If you believe the media, 2016 was an annus horribilis: some even dubbed it the worst year ever. I think there were a few years during the Great Depression or World War II that might have been worse, but maybe I’m just being a crank.
In any event, it was actually another solid year for investors—the Canadian equity market soared, and despite the surprising Brexit vote and the election of Donald Trump, foreign equity returns where respectable as well, at least in Canadian-dollar terms. Bonds just inched along, but anyone with a diversified index portfolio—whether conservative or aggressive—saw a nice gain last year.
Here’s an overview of how the major asset classes performed in 2016:
- The year started very well for bonds, but interest rates rose late in the year and the broad bond market ended up delivering modest returns. The broad-based FTSE TMX Canada Universe Bond Index finished the year at about 1.7%.
. - After a sharply negative 2015 and several years of lagging the US and international markets, Canadian equities rebounded with a monster year, topping 20% for the first time since 2009.
. - The US bull market just keeps rolling: despite a slow start and a whole lot of doom and gloom around election time, US equities returned close to 12%, though this was reduced to about 9% in Canadian dollar terms.
. - International developed markets (Western Europe, Japan, Australia) saw the only loss of the year, falling about 2% in Canadian dollars. However, emerging markets (China, India, Brazil, and so on) picked them up with a gain of more than 6%.
How the model portfolios stacked up
In this context, let’s see how my model portfolios fared in 2016, starting with the Tangerine Investment Funds, the simplest of the three options. Tangerine offers three balanced portfolios, which correspond to the Conservative, Balanced and Assertive versions of the TD e-Series and ETF portfolios discussed below.
| Tangerine Balanced Income Portfolio |
Tangerine Balanced Portfolio |
Tangerine Balanced Growth Portfolio |
| 30% equities | 60% equities | 75% equities |
| 3.05% | 4.96% | 6.19% |
Now let’s review how the TD e-Series and ETF versions performed. We’ll start by looking at the individual fund returns:
TD e-Series Funds
| TD Canadian Bond Index – e (TDB909) | 1.11% |
| TD Canadian Index – e (TDB900) | 20.63% |
| TD US Index – e (TDB902) | 7.47% |
| TD International Index – e (TDB911) | -2.66% |
Vanguard ETFs
| Vanguard Canadian Aggregate Bond (VAB) | 1.32% |
| Vanguard FTSE Canada All Cap (VCN) | 21.46% |
| Vanguard FTSE Global All Cap ex Canada (VXC) | 4.71% |
Now let’s combine these returns according to the five different asset mixes in my models, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks):
TD e-Series funds
| Conservative | Cautious | Balanced | Assertive | Aggressive |
| 30% equities | 45% equities | 60% equities | 75% equities | 90% equities |
| 3.2% | 4.2% | 5.5% | 6.2% | 7.2% |
Vanguard ETFs
| Conservative | Cautious | Balanced | Assertive | Aggressive |
| 30% equities | 45% equities | 60% equities | 75% equities | 90% equities |
| 4.0% | 5.4% | 6.7% | 8.1% | 9.4% |
Teasing out the differences
The first point to make is that the Tangerine funds performed exactly as one would expect. They lagged the comparable e-Series portfolios by about 0.2% to 0.5%, which is entirely explained by the higher fees. Remember, however, that anyone who held one of the Tangerine funds for the whole year achieved that published return. On the other hand, the return on the e-Series portfolios assume the investor had a perfectly balanced portfolio on January 1 and didn’t make any clever moves during the year. So that additional 0.2% to 0.5% wasn’t guaranteed.
The more surprising result is that the ETF portfolios significantly outperformed the e-Series versions in 2016, even more than one would expect from the difference in fees. Interestingly, the exact opposite was the case in 2015, when the e-Series portfolios edged out the ETFs. It turns out the reasons for the diverging performance was similar in both years: it came down to the different index benchmarks these funds use.
Canadian equities. Although Vanguard’s VCN and the TD Canadian Index Fund both cover the broad Canadian market, they use different benchmarks: the former tracks the FTSE Canada All Cap Index, while the latter tracks the S&P/TSX Capped Composite.
