With 2015 now in the books, it’s time to look back on the year that was.
It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January, and then again in July. That spelled another year for higher-than-expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar.
All in all, a diversified portfolio did quite well in the “year when nothing worked.” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details.
The building blocks
Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios:
|TD Canadian Bond Index – e (TDB909)||3.07%|
|TD Canadian Index – e (TDB900)||-8.51%|
|TD US Index – e (TDB902)||20.74%|
|TD International Index – e (TDB911)
Source: TD Canada Trust
|Vanguard Canadian Aggregate Bond (VAB)||3.48%|
|Vanguard FTSE Canada All Cap (VCN)||-8.74%|
|Vanguard FTSE Global All Cap ex Canada (VXC)
Source: Vanguard Canada
Now let’s put these blocks together and see how the model portfolios performed. At the beginning of 2015, I expanded the TD e-Series and ETF models to include five different asset mixes, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks). Here are the returns for each version:
TD e-Series funds
|30% equities||45% equities||60% equities||75% equities||90% equities|
|30% equities||45% equities||60% equities||75% equities||90% equities|
Why the differences?
The first question that leaps out from these numbers is why the TD e-Series portfolios outperformed the ETFs across the board. After all, the e-Series funds carry management fees that are roughly 0.30% higher. There are two main reasons:
Different Canadian equity indexes. Vanguard’s VCN and its TD e-Series counterpart both track the broad Canadian market, hold roughly the same number of stocks, and use a traditional cap-weighted strategy. However, their index benchmarks are different: Vanguard’s ETF tracks the FTSE Canada All Cap Index, while the e-Series fund tracks the S&P/TSX Capped Composite.
The indexes have slightly different rules governing which companies are included and the weight assigned to each. As a result, from year to year their relative performance will vary slightly and randomly. This year the S&P index won out. Over the long term, these differences have tended to even out.
The ETF portfolios include emerging markets. The ETF portfolios get their foreign equity exposure from Vanguard’s VXC, which holds roughly 10% in emerging markets. This asset class was essentially flat in 2015: returns were a little above or below 0%, depending which index you tracked. The TD International Index Fund includes only developed markets, which performed much better on the year.
Again, this is simply a random result that worked in favour of the TD funds this year. Over the long term, adding emerging markets to a diversified portfolio should be expected to boost its expected return, though it may also increase volatility.
Hello CPP. Everyone is calculating returns for 2015. I am invested in eft suggested in Moneysense magazine as winners – XIU XIC XSB VSB .Not only i did not received yield of 2 or 3 pro cent i had more than $6000 less dec 31 2015 then dec 31 2014. How is this possible? Should i sell it all and buy TD or Tangerine?
Thanks in advance for any advice you can give me. Natasha
@Natasha: It looks like you held only Canadian equities (XIU and XIC are similar, and there is no need to hold both) and no US or international equities. Canadian stocks did very poorly in 2015. XSB and VSB are also almost identical, so there is no reason to hold both. If you are not comfortable building a diversified portfolio with individual ETFs, then an option like Tangerine may be better.
I am a novice investor who is trying to move away from high-fee mutual funds toward more self-directed investing.
I decided to try the Vanguard ETF balanced portfolio suggested on this blog. Granted, I invested in late Feb 2015, so I’m not yet at a full year (and a bad start to the year at that). But my returns on all funds are negative.
I had nowhere near 17% return on VXC. I have a -8% return. On VCN I’m -19% and on VAB I’m -2%. Overall my Vanguard balanced portfolio is -7.8% return. I wish it had been anywhere remotely close to the +6.46% listed here.
Dan, further to your comment to sleepydoc, I own u.s. etf’s now (vti). Some pundits suggest that we hedge now to lock in our u.s. currency exchange profits. So how do I do this? thanks,
@Shiny: If you have been reading carefully, then your eyes should be fixed on your 10,15, 20 year investment horizon. You should not be even thinking of using the money invested for other purposes inside that time frame. In that context, the theoretical calculations regarding returns on investments Jan 1 to Dec 31, 2015 are irrelevant.
Of course, as a novice investor you likely are checking the the stock market hourly, daily, weekly, monthly, yearly, whatever. This is normal Newbie human behaviour, like listening anxiously to the novel engine sounds on your new car driving home from the dealer, and on the way to work next morning. But if you thought about it properly in the first place, and decided you can live with the Vanguard ETF portfolio, then you are in great shape, no matter what the calculations were for January 1st or February 14, 2016. It likely was a great rational choice for you and still is. (I’m not sure what you mean by “try” or on what basis you would rate your “try” as a pass or fail — short term results as in within a few years are meaningless. In that sense, I must quote Yoda — “Do. Or not do. There is no try.”)
