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.
I am using VCN, VDU, VUN, and VAB in my portfolio with 30% to VAB and 70% split among the other three. I haven’t tried to differentiate between whole-market ETFs too much. I would be happy to hear anyone’s thoughts on this. Is the MER spread that different between similar offerings of different companies? I’m not a large-portfolio guy; just under 100K right now.
I have been following a version of the Uber-Tuber for a year and I hold several index funds directly in $US. to take advantage of the Canada-US tax treaty in registered accounts. Today the Canadian dollar dropped to its lowest level since 2009 which will inflate my $US holdings. I realize the problems with foreign currency fluctuation, but was wondering if Couch Potatoes should take advantage of a positive currency exchange within their portfolios. In other words, how far does the Canadian dollar have to drop before one should consider selling their $US holdings and buy the equivalent in $CAN? Does the exchange rate “profit” outweigh the tax benefit?
Did the ubertuber not contain tax advantaged etfs at one time, specifically CAB? What to do with this allocation?
@meeko: This is a common misunderstanding. The trading currency of the ETF does not determine your currency exposure: that comes from the currency of the underlying holdings. So whether you hold VTI or VUN, for example, your exposure to the US dollar is exactly the same. And if you hold a fund such as VEA (which is invested in the EAFE countries) or VWO (emerging markets), your exposure to the US dollar is zero, even though these funds are denominated in US dollars. So the international holdings in the Uber Tuber are unaffected by the UDC/CAD exchange rate.
https://canadiancouchpotato.com/2011/04/04/currency-hedging-in-international-funds/
https://canadiancouchpotato.com/2011/04/07/a-case-study-in-currencies/
The only time you’re changing your exposure is if you use an ETF that uses currency hedging: for example, you could “play” the currency game by switching from VTI/VUN to VUS depending on where you think the exchange rate is headed. But then you’ve ceased being an investor and become a currency speculator.
@al: The Uber Tuber never included “tax-advantaged” ETFs, but one of my older portfolios did. These funds were targeted by the 2013 federal budget and are not likely to be around much longer:
https://canadiancouchpotato.com/2013/04/02/how-the-2013-budget-will-affect-etfs/
@meeko if you’re holding USD funds I would consider it important to include the exchange rate when you rebalance your portfolio. For example if you have a $100,000 portfolio where you want 20% in the US market and 20% in the Canadian market, that doesn’t mean you want to hold $20,000 of VTI or VOO. The value of that in CAD would be $21,595 today. So in a case like that you might sell some of the US index and buy more of the Canadian index to meet your asset allocation, or just avoiding buying more of the US index for a while.
@CCP, is there a particular reason why you favor the ING Balanced Streetwise Portfolio over the Mawer Balanced Fund (MAW104)? I believe the MER is 12bp lower with MAW104.
@Matt: The Mawer fund is actively managed. It’s very low-cost and well managed and I certainly wouldn’t try to talk anyone out of it, but it’s not a way to get started with indexing. For the small investor, the Streetwise Portfolios are also much more convenient, since you don’t need to open a brokerage account. Mawer allows direct accounts, but the minimum investment is $50K.
Hi Dan,
Does the combination of XEC and XEF represent a good canadian-listed alternative to holding VXUS? If so, what relative amounts would you suggest holding to replicate VXUS? I think the latter is about 25% emerging markets if I remember correctly.
Thanks,
Jamie
@Jamie: Yes, the combination of XEF/XEC gets pretty close to VXUS. Right now emerging markets are only about 20% of VXUS, but that will change: emerging markets had a bad year, while developed markets had a great one, so the mix is different from what it was last year. If you were planning on an allocation of 15% international equity, something simple like 10% XEF and 5% XEC is fine.
Have you change your option 3 of the global couch potato? I could swear it was 3 RBC mutual fund for stocks and one TD for bonds.
@Francis: Yes, partway through 2013 I swapped the two RBC foreign equity funds for the cheaper versions from TD and Altamira.
I don’t get it. Why PXC for your Uber-Tuber Canadian equity, rather than the cheaper and more doctrinally sound VCN or HXT? When did you go all “fundamental” on us?
Also, why EFV instead of (rather than additional to) VEA? Why SCZ over VSS?
@Andrew : Value Tits to copy dimensional adviser portfolios
@Andrew: This is nothing new. I created the Uber-Tuber portfolio more than three years ago as an attempt to mimic the strategies used by Dimensional Fund Advisors, a firm that attempts to capture the value and small-cap premiums. These funds are available only through a select group of advisers, so I wanted to to see if I could build an ETF portfolio that got close. It’s evolved a bit over the years with the help of some DFA advisors, and I think I’ve gotten pretty close. Here’s some background:
https://canadiancouchpotato.com/2010/09/17/taking-etfs-to-the-next-dimension/
https://canadiancouchpotato.com/2011/05/30/a-portfolio-makeover/
https://canadiancouchpotato.com/2011/06/01/the-tuber-gets-tested/
It’s just an option for those who want to want to step outside the plain vanilla indexes.
Hi, have you had a look at any of the Mawer funds? I understand that they are not true index funds, however, with a modest MER and what I believe is good track record and company backing, would you see them fitting in any of your above categories? Mawer Balanced Fund vs. ING street wise?
@vanbc: Mawer has a long record of prudent low-cost active management and I have a lot of respect for them, but these portfolios are designed for index investors. It’s like asking a vegetarian restaurant why they don’t have steak on the menu. The point is not that steak is bad: it’s just not vegetarian.
There’s also a practical issue to consider. I generally present the Streetwise Portfolios as an option for new investors with small portfolios. The Mawer funds either require you to open a discount brokerage account and invest a minimum of $5,000 or so (varies with the brokerage) or invest directly with Mawer with a minimum of $50,000. Neither arrangement is ideal for the beginning investor.
Wanting to maintain an existing $US trading account, what Canadian listed equity and bond ETF’s but denominated in $US would you suggest for constructing a portfolio with allocations somewhat similar to the Uber-Tuber one?
Thanks
@ARV: This should help:
https://canadiancouchpotato.com/2013/03/26/ask-the-spud-the-us-dollar-couch-potato/
@CCP, I think VDU is cheaper than XEF, is it make sense to use VDU instead of XEF?
As usual, lots of comments to digest! :)
Hi Dan,
First thanks so much for your awesome site, and invaluable information for Canadians.
I follow the Complete Couch potato, and am wondering your thoughts on ZRE (Canada real estate only) versus a global real estate fund – holdings in many countries, including Canada and the USA:
•Claymore Global Real Estate ETF (CGR) – traded in Canada
•Cohen & Steers Global Realty Majors (GRI)
•SPDR Dow Jones Global Real Estate ETF (RWO)
•First Trust FTSE EPRA/NAREIT Global Real Estate Index ETF (FFR)
Would this strategy not improve currency risk and diversify the holdings?
Thanks for your comments.
Cheers
Hi, I will be starting a couch potato portfolio and contributing to it monthly. Do you recommend the same mix for each purchase, or should I try to rebalance so the overall portfolio mix is kept in balance each month?
Thanks for a very helpful site!
Thanks CCP for the update. Any info you have on criteria for deciding on RWO would be appreciated. I went with VNQ & VNQI personally but am interested to know if it’s the number of holdings, index, etc.
Have you ever one a post on the cost or tax implications of having US ETFs with some Canadian holdings? I understood there may be a minor drag on returns because of hold US tax treatment of Canadian holdings.
@Chip: The main reason to prefer RWO is the convenience of a single holding. Nothing wrong with the Vanguard funds. As for the withholding taxes on Canadian securities in US-listed ETFs, this is true, but it is such a tiny cost it’s not worth even considering. We’re talking about a fraction of a dividend from a small fraction of a fund that makes up a fraction of your portfolio.
Is the Vanguard VUN subject to withholding tax if in an rsp account?
Would it be better to hold the US version of this ETF which trades in the US instead in the rsp?
Are the vanguard funds (either Canada or US listed) with foreign exposure best to held in a non-registered account?