Although both indexes hold roughly the same number of stocks and use a traditional cap-weighted strategy, they have slightly different rules for selecting and weighting stocks. Over the long term, these differences have evened out, but the year-by-year performance can vary significantly. In 2015 the S&P index edged out its FTSE counterpart, while in 2016 they traded places. These differences are completely random and should be ignored by long-term investors.
Small caps had a big year. The foreign equity exposure in the ETF portfolio comes from Vanguard’s VXC, which tracks US and international markets, including large, mid and small-cap companies. By contrast, the TD e-Series funds track only larger US and international companies, with no exposure to small caps.
In 2016, smaller companies outperformed large caps in both the US and international markets, so the broader exposure in VXC gave it a significant boost. While it is may be reasonable to expect a slightly higher long-term return from an index fund that includes small companies, this is not at all consistent.
Emerging markets. Perhaps the biggest difference between the ETF and e-Series portfolios is that the former includes emerging markets: this asset class makes up about 9% to 10% of Vanguard’s VXC. There is no e-Series fund tracking emerging markets, so it’s absent from the TD model portfolios, which therefore have a higher allocation to international developed markets.
This had a significant impact in 2016, because international developed markets was the worst performer of the year, while emerging markets did very well. As a result, the foreign equity portion of the ETF portfolios got another boost compared with the e-Series. Again, this will vary a lot from year to year: in 2015, emerging markets were the laggards that dragged down the ETF portfolios.
Thank you Dan.
My resolution for 2017: Stick to the plan. I have a hard time sticking to the plan and I only made 2.1% instead of 9.4%. Fortunately i’m still young and learning and my total amount of investments isn’t really big so that’s not a big loss. Lesson learned… I hope!
I stuck to the plan for my wife’s RRSP and my kids’ RESP and the results were there!
Thanks for the analysis !
Dan, Is there much value in reporting and discussing 1 year returns for long-term investors? What about 3, 5 and 10 year CAGR results which are much more meaningful to a long-term investor. After all, your commentary indicates a number of cases within asset classes that “traded places”. Callan’s Periodic Tables of Investment Returns has repeatedly demonstrated there is no investable year-over-year pattern other than having diversified portfolios across the broad-based indices.
@P_I: Long-term returns are reported on my model portfolio page.
Thanks for the quick reply. I missed that. Perhaps where reporting the annual results you could include a mention where the longer term returns data is available, saving the reader the effort to search for it. There is also a typo on the Model portfolios page. It says “The model portfolio PDFs include 20-year performance records (from 1995 through 2014)” but at the current time the PDFs show data to 2015.
Thanks for the update.
Any comment on the new horizons ETF ?
HXX : Horizons EURO STOXX 50® Index ETF
Seems interesting in some ways but also not a very broad based ETF.
@Ben: Might as well make your mistakes early on when the total dollar amounts are low. If the lesson is learned, it was probably worth it.
Since interest rates are expected to to rise slowly, does it still make sense to keep bonds as the fixed income portion of the portfolio or mix it up with savings/GICs?
Results look great! Do these returns include distributions/dividends or is that just the capital appreciation? Thank you.
@Son: The returns include all distributions as well as price changes.
@Ben: I am curious about what you meant by having trouble sticking to the plan. Was it like getting influenced by a rising sector or maybe being influenced by a financial news article, so you increased your allocation to a sector that was doing well. Or did you add a completely new component that was not part of the rational plan because it seemed to be doing well? Don’t feel bad — most of us have had that learning experience. Consider this past year a test of your resolve, and the results a confirmation that you truly can’t accurately predict what’s in the future.
@Oldie I did exactly everything that you described + picked up individual stocks.
Now I sold everything and bought VXC and VCN again. I’m back on the CCP’s wagon.
Very nice. Would love to follow your model portfolios – is there one for 2017?
For US/International pre-VXC, I have it split between VUN and XEF. Should the performance be roughly similar?
Hey Dan. I was wondering if you could write an article about buying Canadian bonds in 2017? I’ve heard several individuals saying that the higher interest rates will impact the bond market and bonds may see lower results for a few years.
How does this effect the e-series portfolio? Should I contribute less to bonds for now?