Waiting “the full year” to the end of February to re-evaluate your situation is equally meaningless.
You understand, of course, that given the long term tendency for all equity and bond indexes to appreciate, dithering or delaying regular pre-planned contributions to your portfolio every time there is a drop in prices relative to what was expected robs you of the future appreciation of these assets acquired at prices that in retrospect would seem ridiculously low. But that is the nature of recency bias. If you only felt good when prices rise steeply, presumably that’s when you’d rather make your purchases?
Nothing of importance has changed since you did your research last year except you know now that actively managed mutual funds are a rip-off that prey on the ignorant, and you are no longer ignorant. You no longer hold mutual funds that have temporarily dropped in value in addition to extracting an exorbitant MER from you (permanently). Or maybe you haven’t ditched them yet. If you have, you no longer have to endure the gobbledegook from smooth salespersons/agents who are apparently so much more sophisticated than you because they are patched into gurus who can actually predict the future, ha, bet you can’t do that, Fella.
Please know that I am not making light of your insecurity. Emotional uncertainty is to be expected of any new investor learning a new logic, whether the market (or more precisely, the various markets) immediately goes up or down following the initial purchases. But the key is understanding that one has no way of predicting what’s going to happen in the near and near-intermediate future. Anyone who says they can, (and there are lots of these self proclaimed experts) no matter how impressive their graphs are, is lying.
Stay the course; You’re in good shape.
@Dave: I’ve shared my thoughts about this in the link below, but it might be time to revisit it:
To the CPP!
I am very grateful for your reply and advice. Thanks again and all the best. Natasha
Will there be any calculation of the Tangerine funds for 2015? I’m feeling a little left out here!
@Michael: Tangerine publishes the returns of its funds on its website and updates every month:
Past returns are reported on my Model Portfolios page:
Is there a reason you chose VCN over something like VCE?
Thanks for the link to tangerines performance. However I really enjoy the comparative analysis and the insight you bring with it when reviewing the return.
If I’m reading that link correctly has tangerine done significantly worse when compared to TD and The ETF portfolio?
I think you’re article’s numbers are messed up.
I admit I am using annual return from today’s date (January 18), but using this, and working from TD’s own reported returns, we get:
US index-e had a return of +4.68%
Can index-e had a return of -13.4%
Int index-e had a return of -3.4%
Bond index-e had a return of +0.9%
no matter how you slice it your numbers seem wildly off the mark!
are you using annual return data? or did you make a mistake on the timeline? In short, 2015 was not a friendly year for the markets! Couch-potato investing is great, avoids MERs, etc, but like any good balanced fund, in 2015 it took a hit!
Perhaps redo the math and then re-post the article?
@Michael: A few things to keep in mind when comparing the model portfolio options.
– The Tangerine funds have higher fees than the e-Series and ETF options, so their reported returns should be expected to be lower. However, it’s important to remember that anyone who holds the Tangerine funds will get the published return, whereas there are many ways to screw up the maintenance of the e-Series or ETF portfolios (trading too much, not reinvesting dividends, not rebalancing, etc.) and not actually get that published return.
– The Tangerine funds use the S&P/TSX 60 index for Canadian equities, which is large-cap only. The other options use the broad index with mid and small cap stocks as well. So there will be some variance each year.
– The Tangerine (and e-Series) option has no emerging markets, whereas the ETF option does, so this will create differences from year to year as well.
Hope this helps.
@Tony: The reported returns are correct for calendar year 2015. If you are measuring trailing 12-month returns from today, obviously your numbers are going to be wildly different.
Thanks for the quick response.
I like this website by the way, and you are basically my ‘guru’ for investment strategy, so I respect what you are doing and certainly you are helping a lot of people avoid being over-charged at the bank.
As for the discrepancy, yes I am using numbers as of Feb 18 (not Jan 18 as I posted — oops)…. But do you really think 1.5 months would make that drastic a difference? I just find it hard to believe that the US and International index funds climbed that much (20% returns?), just does not seem to jive with the market performances and the news stories over the past year.
The Dow and S&P500, for example, had a terrible year as of December 31 2015: http://www.cnbc.com/2015/12/31/us-markets.html This article says the US markets were pretty brutal all around.
Are you sure it is not possible you made a mistake?
