Your Complete Guide to Index Investing with Dan Bortolotti

Bad Advice from BMO

2010-08-12T10:30:11+00:00February 19th, 2010|Categories: Asset Classes, ETFs|15 Comments

Jim, a loyal reader of this blog, recently emailed to ask about the model ETF portfolios that BMO is offering to its InvestorLine clients. The portfolios were designed by Lipper, the mutual fund research firm based in New York. “All the Lipper Leader Model Portfolios,” BMO’s website explains, “are based on a proprietary Lipper rating and built by their independent and unbiased experts.”

I can’t link to these model portfolios, since they’re available only to InvestorLine clients, but Jim sent me some details. Here’s one for long-term investors looking for a balance of income and growth:

iShares Canadian LargeCap 60 Index (XIU) 19.1%
iShares Canadian Composite Index (XIC) 10.9%
PowerShares QQQ Trust, Series 1 (QQQQ) 9.7%
WisdomTree DEFA Fund (DWM) 8%
Fidelity NASDAQ Composite Index Tracking Stock (ONEQ) 5.3%
Fixed Income
iShares Barclays 7-10 Year Treasury Bond Fund (IEF) 20%
iShares Barclays Aggregate Bond Fund (AGG) 19.1%
iShares Barclays TIPS Bond Fund (TIP) 7.9%

Jim asked whether this portfolio might be appropriate for an RRSP. My answer is that this portfolio isn’t appropriate for anyone in Canada, and I’m shocked that BMO would recommend it to its clients.

First, 62% of the portfolio is in US dollars and 8% in other foreign currencies. While some currency diversification is a benefit in a long-term portfolio, this is truly excessive, especially since it includes 100% of the fixed-income component. For Canadian investors to take that kind of currency risk with their bond holdings is senseless. Bonds are supposed to reduce volatility in a portfolio. Yet a Canadian with this portfolio in 2009 would have lost 20% of their “safe” bond holdings just on the currency.

BMO does warn investors that the portfolios “may create a foreign currency return risk for Canadian investors,” and a spokesperson explained that “we do understand the currency issue and provide our clients with information to manage this issue.” But the point is they shouldn’t have to manage this issue. Putting all your bond holdings in foreign currency is never a sensible strategy.

Second, the equity holdings are redundant. The two Canadian ETFs, iShares XIU and XIC, are so highly correlated that it’s not necessary to hold both. XIC tracks the broad Canadian market and holds 210 stocks; XIU holds the largest 60 of these. Over the last decade their returns are virtually identical, and holding both accomplishes nothing other than doubling your trading costs.

The US equity holdings overlap in a similar way: ONEQ tracks all the stocks on the Nasdaq, while QQQQ tracks the largest 100 of these. Not only is this redundant, it’s a huge bet on one sector: the Nasdaq is more than 60% technology stocks. How does this make sense in a long-term portfolio?

Finally, look at the precision they’ve used in setting the allocations: not 20% here and 5% there, but 19.1% and 5.3%. The decimal place gives the impression that asset allocation is an exact science that requires hiring the “independent and unbiased experts” at Lipper. It’s nonsense, especially when you’re talking about ETFs that are so similar to each other. An asset allocation is like a healthy diet. You should eat a certain number of servings from each food group, but you don’t need a nutritionist to recommend 3.7 carrots or 263.9 mL of milk.

I’ve come to expect dubious advice from the big banks, but usually this takes the form of advisors pushing their own family of overpriced mutual funds. In the case of these model portfolios, the problem is not cost: it’s simply bad investment advice that exposes Canadian investors to needless risk. Given that BMO has its own growing family of ETFs, it’s not clear why they went down this road at all.

When I contacted BMO to ask where these Lipper portfolios came from, they confirmed that the original research was done in the US and explained that “BMO InvestorLine is currently working on creating models based purely on Canadian ETFs.” While you wait for the cutting-edge research from the unbiased experts, allow me to suggest a similar portfolio to the one above, with no currency risk on the bond side:

iShares Canadian Composite Index (XIC) 30%
Vanguard Total Stock Market (VTI) 15%
Vanguard Europe Pacific (VEA) 15%
Fixed Income
iShares Canadian Bond (XBB) 30%
iShares Canadian Real Return Bond (XRB) 10%

Please send the Nobel Prize to


  1. Alan February 19, 2010 at 12:45 pm

    Why wouldn’t I want, right now, more XRB and less XBB?

