Another new year is upon us, and it’s time review my model Couch Potato portfolios. I’ve been at pains to discourage investors from tinkering with their portfolios every time a new fund comes along, but 2013 did see the launch of some significant ETFs. In a couple of other cases, it was just time to replace the incumbents with less expensive choices. You can visit the Model Portfolios page for full details, but here’s a summary of the changes:
Global Couch Potato
- I’ve added the ING Direct Streetwise Balanced Portfolio as a simple option for the Global Couch Potato. While using individual index mutual funds allows for lower costs (especially if you use the TD e-Series option) and more flexibility, the Streetwise Portfolios are ideal for investors who have small portfolios in registered accounts.
- The ETF version of this portfolio (now Option 4) has been overhauled completely. I’ve replaced the Canadian  equity and bond funds with cheaper alternatives from Vanguard. And in place of the iShares MSCI World (XWD), I’ve suggested the Vanguard US Total Market (VUN) and the iShares MSCI EAFE IMI (XEF). These changes lowered the portfolio’s overall MER by about a third.
Complete Couch Potato
- As with the Global Couch Potato, I’ve substituted the Vanguard FTSE Canada All Cap (VCN) and the Vanguard Canadian Aggregate Bond (VAB) to reduce costs of the portfolio by few basis points.
- I’ve added a note suggesting that investors who do not want to trade in US dollars should consider VUN, XEF and the iShares MSCI Emerging Markets IMI (XEC) instead. All three of these funds were launched in 2013, finally providing low-cost options for foreign equities without currency hedging. Outside an RRSP (where these Canadian-listed ETFs are less tax-efficient) the case for using US-listed ETFs is not as strong as it once was.
Uber-Tuber
- I’ve replaced the iShares Canadian Fundamental (CRQ) with the PowerShares FTSE RAFI Canadian Fundamental (PXC). The two ETFs track identical indexes, but the PowerShares version has a much lower MER (0.51% compared with 0.72% for CRQ), which was reflected in its lower tracking error in 2013. It now has almost two years under its belt as well as $100 million in assets, so it’s hard to make a case for CRQ anymore.
- The Vanguard Canadian Short-Term Corporate Bond (VSC) replaces the BMO Short Corporate Bond (ZCS) thanks to a much lower MER (0.18% compared with 0.34%).
Don’t rush to make changes
I can’t stress enough that there is no need to implement any immediate changes if you happen to follow one of my model portfolios. It makes little sense to incur two trading fees to switch to a fund that has a slightly lower MER, especially in a small portfolio. Consider, for example, the cost of switching to VAB from the iShares DEX Universe Bond (XBB). The difference in MER is seven basis points, or just $7 annually on a $10,000 investment. Meanwhile, the switch may cost you $10 per trade, and perhaps a couple of cents per share on the bid-ask spread.
In a taxable account it is almost certainly a mistake to swap out an equity ETF now. Given the markets’ performance over the last couple of years, you’d likely incur a significant taxable capital gain. For example, XWD has risen in price almost 45% over the last two years. Taking a huge tax hit to save 0.22% in MER is madness. If a tax-loss harvesting opportunity arises in the future, that’s the time to make any switches in a non-registered account.
That said, many people will be making RRSP and TFSA contributions this time of year. And since 2013 was a huge year for stocks and a lousy one for bonds, chances are it’s time to rebalance your portfolio. If you’re planning to make a few trades in your account anyway, that’s a good time to make any product switches you’ve been considering.
Your GCP pie chart is incorrectly allocated with bonds appearing to be the smallest slice.
Not a fan of the 4 options ordering. IMHO they should be from least to most expensive with asset and effort based qualifiers in the text. ING is more of a “good enough” choice and listing it as option 1 may lead some unsuspecting uninformed readers to think it is the optimal option.
@gsp: Thanks for pointing out the error in the pie chart, which is now fixed.
Thanks, Dan.
Couple of notes: The link given for XEF in the Complete Couch Potato note actually leads to the page for VUN.
Also, I note on the Model Portfolio page that you state, in the Complete Couch Potato section: “The following version of the portfolio uses US-listed ETFs for the foreign equity components. These have lower MERs than their Canadian counterparts and are more tax-efficient when held in an RRSP. ”
Should that read “when held OUTSIDE an RRSP”? Because why would tax efficiency be relevant inside an RRSP?
@Trevor: I fixed the link, thanks.
The note about tax efficiency was correct: the issue here is foreign withholding taxes. US-listed ETFs are exempt from US withholding taxes inside an RRSP, whereas the Canadian-listed versions of these funds are not. I reworded the note to make this explicit.
I’ve been recommending ING recently and I absolutely agree with putting that first as the simplest option.
While they may be restricted to phone, mail, and online access like the e-Series funds I believe they are more helpful and offer a better online interface (I haven’t personally used them). Since they don’t even require as much oversight as an e-Series portfolio they seem to be the simplest indexing option available. Along with my recommendation I give a simple rule for dividing money between the 4 funds based on how long it can be invested for which allows a little more fine-tuning than picking one fund.
But with fees like that I hope Vanguard comes out with something in the next few years to introduce more competition. Even if Scotia decides to give up the market I know Vanguard would serve small investors well.
Dan,
Any particular reason why you prefer XEC and XEF over Vanguard’s VEE and VEF/VDU given that Vanguard’s MER is lower by 2 basis points?
Thanks
@Nick: XEF and XEC have broader diversification with more exposure to mid-cap and small-cap stocks, which I feel is worth 2 bps. But VDU and VEE are perfectly good alternatives. VEF uses currency hedging, which I feel is an expensive an unnecessary strategy in an international equity fund.
Hi Dan:
The dividend yield for XBB and VAB is 3.92% and 2.47% respectively whereas the difference in MER is only .07%. Does .07% save justify the loss of 1.45% higher dividend yield? Is there any other reason to choose VAB instead of XBB? Thanks!
WS
I see that it is not a great idea to make large changes.
How do you typically advise making this change? Begin purchasing the new suggested funds, and when rebalancing sell the old and do it over time?
Last year when you switched to ZCN you made a point about holding off until the fund was big enough (+$1 billion in assets) and around long enough to have a good tracking record before finally deciding to do the switch. How come the change in heart for the VCN and VAB?
@WS: That’s a common question, but the distribution yield is virtually irrelevant. What matters is the funds’ yield to maturity, and for these two ETFs they are almost identical (2.7% for XBB and 2.6% for VAB). VAB’s is a little lower because it holds about 80% government bonds compared with 70% for XBB. But the two funds are very similar in all other respects.
Dan – Thanks for the clarification. I am new in investing and sometimes ask silly question.
@Tyler: There’s no simple answer to that question: it depends on the size of the holdings and how much you pay for trades. Using tow different holdings for any asset class seems like a pain to me, but that’s just personal preference.
@Joel: VAB is now more than two years old. VCN is new, but I trust Vanguard’s extraordinary record at keeping costs and tracking error low, so I feel comfortable using their ETFs even while they’re still small. I observed that ZCN had caught up to XIC in assets under management last year, but I wouldn’t ever suggest waiting until a Canadian ETF had $1 billion before using it: only a small number every reach that scale.
Also, last year Vanguard was still transitioning from MSCI indexes to FTSE indexes, and as expected, this caused some taxable capital gains within VCE. But this transition is now complete (and didn’t affect VCN in any case).
@WS: Not a silly question at all: it’s a very common misunderstanding.
Thanks Dan!
Good changes. I currently hold ZAG and I was wondering if there is a material difference between ZAG and VAB? As far as I can see they both have the same Management Fee of 0.20%. VAB has an MER of 0.26% and it looks like ZAG’s is slightly higher at 0.31%. Not sure how the indexes compare.
Hello Dan, I’m a beginner investor – well under 25K – and this blog has been one of my first steps towards investment literacy. Thanks for all the advice!
I was hoping you could share some extra advice in the following situation: I’ll be leaving Canada for a couple of years to work abroad.
This means I have the option of declaring myself a non-resident of Canada and pay only the foreign’s country tax, which is substantially less – conservatively speaking about 15%. But doing this means I would need to forfeit Canadian government services, including TFSAs and RRSPs.
Now I’m wondering if it makes sense to keep my investments with TD e-series while in Japan outside the TFSA. Yes I would have to pay 25% of earnings, but that is going to be considerably less than 15% of all my salary – which would be the cost of keeping the TFSA.
Any ideas or resources you can point towards? Thanks!
Any reason for preferring ZCS over VSC? I have VSC in my portfolio.
Thanks for keeping us up to date on all these changes.
One quick question. For the Global Couch Potato, you mention using XEF and XEC instead of VXUS if you do not want to use US-ETF. Can you let us know what ratio of these 2 you should use instead? Should it be 50/50 of the total allocated to International Equity (VXUS), or less towards the Emerging Market (XEC)?
Thanks again
@Chopstick Man: The rules for expatriates are complex and I wouldn’t presume to give you any advice here. I would suggest speaking to an account or tax adviser.
@Sean: To be honest, that was an oversight on my part: I’ve replaced ZCS with VSC and updated the relevant pages. The cost difference is too large to ignore when we’re talking about short-term bonds, where even five or 10 bps is significant.