@Tony: Shifting the start and end dates one-and-a-half months can make a huge difference, especially because January and February 2015 were very good months, while January 2016 was dreadful:
The Dow and S&P 500 numbers you are looking at are in USD. Canadian investors holding those same stocks enjoyed a huge boost from the appreciation in the US dollar:
Okay you are right CCP, I shouldn’t have doubted you so quickly — my faith is restored! I should have done my homework better before chiming in. I fully concede you are quite right about things, and I suppose, should have assumed as much.
Given this business about the importance of relative currencies, I wonder if it is a good idea to switch over to US index-e (US$ funds), since the Canadian dollar is likely to start climbing back up? any advice on this?
@Tony: Switching to the USD-denominated e-Series funds would make no difference to your currency exposure, though switching to the “currency neutral” version would:
Using the hedged version would likely help if the Canadian dollar moves up sharply, but I don’t recommend switching back and forth:
Is there any reason TD is closing offering on Japanses Index Fund and Growth fund? I recieved a letter stating they would be closed. They have done well though.
Hello CPP. before CPP there was ” easy chair” created by one univ . Prof. And he suggested SPDR S &P 500 EFT trust for US part of holdings. Do you think they are suitable for CPP also?
Thanks . Regards natasha
@Mr. Mr. Looks like these funds have very little in the way of assets, and therefore they are probably not generating enough in fees to be profitable.
@Natasha: That ETF is fine, but there are now better options for Canadian investors who do not want to trad in US dollars.
@oldie. Thanks. My reason for looking at yearly returns it because part of the advice, if I recall, about these portfolios is to rebalance them every year, so I’m looking at that now. It is nerve-racking for sure, in small part because I’m quite ambivalent about whether this money is actually my “retirement” fund or something else. This particular portfolio is in my TFSA. Perhaps it will form a down payment on a house one day, or maybe not. Theoretically my time frame is 30 years hence but perhaps it’s as soon as 3-5 years. It difficult to say with certainty and therefore difficult to set it and forget it. But holding it in cash or in a GIC that pays next to nothing doesn’t seem like much of an option either.
Thinking of leaving Couch Potato and moving over to Wealth Simple.
Any thoughts. We have TFSA RRSP and a corporate account.
Great read. Our investment strategies are quite different, so it’s been really nice to see your take on things.
Question for you – obviously you are an investor who believes in ETFs as a product class. I’m wondering if you’ve ever considered investing in some of the more “exotic” ETFs? Like a covered call ETF, or a laddered preferred shares ETF?
@Financial Canadian: Thnaks for the comment. No, I don’t recommend using more exotic ETFs or alternative asset classes. If you look back at my older posts you’ll see that the longer I do this the more I come to understand that simpler is almost always better than complex:
I’ve just put together a spreadsheet that calculates returns and tracks my investments along with my budget and I’m comparing my 2015 returns with these ones, I follow the 4-fund eseries strategy.
I know you pulled these investments returns straight off the TD website but do you know how they’re calculating them?Is it simply “If you invested $$$ in the US Index eseries on January 1 you would have seen 20.74% ROR on December 12, 2015?”
I understand that my ROR will be quite different (28.5%) because I invest numberous times throughout the year and see have to done well with when I invested. Though it’s balanced by a dramatically lower CAD equity return.
I also notice that if you go onto google finance and grab the return for any of these funds, for the 365 day 2015 calendar year off of there it is a again different.
In summary I’m just curious if you have some insight into the ROR calculation, I find this one quite difficult to accurately calculate but think I’m getting closer….
Further, I attempted to recreate this return for the Canadian equity. I entered $10,000 into the market on January 1st (no reported share price so I used Dec. 31 2014 of $23.71) and you finish the year with $8924.50 at a share price of $21.16 on December 31, 2015 — a constant number of 421.76 shares.
Using a Modified Dietz ROR (Gain or Loss/Average Capital) you end up with a ROR of -10.73%, significantly different than TD’s reported number.
So I’m quite confused as to the exact calculation method they’ve used, of course there are several methods out there but I’d be curious to find out how they came up with their return number.
@CKB: When mutual funds and ETF publish their returns they use a time-weighted methodology and assume all distributions are immediately reinvested back into the fund. That is probably where you’re going wrong here, i.e. ignoring the ~2% dividend the investors would have received.
If you measure your own personal rate of return using a money-weighted calculation it may be quite different from the fund’s published return (less so if you use Modified Dietz).
These articles and the accompanying white paper should be helpful. You may also want to download Justin’s calculators:
Never trust tools like Google Finance for data like this: