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.


322 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.

  16. Jeffery Ha February 25, 2017 at 8:25 am #

    Hi Dan,

    Are there any options available for ETFs that are for international emerging and developed markets combined?

    In your list of recommended funds, you have an ETF for International developed, another for emerging markets, and other options for international, excluding Canada only. I’m looking to hold a product for Canada, another for US, and another for international (developed and emerging markets)

  17. Canadian Couch Potato February 25, 2017 at 10:18 am #

    @Jeffery: There is no Canadian-listed ETF that holds international developed and emerging markets only. The closest you can get is probably VXUS (a US-listed ETF), which holds all markets except the US, so it includes a small allocation to Canada.

  18. Brad February 28, 2017 at 1:26 am #

    Hi Dan,

    Given the S&P500 companies generate about 50% of revenue domestically and 50% abroad, would it make sense to use something like Vanguard VFV (0.08MER) versus iShares XAW (0.22MER) to gain US and International exposure? Pros/cons to using VFV in portfolio either as suggested or as US equity ETF?

  19. Canadian Couch Potato February 28, 2017 at 8:03 am #

    @Brad: This is a common argument that just doesn’t play out. Have a look at the returns of the S&P 500 compared with international stocks and you will see that there is no meaningful correlation. US stocks are US stocks, not a proxy for true global diversification.

  20. Steve February 28, 2017 at 1:32 pm #

    As someone currently holding the previous portfolio’s ETFs… I get that I should not sell everything simply for the sake of changing. For my future investments / rebalancing, should I buy the new ones or should I continue to buy the previous symbols ?

  21. Mac February 28, 2017 at 7:49 pm #

    I’m starting to diy my portfolio. I was wondering in which cases I would choose Justin Bender model’s portfolio linked in your porfolio page instead of your simple 3 ETF one ?

    Is there any advantage to have more ETF in my portfolio ?

  22. nicholas March 1, 2017 at 9:22 pm #

    does this model portfolio work if i have a large amount to invest ??

    i recently cashed in my house and prefer to rent now that i am retired

    thanks in advance

  23. Larry March 2, 2017 at 12:52 am #

    How would you compare VSB to ZAG for canadian bonds?

  24. Canadian Couch Potato March 2, 2017 at 7:59 am #

    @Larry: VSB holds short-term bonds only (average maturity about 3 years), while ZAG holds all maturities (average about 10 years).

  25. Darby March 2, 2017 at 1:31 pm #

    We have been following the Couch Potato investment strategy for about five years now and appreciate all the information this site has given us. Thanks for the updated portfolios.

    My question is more related to drawing down investments and I am wondering if the TD e-series are better places to have investments in that case. We will only be making one lump sum withdrawal from our RRSP accounts each year, mostly to deplete it and reinvest the after tax dollars in an unregistered account. This is being done now, pre-age 65, for future tax reasons as when we are obligated to take minimal amounts out after age 71, when these accounts become RRIF accounts, it may put us in higher tax brackets.

    So money is being withdrawn from our RRSP by selling ETF shares, paying the taxes and then buying in either an unregistered account or our TFSA acounts. The question is should we be buying more ETFs or move to the TD e-series?

    Another strategy we are using is to sell our ETF shares, once a year, as needed in VTI and VXUS and withdrawing the USD to be used for the expenses on a home in Florida. We are then buying either XAW or TDB902 and TDB911 investments with the equivalent amount of money in CAD to be held in our TFSA and unregistered accounts. This reducing the amount in our RRSP but not reducing the amount of our overall portfolio. Is this a sound strategy?

  26. Canadian Couch Potato March 2, 2017 at 3:46 pm #

    @Darby: I can’t comment on the overall strategy of withdrawing from the RRSPs, but I am not sure why it would make sense to switch from ETFs to e-Series as you do so. If you are only making a couple of trades a year the ETFs are likely to by cheaper.

  27. Julio March 2, 2017 at 5:12 pm #

    @CCP: Do you have any comment on Mac question, considering also that sometimes one could get free trades?