@YVR: If you want to get close to the actual percentages in VXUS today it would be about 80% XEF and 20% XEC, though that’s after a year when developed markets are way up and emerging markets are way down. Two-thirds XEF and one-third XEC would be about right.
I also agree with putting ING first as the simplest option.
I’m in the process of getting 3 nephews and a niece started with investing, and the project would probably never have got off the ground if they had to manage a TD e-Series account. I can only hope that Vanguard will have made their LifeStrategy and Target Retirement funds available in Canada by the time they get to about the $50,000 level.
Hey Dan,
New investor here, so firstly thanks for all the work you put into this site, and the advice you offer. I’ve done a ton of reading, and going through the process, and I’m hung up on a couple thoughts and was hoping you could shed some light.
Do you still use iTrade? If so do you pay the $120 for the year of the friendly CAD to USD conversion? Am I right in assuming it works out to be 0.12% drag on the portfolio if you have 100K invested? Wouldn’t you end up paying more for the Canadian equivalents at that point? Since I bank with Scotia, iTrade feels “comfortable” but I worry I’ll be wasting away my dollars on exchange. I know this ties in with you saying not to sweat the details, but I’m wanting to understand them best I can to make the decision.
Also, for someone getting in with a larger chunk of cash, is there any reason not to buy all at once? Can I get burned on bid-ask spreads? Is it better to spread out the purchases?
Thanks again, and keep up the awesome work!
Thanks! :)
@CCP: You said “US-listed ETFs are exempt from US withholding taxes inside an RRSP…” Does this apply to all US-listed ETFs, or only those representing US based equities?
@Dan: What made you decide on VAB instead of ZAG? Thanks, Que
@CCP: In your Uber Tuber Portfolio, which has the same 40% total Bond portion as in the Complete Couch Potato Portfolio, there is no Real Bond portion. Is this because there is some feature embodied by the rest of the Asset mix that addresses inflation, or is inflation mitigation omitted from the list of requirements in the design of the Uber Portfolio?
@Que and Tennis Lover: Other than cost, ZAG, VAB and XBB are the same in all meaningful ways despite tracking slightly different indexes. (VAB has a little more allocated to government bonds than the other two.) VAB has the lowest MER at 0.26%, although ZAG lowered its management fee significantly about a year ago, so its 2013 MER should come down. I would consider these two funds to be virtually interchangeable.
@Oldie: Any US-listed ETF that holds dividend-paying equities (domestic or foreign) is potentially subject to withholding taxes on those dividends. Canadians are exempt from this withholding tax of the security is held in an RRSP. If you were to hold an international equity fund like VXUS in an RRSP, you would still pay any withholding taxes levied by the countries where the stocks are domiciled (Europe, Asia, Australia), etc. This is unavoidable, no matter what type of ETF you use.
The Uber-Tuber started life as an attempt to mimic the strategies used by Dimensional Fund Advisors. DFA’s fixed-income strategies do not include real-return bonds (or TIPS in the US), so I left them out of this portfolio.
Hi Dan,
I’ve been using XIC for my Canadian equities component but I see that now you’re recommending VCN. The returns of the two ETFs look pretty similar since VCN’s inception (as they should), but I noticed that VCN has a dividend yield of only 0.81% vs. XIC’s yield of 2.69%. Any idea what’s up with that? Thanks. — Mike
@MoneyMatters: Thanks for the comment. Yes, I use iTrade, but I do not use the US-Friendly RRSP option. That’s simply because I have some USD income I can use to buy the US-listed funds in mt RRSP. If you would like to use US-listed ETFs in an iTrade RRSP, my suggestion would be to pay for one quarter of the US-Friendly service ($30) make all your trades for the year, and then cancel the service immediately.
As for buying in all at once, if you’re concerned only abut transaction costs, then a one-time purchase is always going to be cheaper. But this is simply because you’ll incur fewer trading commissions. Bid-ask spreads don’t really enter into it: if the spread costs you $0.02 per share, you’ll pay $10 whether you place one order for 500 shares or two orders for 250 shares. Hope this helps, and good luck.
@Mike: VCN is brand new and has only made one full quarterly distribution, so its yield calculation won’t be meaningful unless you adjust for that. Since the indexes are extremely similar you should expect the yield on XIC and VCN to eventually be very close.
Thanks again for the response! One follow up question I have is if you were starting right now and didn’t have the USD income would you still use itrade and use the US rrsp friendly program or would you go into the Canadian versions directly? Of course I’m guessing the itrade program is good if I choose to buy an us stocks outside of Etfs as well. Or would you look more at someone like quest trade? I think this right now is the hardest choice for me. Everyone wants a cut :-)
@Dan: Makes sense… Thanks for the very quick response.