@MoneyMatters: REITs and real-return bonds have low correlation with the other asset classes and therefore should lower the Complete Couch Potato’s overall volatility, but these are small details. I can’t stress enough how important it is to just pick the strategy that seems simplest and most comfortable and just do it.
@CCP: This blog by Justin should help:
https://www.pwlcapital.com/en/Advisor/Toronto/Toronto-Team/Blog/Justin-Bender/January-2013/Foreign-Withholding-Taxes-and-Global-REITs
@Sue: Yes, VUN is subject to withholding taxes in an RRSP, while its Us-listed counterpart (VTI) is not:
https://canadiancouchpotato.com/2012/09/17/foreign-withholding-tax-explained/
Re:VUN
Thanks for your insights.
Would this still work out to be a financially good etf to contribute to monthly in an rsp account through a brokerage that offers free purchases if you did not want to use VTI
And would this be a better strategy than using the US index fund offered through TD , the e series or non- e series. Or would they both be a consideration
Is there withholding taxes with the US, international and Nasdaq e funds and would this then mean it would be better to hold these funds in a non-registered account or does it really matter in the big picture?
I hold VTI and VXUS in my RBC Direct Investing US RSP account and noticed that there is no DRIP. When I contact them I was told they are no longer offering DRIP on ETFs and these two are not on their grandfathering list. Is there are alternative that I can use? Should I manually purchase shares when i get the quarterly dividends?
1. Referring to the global couch potato-remodeled portfolios, Option1 has higher annual cost (1.07%) than option 2 (0.44%). For a small investor, would it be better to go with option 2? I have just started investing with option 2 so is it ok to continue with that.
2. I was reading an article on Globe & Mail on 2 Minute Portfolio. It says that 2 Minute portfolio strategy is cheaper to index fund strategy and has been faring better than index funds. Appreciate your view on this. Thanks
@satuk: If you have already started with option 2 there is certainly no reason to switch. Option 1 is just much easier to implement and maintain if you are starting from scratch.
The 2-Minute Portfolio is just one of countless stock-picking strategies that show good backtested results. I don’t have any comment about it except to say that most people who pick individual stocks take too much risk and have a difficult time executing their strategy with discipline.
@Sara: Most brokerages do not offer DRIPs on US-listed ETFs. In my opinion, DRIPs are overrated: they are convenient, and you should take advantage of them if they are offered in a registered account. But I would never choose one ETF over another based on DRIP eligibility. A little bit of idle cash accumulating in your account is not likely to affect returns significantly, and you can always use it when rebalancing.
Thanks for the response. Regarding option 2- I make monthly contributions. In a particular month if one of the four outperforms the other..for eg: Canadian equity performs better, do I need to rebalance my portfolio next month to ensure I still maintain the 40-20-20-20 ratio? When would I need to rebalance-every month or at the end of every year? Thanks
@satuk: Rebalancing every month may be overdoing it. Once or twice a year is usually fine:
https://canadiancouchpotato.com/2011/02/24/how-often-should-you-rebalance/
Thanks for the reply. Appreciate it.
You de-listed ZAG and went with VAB only. I wonder why since previously you said ZAG slightly out-preformed VAB last year and they have the same MER?
@David: ZAG has never been in my model portfolios, but it’s a perfectly good choice.
For the Global Couch Potato option (using the four TD e-series funds), if not all can be invested through an RRSP or TFSA account, which – in addition to the Canadian fund – are best left in an UNsheltered account?
@KLF: In general, the next best choice for a non-registered account would be US equities: the dividend yield is currently lower than it is for international equities, and therefore the taxes will be lower.
If you had about $40,000 to re-allocate in your RSP and this amount is currently in cash, and you were looking for a Canadian ETF that holds US stocks such as VUN. Would this be a good one to add it you didn’t want to get the US held version or couldn’t without alot of currency exchange in the situation where the brokerage company won’t let you hold US funds in an RRSP. What would the likely withholding tax be that you couldn’t recover if lets say this amount was never touched and it was left to grow in the RSP for the next 20 years. In this example would it be best to buy this ETF or would the lack of flexibility about the withholding tax be a deal breaker? Would it be better to buy the TD-US index fund as an alternative to this ETF strategy?
