the rock bottom fees we currently have, in an effort to further simplify our lives, we are considering selling these and moving our allocation over to XAW.

    Now, I was all set to do this when I had a look at the returns of each over the last 1 year and 2 year timeframe. Hmmm… VTI and VXUS have done much better than XAW. (And I do understand that I need to roughly mix them together at 55% VTI and 45% VXUS). How to explain this?

    I understand that they are not exactly equivalent when it comes to holdings… maybe not even close. That’s something I’d like your expertise on. How dissimilar are they? Or maybe the question should be: should I be concerned over that dissimilarity?

    I also understand that I have to look at XAW with the currency exchange in mind. But here’s the thing: if I sell my two US funds right now, I realize their much bigger gains AND I also get even more CDN money because we bought those funds when the currency was close to par and now we are in a big gain position. Great… I have lots to buy XAW with.

    But those currency gains make the past two years of XAW look even worse.

    How should I think about XAW going forward? That’s where my brain gives out. 🙂

    The most simple way I can think to ask this question is: am I really replacing like with like going forward?… despite what looks like, on the surface, lower returns?

  47. Bev February 13, 2017 at 12:25 pm #

    Does age make a difference when deciding on the bond type and percentage? For example, would you still recommend 25 percent ZAG to someone in their 80s? Or would a shorter term bond like XSB be a better option?
    I already own 25 percent XIC. I’m considering adding 50 percent XAW and 25 percent ZAG or XSB.

  48. Kelly February 13, 2017 at 9:11 pm #

    Hi Dan,

    Thank you for your excellent site and series podcasts. I check in regularly and have put into use your recommended ETF portfolios. I was wondering what your thoughts are though on investors who implement the “Buffet ETF” strategy of just using one single S&P 500 ETF, such as Vanguard’s VFV or iShares XUS. There seems to be so much written on the webt using this mantra that one only needs the S&P 500 and a small percentage in a bond ETF. I’m really happy with the diversification that your portfolio’s provide. Would you advise against such a strategy of using just a single S&P 500 ETF?

    Thank you for considering this comment and any answer is much appreciated

    All the best

Leave a Reply