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.
@RJ: Yes, it’s true that FTSE doesn’t impose a cap on individual stocks in its broad-market indexes, so it could theoretically become vulnerable to something like the Nortel effect. But this can’t happen suddenly: there would be lots of warning and plenty of time for an investor to move to a capped index if they felt that a single company was starting to take up too large a share.
@Que: I understood the comment to mean she was looking to make a $40,000 ETF purchase, as well as additional purchases in the future. I also never assume that investors will get a 0.4% spread unless they specifically say they’ll be using Norbert’s gambit (where it would be less). The retail spread is generally much higher.
Hi CCP, I am interested in finding out why you stuck with ZRE for your Complete Couch Potato portfolio over the cheaper alternative in VRE. I saw in one video at the Globe & Mail, where you, Justin, and Rob discussed what a retiree’s portfolio should have. In that portfolio, you guys used VRE instead.
I personally am struggling with the choice. I intend to initiate a position into REITs with about $7,000. I can use the brokerage’s DRIP with ZRE because of the consistently large distributions (hypothetically, $0.08 per unit) and low market price; conversely, VRE’s distribution is inconsistent and rather low (about $0.055 per unit) combined with a higher market price, which may not allow me to use DRIP.
@DL: Both ETFs are perfectly acceptable for Canadian REITs. Personally I like the equal-weighted methodology because it avoids the large concentration in a one or two holdings that you see in VRE. However, the counterargument is that ZRE has a higher fee and has relatively large holdings in some very small companies. I don’t think the DRIP concerns should have any effect on the decision: it’s more more important to decide on the strategy you’re most comfortable with.
This post may help:
https://canadiancouchpotato.com/2013/12/19/why-has-vre-outperformed-its-rivals-in-2013/
Hi,
I was considering purchasing the funds in your Option #3 of the Global Couch Potato, but the Altamira Intl Index fund causes me concern. I am frankly shocked that it was recommended at all, and am surprised that it is still on the list. It has only $11 million (with an m) in the fund! I suspect most of that is due to CPers! How a fund with that little investment can sustain itself and manage a true portfolio is beyond me. The other shocking thing is that it has been around since 1998. Sounds too risky to me. Thoughts?
@John: An index fund with a small asset base is not unusually risky. The worst case scenario is the fund would be wound down and investors would have their money returned to them. And as you point out, the fund has been around for 15+ years, which suggests this is not an imminent danger.
If you have no access to the TD e-Series funds, the next best option for an unhedged EAFE index fund is TD’s I-series, which has a 1.38% MER.
@CCP: thanks for answering. I will take a look at the TD fund you mentioned.
Hi, Thank you for all of your information and updates. Would you consider doing a portfolio for a leverage based investment (either smith or standalone investment loan)?
Hi Dan,
I might have missed an earlier post, but can you explain why you are choosing VAB (average maturity 10 years) as opposed to a short term fund like VSB? For a long term investor is the idea that it will eventually work itself out even taking into account that we are in a rising interest rate environment?
Thanks
@Brian: Short-term bonds are a perfectly good alternative if you prefer lower volatility. But for an investor with a long time horizon, a brad based bond fund should have higher expected returns. Be careful of ideas like “we’re in a rising rate environment.” We don’t know with certainty whether rates will rise, fall or stay the same.
On your Model Portfolios page, no mention of correlation … the underpinning of your whole index investing strategy.
Correlation matrices for each portfolio would be nice.
In your Couch Potato Models you are using mainly Vanguard ETF. Why not iShares? I don’t think there is a significant difference in MER
Peter
@Peter: In most cases iShares ETFs would be perfectly good substitutes. The ones I list are just suggestions.
Hi.
Long time lurker here. I have been looking at your various portfolio options, and wonder what you might recommend to emulate some of these using low MER mutual funds. My RRSPs/TFSA are maxed and can be dealt with via ETFs, but I am just setting up a systematic investment plan with Waterhouse where I will be investing roughly 1000/week. I wouldn’t want to incur trade costs in this scenario. Any thoughts?
@RW: Why not just use TD’s e-Series index funds?
Fast reply! Woops, I should have been more clear. I meant something to emulate some of the more nuanced portfolios. Like the complete/ubertuber, or at least a good mutual fund option to get real estate exposure and emerging markets?
I know I could do a bare bones eseries approach on the simplest portfolio, and then move to ETFs in the uber tuber maybe at the end of the year when there is about 50k in value..and repeat each year. I would like to dollar cost average my way into it though.
Thanks!
@RW: No, there are no good index mutual fund choices once you get beyond the core asset classes. I wish there were. CIBC has an emerging markets index fund, but its MER is 1.39%. All real estate mutual funds in Canada are actively managed. Your second idea (the bare bones approach) sounds better.
I have invested (RRSP) @ $25000 in RBC North American Value mutual fund. Now I want to contribute @ $30000 this year in RRSP and TFSA. I am thinking to invest in ETF now. I am thinking about VUN, VCN & XEF. Please suggest me. Are the ETF better option than Mutual funds? Are these safe ?
Curious why XEF and not VDU in the global portfolio (option 4)?
@Michael: VDU is a perfectly good choice. XEF has more diversification with additional mid-cap and small stocks for only a very slightly higher fee, but both are excellent choices for international equities.
is there a role for XCB (corporate bond etf) in one’s rrsp as an option for fixed income or do you prefer another type of bond ETF as part of a diversified portfolio?
@Sue: Corporate bonds are a reasonable holding if you don’t mind taking on a little more risk in exchange for a a higher yield. They will not offer the same protection as government bonds in the event of a market crash, however. Broad-based funds like VAB, ZAG and XBB include both government and corporate bonds, which I think is a good compromise.
I’m looking at switching some funds from TDB966 to TDB909 to take advantage of the lower MER of the e-series fund. The existing TDB966 has a DRIP and I was told by the TD brokerage advisor to cancel the DRIP (30 days) before making the switch to TDB909 to avoid the early redemption penalty for newly purchased DRIP shares.
Anyone else aware of this? Are the early redemption fees significant say for a $100 reinvestment or is this something I don’t need to worry about. If rebalancing do we need to keep this in mind and cancel the DRIPs first?
@SRR: That is definitely good advice for ETFs, but it seems odd for mutual funds, which do not typically have record dates for dividend payments:
https://canadiancouchpotato.com/2013/05/09/etf-dividend-dates-explained/
TD should tell you exactly what the early redemption fee would be. The website says “Up to 2.00% of purchase cost if redeemed within 30 days of purchase.”
I need to replace VCN in this portfolio with a US-listed ETF for tax reasons. As a US citizen in Canada, I can’t hold Canadian-listed ETFs in my non-registered accounts if I want to avoid PFIC issues.
Considering a mix of iShares MSCI Canada (EWC) and iShares MSCI Canada Small Cap (EWCS) on an 85/15 split, which roughly matches the large cap / small cap mix of VCN.
Does anyone have any thoughts on this, or other suggestions?
Thanks in advance.
– Erik
@EJD: Good decision to use US-listed ETFs, though I would suggest the portfolio would need to be pretty large before I worried about adding small-cap Canadian equities at 0.59%. A portfolio of EWC, VTI and VXUS would cover the world pretty simply and cheaply.
Thanks for the feedback. The rationale on the split was that VCN holds 235 equities and EWC only holds the top 96, so the small-cap fills out the rest, but I get your point on portfolio size. Not sure where the .59% figure came from…I was figuring 15% of VCN’s 20% allocation = 3% EWCS. But I’ll do the math and see if that’s material.
@EJD: 0.59% is the fee on EWCS, which is very high for a US-listed ETF. All I meant was that if you are using US-listed ETFs you can get very broad equity coverage without having to bother with expensive and narrowly focused funds like that.
@CCP: Ahh, got it, thanks.
I’ve had a savings account with the same bank for 25+ years. My picture ID, passport and government issued have expired. I’m having trouble opening a TFSA trading account with the direct investing division of the same bank. Any suggestions besides wasting the money for picture ID ? Thank you very much for your help……Jim
@Jim: Brokerages are pretty strict these days because of money laundering laws: they pretty much always insist on on valid photo ID. But often they will accept a provincial health card (even if your province does not have photo-ID health cards), so you could try that.
Hi Dan,
Can you direct me to a link that maybe able to show me what the difference in fees paid would be between the td us index fund (I series, I can’t do e series) and the fees incurred in using the etf VUN. I would be looking at trying to find out if the returns would also be better with investing In the VUN on a quarterly or twice a year basis with an RSP contribution allocated to US equities of about $5-6 K a year factoring in trading fees and possibly missed opportunity costs of not contributing monthly with money accumulating in a money market fund until enough accumulates to make the etf purchase.
Is there also a resource on line that I can find out if the rate of return of this etf has beaten this mutual fund taking the MERS and trading fees into account. Sue
@Sue: The spreadsheet linked here should help compare costs when you factor in MERs and trading commissions:
https://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/
In terms of cost, my guess is it would make sense to use the ETF and make two purchases a year. But that’s all you can measure. The difference in returns can never be known in advance.
The past performance of all ETFs and index funds are available on the funds’ websites. They are always published net of fees.
https://www.vanguardcanada.ca/individual/etfs/etfs-detail-overview.htm?portId=9557
https://www.tdassetmanagement.com/fundDetails.form?fundId=3270&lang=en
Thanks for your reply and resources. I would incur withholding tax with no ability to claim in within the RSP but it sounds like despite this, VUN would be a good choice for an RSP with a twice a year contribution. Rebalancing could happen with putting less in rather than selling shares I would anticipate. When I mentioned I could not use theTD e-series US index fund it is only because my investments are all with another investment brockerage firm. I do have TD accounts and Waterhouse and could use the e series version but it would mean my US equity component of my RSP would not be within the same financial institution/brokerage and it could be complicated to keep the accounts “unified” if you will regarding making sure the %asset allocation is taken into account. The MER savings of 0.2% might be worth this inconvenience but I don’t know. Others have probably contemplated the same thing and I don’t know how well it has worked for them or just became a big headache.
Would it be a good idea to separate the bond allocation from only Canada to Canada, US and even the world?
@Bettrave: Foreign bonds should generally be part of your portfolio only if you can hedge the currency risk. There are very few low-cost funds available that offer that option:
https://canadiancouchpotato.com/2012/03/01/ask-the-spud-should-i-hold-us-bonds/
Hi,
I am retired and moving back to Canada after many years abroad. I have a substantial sum to invest, but don’t want to be an active investor. I need to ensure some income from the investment to supplement my pension, so I have been considering the Tangerine Balanced Income Fund, but am concerned about bond prices when rates go higher. I also don’t want to put all my eggs in one basket. Can you suggest what I should do?
Thanks and regards
Donihue
@Donihue, may I suggest doing a search within this site for articles on bonds? Dan has discussed this matter several times. This site is already rich with exactly the information you’re looking for. Regular readers of this site are in the habit of combing its contents for information as needed, because it’s a very fruitful activity. Searching is easy, and I highly recommend it.
@Donihue: As Trevor says, I have addressed the bond concerns many times on the blog. If you are considering the Tangerine funds but want to avoid bonds, there as an all-equity Tangerine fun that could be combined with GICs. As for putting all your eggs in one basket, can you explain what your specific concerns are?
Thank you Trevor C and “CCP” for your very quick replies. I apologise for my very basic query: I am totally new to this site, having just discovered it by coincidence via Google. I will do as you suggest and search the site before asking anything else! Indeed, I have already seen, for example, that the “MER” of Tangerine is much higher than that of, say, the VSC and VAB you have recommended. Apologies.