I am just coming to realize that some non-Canadian focussed ETF’s due have foreign income to pay and maybe we don’t either know this or are really aware of the impact on drag on your return. Is there a way of finding out how much of a theoretical impact this has. Also, would companies like ishares; BMO and Vanguard for example post on their websites the income sources for income;dividends so we can be better informed if we put these in an RRSP. I also hold BMO Global Infrastructure and I am trying to tell if within my rsp I am getting a drag on my return because of foreign income witholding tax. This ETF has done well for me, I don’t intend to sell it and it represents a small holding in my LIRA but you have opened my eyes to the hidden features of ETF buying.
Any insights would be greatly appreciated. Thanks Sue
One thing I always wondered about the uber tuber portfolio. It puts 40% of overall assets in ETFs with US dollar exposure (ie unhedged to Canadian ). Is 40% foreign currency exposure higher risk ? Would be interesting to have and über tuber portfolio with and without hedge to see perf difference.
@Sue: For Canadian-domiciled US equity funds (such as VUN and the TD US Index Fund), just multiply the dividend by 15% to get an idea of the withholding tax amount. These days US index funds yield about 2%, do the withholding tax is additional cost of about 0.3% (2% x 0.15). On a $40,000 holding that’s $120 annually. My guess is you would pay more than $120 in currency conversion costs to buy a US-listed ETF, so it’s a trade-off.
This is very helpful thank you. At the end of the day or lets say in 20 years time, this cost may come to much less than it may cost to buy a high MER US equity fund that did not beat the underlying index. I know this doesn’t compare apples to apples but its the cost effectiveness of ETF’s and very low MER index funds that are worth noting the bigger pay off with this approach. I am debating between the VUN or the TD US index fund in my RSP and still am not sure which way to go (BTW this has become possible with essentially selling my poorly performing US equity fund and realizing that actively managed funds rarely will beat the index so I might as well buy the index and save my money and start improving my opportunity costs again !!)
@Dan: Can you provide an accurate way of calculating the cost of currency exchange, specifically how to compare a Norbert gambit to an accurate current exchange rate to determine your actual cost? Thanks, Que
@Que: Just take the bid-ask spread of DLR or DLR.U (usually it’s two cents) and multiply it by the number of shares you’re trading. Then add the two trading commissions. The current exchange rate is irrelevant to the transaction cost:
https://canadiancouchpotato.com/2012/12/17/how-much-are-you-paying-for-us-dollars/
@Edgecoat: Currency diversification actually tends to lower the volatility of a portfolio, and currency hedging causes a long-term drag on returns. It would be impossible to test the Uber-Tuber with currency hedging because the products have never existed to make that possible.
I’m not sure if you’ve addressed this elsewhere, but I was holding XBB for the Canadian bond portion. The benchmark tracked by that is DEX Universe Bond Index. The new Canadian bond recommendation VAB is tracking Barclays Capital Global Aggregate Canadian Float Adjusted Bond Index. Can you please explain the difference between these?
Thank you
@Jessica: The two indexes are very similar: VAB has a little more in government bonds (about 80%, compared with 70% for XBB) but otherwise they are more or less interchangeable.
The new RBC ETF’s just launched this week. Do you have any opinions on these and would you be a buyer if you were looking for a dividend/income producing ETF (with monthly contributions to a registered account or would the others from BMO, ishares or Vanguard be better options given their respective histories. Thanks Dan
@Dan: you said to Sue “On a $40,000 holding that’s $120 annually. My guess is you would pay more than $120 in currency conversion costs to buy a US-listed ETF”.
I’m just trying to understand how you figure she will pay more than $120 in currency conversion costs. A spread of 0.4% resulting in $120 would be a contribution of $30,000, and how would that contribution make sense to a $40,000 holding?
Thanks, Que
I see that you have now selected VCN over ZCN. Am I correct that a notable difference is that ZCN caps any security at 10% of the index whereas Vanguard is a true market cap index and therefore could be vulnerable to the Nortel effect, where one stock represents more than 10% of the index (thereby increasing specific company risk).