  28. Matt March 2, 2017 at 5:23 pm #

    I have $11,000 in very low risk in RBC TFSA.I got $1,500 to invest biweekly. I am moderate risk because I don’t plan on taking out the money for 10+ years. Please advice what I should do

  29. Canadian Couch Potato March 2, 2017 at 8:59 pm #

    @Julio and Mac: The two portfolios are virtually identical in market exposure. The three-ETF portfolio requires less rebalancing, but is a tiny bit more expensive in MER. Feel choose to whichever one you prefer.

  30. Justin March 2, 2017 at 11:09 pm #

    Hey Dan, been following since 2012, awesome stuff as always.

    Just thought I would echo Steve’s question above:

    As someone currently holding the previous portfolio’s ETFs (VXC, VAB, VCN)… I get that I should not sell everything simply for the sake of changing. For my future investments / rebalancing, should I buy the new updated ones you recommend or should I continue to buy the previous symbols? Or maybe since I am still fairly young (27 yrs) I should just take the small hit and sell off all previous portfolio ETF’s and buy into the updated ones?


  31. Canadian Couch Potato March 3, 2017 at 7:47 am #

    @Justin (and Steve): This really isn’t an investing decision, it’s just a personal one. Whatever you feel is more convenient.

  32. Greg March 4, 2017 at 4:29 pm #

    I have to question a real home country bias. The S&P 500 has returned 5.56% over the last 10 years — the TSX, 1.95%. Is this a permanent shift to lower returns from Canadian businesses? Or does this mean we’re due for a pop? The great returns in 2016 were nothing but a reversal of the dismal losses in 2015. Also, it’s not like we have a pro-business government in Canada, and Trump’s nationalism will certainly not help, either.

    The fact is that the Canadian market is poorly diversified with its dependency on energy and finance. Do Canadians just assume that Canada will recover despite a a long period of time that points to the contrary? I’d doubt you’d find significant Canadian exposure in global portfolios. Any foreign currency worries could be countered with hedged ETFs. And if the Canadian economy continues to lag, a poor Canadian dollar will help foreign exposure.

    This is obviously a personal decision that everyone needs to make, but I’m questioning my Canadian equity exposure more and more.

  33. Lt Mat March 5, 2017 at 4:46 pm #

    I will go for model 3 assertive in a TFSA and a non-registered account. If I swap ZAG for ZDB, what should be the priority to max out my TFSA?

    ZDB, then XAW then VCN ?

  34. Anoop March 5, 2017 at 4:55 pm #

    Another thankful beginner investor who has found this website very useful. I was reading about the switch from VAB to ZAG and found you previous post about ZDB: Is there a reason why you recommend replacing VAB with ZAG rather than ZDB? Why is that you recommend ZAG (for registered accounts e.g. TFSA) and ZDB (for non-registered – e.g. Margin Questrade account) when the article I link in this comment says ZDB outperforms ZAG in either registered or non-registered accounts? Thanks for taking the time to reply to all these comments!

  35. Canadian Couch Potato March 5, 2017 at 5:14 pm #

    @Anoop: The outperformance of ZDB that one year was a fluke. This fund is somewhat less diversified than ZAG and should only be used in taxable account: there is no advantage to holding it in a TFSA or RRSP, where ZAG is a better choice.

  36. Jimmy O'Neill March 8, 2017 at 9:47 am #

    Hi – a question about the MER/fees for ZAG (and for any ETF that is made up of other ETFs). You note that the MER is 0.09%. I assume that this figure does not account for the MER costs associated with each of the constituent ETFs (ZAG is comprised of 9 other BMO bond ETFs). Presumably BMO earns fees on each of the underlying ETFs within ZAG, and then layers (or “pancakes”) on an additional 0.09% at the ZAG level, correct? Also, can you confirm that this is the industry-wide practice for ETFs and mutual funds? For example, I own Vanguard VXC (MER 0.27%), which is comprised of several other Vanguard ETFs. The MER for VXC is pancaked on top of the MERs for each constituent ETF? I was also looking at investing in a PH&N Target Date mutual fund, which again is comprised of several PH&N and RBC funds – would the pancaking of fees apply here, too?