Thanks
This article confirms my numbers from my own spreadsheets based on the actual dollars in my accounts adjusted for deposits/withdrawals/transfers. I am using the TD e-series plan with 65% equities and earned 6.2% for the year. For the last 3 years (since I started tracking it weekly) I am at 6.8%. I am happy with both those numbers and I sleep well at night using this plan.
Dan, another solid year for me of doing absolutely NOTHING to my portfolio and making a nice gain with what feels like essentially no risk. I like to benchmark the performance of your portfolios against a few benchmarks (S&P 500, S&P/TSX) just for fun and perspective…according to Google the S&P 500 was at 9.54% for the year. My return which does include some tech stocks was at 7.8% and mirrors roughly your Assertive portfolio (8.1%). Again, according to Google S&P/TSX was 17.51%. I am open to anyone correcting these numbers as I find sourcing these not that easy!
Anyway, my point is that as much as I’d like 17.51% I know the risks and effort I’d need to take to get that kind of return. But, I have a full-time job, kids and a wife and I’d actually like to live my life rather than being tortured by the market. I have stuck with your plan now for 4 years…re-balanced 3 times…reinvested all my dividends and since that time I have nearly doubled my money. I will take that any day!
Thank you again for making this part of my life so simple!
I can’t complain about my performance in 2016. My return of 20.88% was my best since 2013 and was done without adding in any new money in retirement. I had decent income growth too up 12.94%.
My 75% equity portfolio exactly matches your 8.1% result. I have few different funds like XIC instead of VCN and VTI/XEF for US/International but came out the same.
@Brad: First rule is don’t use Google Finance for anything other than casual browsing:
https://canadiancouchpotato.com/2015/05/29/how-bad-data-leads-to-poor-investment-decisions/
I’m concerned about your comment that your investment strategy “feels like essentially no risk.” If you are using an asset mix similar to my Assertive portfolios you’re taking very significant risk. Any equity index fund can lose 30%, 40% or more of its value in a major downturn. The last four years have been kind but please don’t ever forget that investing in equities is very risky in the short term. Don’t get blindsided when the next bear market finally arrives!
@Ben: Search for “rising rates” in the blog’s search tool and you’ll find many posts on this topic.
Enjoyed the first 2017 blog, feel like I am pumped up. BTW, do you like morningstar?
As others have stated I follow the CCP philosophy with slightly modified ETF selections from earlier year’s models. My returns for 2016 (and 3/5) years are almost identical to those above for a balanced portfolio. I do watch the market frequently but have learned over the years that it is more for entertainment value than a guide to what I should do with my investments. I look forward to an article (or podcast) for the recently retired investor.
My candidate for Bad Investment Advice: After such a thrilling return on US and Canadian Equities this past year (if, like we’re incessantly told on this web-site not to, you have been obsessively following the returns of the individual components of your correctly assembled CP portfolio) it might be easy to get nervous about the prospects for 2017, and LARRY BERMAN advises us in an article in the Globe and Mail on December 30th, 2016 with this headline “Markets are overshooting reality. It’s time to get defensive.”
He may be sort of right, and in fact, if you wait long enough you can guarantee you’ll eventually get results in Equity returns that he could use to justify his advice later in hindsight. But it still is bad advice, as is any advice that tells us to shift our investments around (I’m not talking about rebalancing back to your original “comfortable” allocation if necessary) in anticipation of predicted economic occurrences in the near future.
@Ben also has a good one regarding Bonds in 2017, if the advisors he refers to actually advised cutting back on portfolio Bond components in 2017.
Thanks for the update. I noticed in the last Moneysense magazine that the Couch Potato portfolio has been changed. Should we be thinking of making changes – or is that just for people who haven’t set up an ETF portfolio yet? (I’m happy with the Vanguard mix, so don’t particularly want to switch up).
I know you update your model portfolios each year. Will there be any updates to you ETF selections this year?
Hi Dan,
Thanks for your post – really enjoyed it! With regard to your model portfolios, why are there no REIT ETFs? Is it for the sake of simplicity? Are REITs built into the VXC?