  2. Canadian Couch Potato February 19, 2010 at 12:55 pm

    No problem with that strategy, although note that real return bonds are quite a bit more volatile than nominal bonds. In this case, I’m just mirroring the Lipper portfolio, which allocates about 8% to Treasury Inflation-Protected Securities (TIPS), the US equivalent of real-return bonds.

  3. doug February 19, 2010 at 1:02 pm

    I couldn’t agree more Dan. Keep up the good work. I’ve trying to understand the relative benefits of a Real Return Bond ETFs vs a broadly-based bond ETF. Can you please explain how one would go about choosing between them?

  4. Canadian Couch Potato February 19, 2010 at 1:22 pm

    Doug: You may find this link helpful:

    Here’s another article from Morningstar:

    I wouldn’t think of it as choosing between them: most asset allocation experts suggest holding both, with perhaps about one quarter to one third of your fixed-income holdings in real-return bonds and the rest in short- and medium-term nominal bonds.

  5. Pacific February 19, 2010 at 7:17 pm

    I appreciate the Canadian content! And so simple!

  6. Doug Morrow February 20, 2010 at 10:38 am

    Guys, don’t forget PH&N inflation linked bond fund. For a mutual fund company, these guys are pretty good. MERs are rock bottom.

  7. Doctor Stock February 20, 2010 at 11:27 pm

    Great point Doug… always important to keep your eye on that.

  8. Sunny March 13, 2010 at 7:31 pm

    I agree with you! Right now, the Canadian market is the place to be! It’s good to have US dollars in a portfolio, but not as much as 68%. Our market (Canadian) seems to be much stable than the US one.

  9. […] surrounding the financial sector. The issue is that NASAQ is a tech heavy exchange which, as ETF experts have pointed out, create a sector specific reliance not suitable to most long-term investors and […]

  10. ThinkDividends March 25, 2010 at 7:49 pm

    Nice simple ETF portfolio Doug… I’d add some XRE (The iShares REIT Index) to get another asset class in there… Cheers

  11. Patrick August 20, 2010 at 3:56 pm

    I like the mix of XBB and XRB, though I’d be somewhat inclined just to do 50/50 between them. Buying XBB is a bet that inflation will be lower than expected, and XRB is a bet that inflation will be higher than expected. If you don’t have an opinion either way, buy both and hedge your bet.

  12. Kori March 3, 2015 at 12:38 am

    I know this is an older post but I just signed up for a BMO RSP Growth ETF Portfolio – diversified in Asset Class, geographical allocation, and industries.

    45.2% USA
    19.2% Canada
    5.6% Japan
    12.9% Europe
    16.9% Emerging

    We had to rush to contribute as we jus returned to Canada and had the RRSP deadline creep up on us but I thought this portfolio was diverse and mildly comforted that it will be rebalanced as needed but I now I am questioning the 1.7% MER. Any thoughts on this? Should I move my investment out of this portfolio to another RRSP with a lower MER?

  13. Brian G September 3, 2015 at 2:01 am

    I came across this post while looking for something else. For giggles I calculated the trailing 5 year returns for $10,000 in each of the above portfolios (as of today.)

    Lippor portfolio:
    $16,534 or 10.6% CAGR.

    Dan’s portfolio:
    $15,085, 8.6% CAGR

    It turns out their picks were spot on. What’s also interesting is they did it with less equity exposure (53% vs 60%).

  14. Jer March 3, 2017 at 8:09 pm

    Dear CCP,

    Could you please articulate as to why investing in a NASDAQ-100 index is a poor investment choice for the long-term?

    While it is sector-specific, isn’t there a potential for high returns?

  15. Canadian Couch Potato March 4, 2017 at 1:48 pm

    @Jer: Lots of investments have the potential for high returns, but always with additional risk. I prefer broadly diversified ETFs that are not unnecessarily concentrated in a small number of sectors.

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