    Thanks for any insight – I haven’t been able to find any information about how these fund fees are calculated on the vendors’ websites and fund factsheets. Really appreciate your website.

  37. Canadian Couch Potato March 8, 2017 at 10:26 am #

    @Jimmy: No worries, there is no “pancaking” going on. When an ETF holds other ETFs, it rebates the fees of the underlying funds and charges only one fee at the top level:

  38. Andy March 8, 2017 at 6:49 pm #

    What ETF would you suggest for more U.S. exposure? I’ve been looking at ones such as VFV and VOO (NYSE). Pros and cons?

  39. Greg March 13, 2017 at 2:58 pm #

    Do you have any US-listed ETF recommendations? My plan is to use 50%/50% RSP(smart beta, I know)/VTI for my US exposure and VEU for my int’l exposure. The only sample portfolios I see contain Canadian ETFs despite the recommendations to keep US-listed ETFs in registered accounts to avoid withholding tax. Thanks.

  40. Greg March 13, 2017 at 3:16 pm #

    Thanks, Dan!

  41. Darby March 15, 2017 at 11:18 pm #

    Can you help me understand? I am looking at Morningstar and comparing VXC vs XAW in the section titled Dividend and Capital Gains Distributions it appears that VXC distributions are considered interest income whereas XAW distributions are considered Canadian Dividend. The same is true of VCN vs XIC. Is it not then better to have XAW and XIC because of the Canadian Dividend distribution or am I missing something?

  42. Canadian Couch Potato March 17, 2017 at 8:52 am #

    @Darby: The information you’re looking must be incorrect. XAW holds no Canadian stocks and does not pay Canadian dividends. VCN and XIC both pay Canadian dividends.

  43. Darby March 18, 2017 at 9:38 am #

    Here is the link for VXC at the a bottom of the page it shows the distributions as interest income.

    Here is the link for XAW at the bottom of the page it shows the distributions as Canadian Dividend.

    Here is the link for VCN at the bottom of the page it also shows the distributions as interest income.

    Here is the link for XIC at the bottom of the page it shows the distributions a Canadian dividen

    Is the report wrong? Am I misunderstanding something?

  44. Canadian Couch Potato March 18, 2017 at 11:00 am #

    @Darby: The Morningstar info is wrong.

  45. CF March 20, 2017 at 2:34 pm #

    Comparing the two models, are VUN+XEF+XEC and XAW the same? The fees and returns are 0.01% and 0.1% different so there is a difference, but what is it?

    XAW have emerging market in there? Does VXC (in case their fees drop below XAW)?

  46. Canadian Couch Potato March 20, 2017 at 3:12 pm #

    @CF: While the asset classes are the same, the indexes are slightly different so there will be some short-term variance in the returns. This is random and not meaningful. Both portfolios should deliver very similar returns over the long term.

  47. Fred March 24, 2017 at 12:11 am #

    The Federal Government announced they will cancel the Canada Savings Bonds this year. How will that affect the couch potato portfolio? Does that mean ZAG becomes useless?

  48. Canadian Couch Potato March 24, 2017 at 7:52 am #

    @Fred: Canada Savings Bonds are a retail product that have nothing to do with the Government of Canada bonds traded in the marketplace.

  49. James March 24, 2017 at 8:37 am #

    Hey CCP:) great blog. As someone who is about to purchase their first etf’s and apply the couch potato strategy, is now a bad time? Should I hold it in cash(already requested the transfer) and then slowly buy back in (dollar cost averaging)? Or can I just go ahead and reinvest the whole thing? I’m pretty comfortable with risk, and I know my goal is long term investment, but with the index’s tracking high I have a little trepidation.


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