Regards
Donihue
@Donihue: Questions always welcome! Our newly updated white paper may be of help. It addresses both the bond/GIC question and the concerns about the Tangerine MERs:
https://canadiancouchpotato.com/2013/09/12/the-one-fund-solution/
Thanks “CCP”. I am on a steep learning curve! I have downloaded and am reading the mentioned white paper and have also purchased your MoneySense Guide book which I am reading right now. After that, perhaps I can ask some sensible questions!
Regards
Donihue
Hi Dan
First of all, great blog, and I recently read your book “MoneySense Guide to the perfect portfolio – 2013) and found that incredibly useful as well. I had a few questions about your portfolio/fund suggestions, aimed towards people with TFSA, RRSP and non-registered accounts to split the decisions.
I have a maxed out TFSA, and my wife’s TFSA that is currently empty. I also have about 65k in my RRSP, and 25K in a non-registered account. My own TFSA and RRSP as well as my non-registered account are all actively managed at RBC, and I’d like to move away from that. Here is my plan
My own TFSA – Mawer Balanced Mututal fund. Diversified yet all-in-one
My wife’s TFSA – Tangerine Balanced Mutual fund, for all the reasons on your blog. Plus I plan to gradually build it up with biweekly contributions, since its currently empy
RRSP – Very similar to couch potato ETF only strategy. I prefer the convenience of CDN investing rather than Norbitts gamble etc, so I’d just use VFV or VUN, rather than VTI. However one question for you is whether I should seriously think about a US dollar account with RBC, since the amount in this fund would be 20% of 65K, so about 13K (not trivial)
Non-registered account: Don’t know yet, but something that I can get back withholding taxes. I like simple and convenient over complex (but more effective).
A final question was whether its worth liquidating my entire non-registered account and filling in my wife’s TFSA (since its pretty close to a maximum TFSA account.
I’m 34, and only just getting into DIY investing.
Thanks, and amazing work!
Sid
@Sid: I can’t make any specific suggestions for individual investors. But to answer your general question about selling non-registered investments and moving them to a spouse’s TFSA: it’s usually best to fill up a TFSA before holding any non-registered investments. Why pay tax if you don’t need to? Just remember that if you give money to a spouse for a TFSA contribution, that money becomes the permanent property of the spouse.
Hi Dan, Re your change to PXC for the UBER TUBER, What do you think of VCE with a much lower cost and better liquidity as a better choice now that they have switched to FTSE? Keep up the great work. Love this site!
@Doug M: The FTSE index tracked by VCE is cap-weighted: it’s not a fundamental weighted index like the FTSE RAFI index tracked by PXC. So the ETFs are not really comparable.
Hi Dan,
Thanks so much for everything, your site has been truly a valuable resource for me getting started with investing. I have a question regarding withholding taxes and TD E series funds. Assuming I have contribution room in both TFSA and RRSP, based on what I’m read on CCP, it looks like:
1) I should put TDB900 (canadian index) and TDB911 (international index) in my TFSA, as those two funds have greatest growth potential and are not subject to withholding tax; is this correct?
2) Is TDB902 (us index fund) best in a TFSA, RRSP, or non-registered account? I don’t fully grasp how withholding tax works for TDB902 but my gut feeling is it should be in an RRSP?
Thanks again!
@Jack R: Thnaks for the comment, and glad you’ve enjoyed the blog.
First off, the TFSA v. RRSP should not be driven by foreign withholding taxes. You should decide to contribute to one over the other based on which one provides the best income tax savings over the long run. Moreover, if you have investments in both an RRSP and TFSA, it actually makes little difference which e-Series fund you put in each account type. The withholding tax treatment on Canadian mutual funds is the same in RRSPs and TFSAs. In both cases, the taxes are lost.
Thank you for clarifying, Dan. I think I understand now – so the withholding taxes are addressed by the fund itself, and already factored into the performance information on the fund card, is that right? So whether I have the TDB902 in a tfsa/rrsp or a non-registered account, it doesn’t really matter as it’s already been taxed within the fund itself?
Dan
is the withholding tax a cosideration for you when buying etfs for a TFSA.. and if what is your suggested “global couch potatoe” portfolio for a tfsa.. tks mike