One other question, as I mentioned earlier, I’ve been using XIC (and XBB/XIN/XSP) for quite some time now but I’m about to make my yearly contributions to my TFSA and taxable account for my ‘Global Couch Potato’ portfolio. Aside from the the slight book-keeping hassle of dealing with having two ETFs that cover the same territory is there any reason you can think of why I shouldn’t start accumulating savings using your new ETF recommendations from this point forward? I guess, at some point, I’ll need to do two transactions to sell instead of just one. But I plan to be in accumulation mode for a while yet. Thanks again!
Hi,
First off, I want to thank you for writing all these excellent articles. I read all of them as soon as I see a new one come out.
I have many questions for you but I will just start with a basic one regarding TFSAs. I know you are an advocate of keeping tax inefficient ETFs to avoid paying taxes on a greater portion of the distributions, but what about putting higher growth ETFs (i.e broad indexes) to shelter the (hopefully) potentially higher gains? There is probably a cost benefit to it but I just wanted ask your opinion on it.
Thanks again for writing all these great article!
@Tony: I appreciate the comment. Yes, a TFSA is an ideal place to hold equity funds with a lot of growth potential. I guess I’m not sure what you’re thinking of as an alternative. Are you asking whether it’s best to hold equities in a TFSA rather than an RRSP (assuming you’re contributing to both account types)? If so, the answer would typically be yes. In most cases it’s preferable to keep the slow-growing assets such as bonds in the RRSP and high-growth assets in the TFSA. This way you would expect to have a much smaller tax liability in retirement.
@Mike: There’s nothing wrong with holding two funds for each asset class: it’s just a bit messier, that’s all. But if you;re doing it to avoid a huge tax bill, then clearly it’s worth it.
I should note that there may be good reasons to reconsider funds like XSP and XIN (which were the ETFs recommend by MoneySense in the original Global Couch Potato). Both use expensive currency hedging, and there are now much better options available. Whole it’s not worth switching ETFs to save two or three basis points in MER, it is often worth to switch to an ETF with a better stratgey.
@MoneyMatters: In an RRSP I would still use the US-listed ETFs. Paying $30 once a year or so to convert currency at a very low rate is worth it, assuming the portfolio is reasonably large. You mention $100K, so I’ll assume your US holding is about $15K or $20K, and your international equity allocation is about the same. At that level it would make sense to take advantage of the US-Friendly service.
@Dan: It looks like ZAG is now at 0.20% MER versus 0.26% for VAB. So if someone already has ZAG, would you tell them to stay put, and keep adding to it? Thanks, Que
@Que: Don’t confuse management fee and MER. Both funds have a management fee of 0.20%. The full MER for VAB is published on Vanguard’s website (0.26%) but for ZAG you have to go digging into its Management Report of Fund Performance. The most recent one (June 2013) says 0.23%, but this is a six-month figure. Will check again when the year-end report is out.
As I keep trying to stress, many of these ETFs are virtually interchangeable. Selling ZAG to buy VAB makes no sense. I could have suggested ZAG in my model portfolios and everyone would be asking why I didn’t use VAB. :)
Thanks for keeping these updated; it’s extremely helpful! I also agree with your placement of ING; it’s largely the complication of working with a broker that keeps many people from getting into ETFs. On that note, do you have any thoughts on brokers? The Globe and Mail likes Virtual Brokers, but in some areas Questrade is less expensive.
When will you be posting the 2013 performance of these portfolios? Will you base it off of the previous ETFs or the new ones?
@Andrew: I wrote a feature about discount brokerages for MoneySense last year. We teamed up with a research organization (Surviscor) and came to a different conclusion than the Globe. My feeling (backed up by the research) is that super-low commissions should not be the top priority for most investors. That’s especially true if you’re an index investor who is not likely to be doing much trading anyway. Though I’m aware many investors love the commission-free ETF options at Virtual Brokers and Questrade.
http://www.moneysense.ca/invest/canadas-best-discount-brokerages-2
@Kurt: Pulling together the performance info is on my list. The 2013 performance numbers will be based on the 2013 portfolios: otherwise it’s cheating. :)
Hey Dan,
Caught your presentation in Waterloo, was fantastic.
Gen Y here, set up my first RRSP plan about a year ago with ING’s full equity streetwise fund (prior to discovering your blog). I’ve seen the light and will stay passive. Need to rebalance though and am having a difficult time deciding how to add some fixed income to my portfolio. Will continue with bi-weekly paycheque DCA contributions so I will stay away from ETFs, wondering if there is a low MER bond fund you would recommend?
Am an RBC client and they don’t seem to have much that is attractive in this arena for DIY investors. Also hear many suggest selecting a bond fund with some international exposure. Should I ignore and just go with tried and tested e-series DEX universe?
@Brendan: Glad you enjoyed the talk in Waterloo. It seems like an ordeal to use the Streetwise Portfolios for equities and an e-Series fund for bonds. Why not use just one or the other?
Another option is just doing DCA into a savings account at ING and periodically using that money to buy GICs. You’re getting 1.35% in a savings account with zero risk. In our white paper on the Streetwise Portfolios we discuss the idea of using the all-equity Streetwise fund in conjunction with a GIC ladder for the fixed income:
https://canadiancouchpotato.com/2013/09/12/the-one-fund-solution/
@Dan, Que: For ZAG, the MER can actually be found in a quick and convenient way on the list of BMO’s ETFs: http://www.etfs.bmo.com/bmo-etfs/ . ZAG currently lists a MER of 0.31% (5th column).
Hi ccp,
My question was making the assumption you have maxed out your rrsp/tfsa in cash but have not made any security purchases yet. Assuming the rrsp will be used for US listed ETFs for us/international stocks, you’re left with Canadian securities and fixed income to be allocated to your non-registered account/TFSA.
One alternative is to hold tax inefficient ETFs in the TFSA and enjoy the tax efficiency of Canadian equities in your non registered account (but pay large capital gains if it grows in the future) or vice versa, using your TFSA to shelter large capital gains in the future but keep tax inefficient bonds/reits in your non registered account. Sorry if it sounds confusing, heh.
Ok, I have multiple accounts: RRSP, Spousal RRSP, Hubby’s RRSP, 2 TFSA’s, and now a new non-reg account. I just topped up the RRSPs and TFSAs from my Dad’s estate, and have a major reworking to do to rebalance and integrate over $100k of new funds into all these accounts – it is officially a dog’s breakfast totalling over $225k spead between Q-trade for ETFs and ING for laddered GIC’s (original TFSA accounts) I have been using the Complete Couch Potato as my model portfolio.
So I looked up your multiple account rebalancing spreadsheet – but it doesn’t appear to incorporate your new recommendations (see above) and I am just a bit lost now! In the article regarding this spreadsheet you mention that tinkering will void it – so will you have an update available relatively soon?
I have available to deploy cash as: $17k in the spousal, $50k in non-reg and $41k between the TSFA accounts. It is going to be a BIG job!
@HeidiPG: Thanks for the comment. The spreadsheet works no matter which funds you happen to use for each asset class. You can simply change the fund names that are there now if they’re different from the ones you use. The tinkering I referred to was in reference to the formulas.
The situation you find yourself in is very common, and it’s not a simple solution. It’s exactly the reason we set up our DIY Investor Service:
https://canadiancouchpotato.com/diy-investor-service/
This might be a dumb question, but I can’t find the answer.
When it comes to the TD e-series funds for US equity part of the couch potato portfolio, there is the TD U.S. Index Fund – e (which is the one included in your model portfolio), as well as the TD U.S. Index ($US) Fund – e. If/when the Canadian dollar loses value vs. the US dollar, will TDB902 necessarily lose value? Should I be buying TDB952 if I believe the Canadian dollar is going down?
Thanks!
Yeah, I just was coming back to say I had re-read the article and was beginning to realize I had panicked too early. I have been managing our meager money for many years, and this recent influx has been a bit intimidating, but I know if I just work through it (using the tools you have provided), I can actually get it done. I am not going to rush though and make sure I feel I have reviewed all the options before I pull the trigger. Thanks for the input!
I originally posted this on the Money Sense website, but I thought that it might make more sense to post it here, so I copied and pasted it below. (For the following question, let’s assume that everything is invested in an RRSP)
I’m always interested in your articles and your blog, but I have a question about your asset allocation. With the market capitalization of Canadian equities being about 3% of the global market, what is your justification for allocating so much more to Canadian Equities? In your Global Couch Potato and Uber-Tuber portfolios, you have 33% of your equities allocated to Canadian equities, and in the Complete Couch Potato portfolio, it is 40% of non-real estate equities. Historically, Canadian equities have not outperformed other geographic sectors, such as the US, so is there a strategic reason to overweight Canadian equities in your portfolio?
@Sadnie: It’s not a dumb question! I explain the difference between the three versions of the TD US Index Fund in the post below:
https://canadiancouchpotato.com/2010/08/11/will-the-real-sp-500-please-stand-up/
@EH: I address that question here:
https://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/