Thanks,
BD
I gather that simplicity is the major driver to Dan’s model portfolio, geared towards beginning portfolios since 2015, where he dropped REIT ETFs, among other changes. He has advocated that even larger portfolios with seasoned investors may still be better off staying simple: the savings in costs, both the direct MER/trading-via-rebalancing fees kind and the emotional well-meaning-but-often-self-destructive costs of tinkering/return-chasing. See more at:
https://canadiancouchpotato.com/2015/01/15/couch-potato-model-portfolios-for-2015/
https://canadiancouchpotato.com/2016/01/25/why-simple-is-still-a-hard-sell/
Why did Mawer’s funds do so badly in 2016? I can’t find any information.
Where are the Mawer fan boys this year?
I don’t think we will hear from “snarky” Thomas or “I am smarter than the academic studies” Glen this year with these results:
…………………………………Vanguard…….Morningstar…..Mawer
Canadian Equity …………21.45 ………….15.90…………..16.32
International Equity……..-1.27………….. -4.26………….. -4.96
US Equity………………….. 8.80…………… 4.50…………… 6.65
Global equity………………. 4.67…………… 1.82……………-0.46
Canadian bonds…………..1.17…………….2.01…………… 0.21
Global balanced 60/40….6.70…………… 3.72………….. -0.86 & 2.67
Vanguard: Vanguard Total Market ETF Unhedged
Morningstar: Morningstar category average
I think Mawer provides an important lesson here. They are doing many things right for active manager: they have relatively low turnover, no trailer fees so cheaper MERs than most active funds, and they are privately owned which allows for a longer term focus. They had a fantastic past record of returns to go with it. But…
1) nothing works all the time
2) high past returns brings in net assets and high net assets make it harder to continue to outperform
3) although ~1.3% MER for Mawer funds look cheap compared to their trailer included peers, this is still very expensive relative to index funds and active management anywhere outside Canada
So will the Mawer fan boys rebalance into their expensive losers or will they do like most people do and get scared out when their fund underperforms and lock in underperformance. What if they loose by ~5% again next year? then what?
One of the beauties of the humble vanilla index is that you always know with 100% certainty that will always beat most because of the low fees whose advantage will always be there. This reduces regret which helps minimize big mistakes.
Favorite Stat of the year:
0 of 92 Canadian based actively managed US Equity funds beat the index over the past 5 years.
NOT A SINGLE ONE LOL!
source: SPIVA mid-year scorecard 2016
http://ca.spindices.com/search/?ContentType=SPIVA
all of the data in my table was from Morningstar Canada
Mawer Canadian equity is underweight oil. They have 10% energy where XIU has 21% so they had a lower drop in the decline but have had a lesser gain in the recovery. Maw104 is 1% MER; they give you 0.3% discount of you buy the bundle of funds. They still remain an excellent strategy and it is the only active strategy that CCP has *almost* endorsed.
https://canadiancouchpotato.com/2011/04/20/how-did-the-couch-potato-stack-up/
Dan, thank you for once again taking the time to report these returns to your loyal readers! I know you’ve mentioned that it’s time-consuming, so huge kudos to you for taking the time to do it. I know from your other articles that there are different ways to calculate personal rate of return – would Justin Bender’s PWL Personal Rate of Return Calculator from the PWL site be the best one for me to use to compare against the returns you’ve listed here?
Shaun:
I am one of the Mawer fanboys you mentioned. RGZ is correct. I own only Mawer Balanced to get instant diversification, as well as the lower MER vs. their individual funds. If you notice from my previous post, I said that I was comfortable if Mawer did under-perform in certain years. Last year was one of those years, partly because they did not play the oil run-up from the lows. I totally understand this – they are an extremely conservative company with an extremely conservative focus. They buy deep value for the long term and do not play the trends in the market. That is why I own their Balanced Fund and I will hold it for the long term as part of my balanced portfolio. Please do note, however, that I have always had a portfolio that is a combination of Index funds and Mawer Balanced. I visit CCP because I am an indexer and have been since 2001. I just also like to have some active management in my portfolio as well as index funds. I also play the market with 10% of my portfolio and do very well there. This mix of strategies works for me. For some, 100% indexing is their strategy. For me, I employ indexing, just not with 100% all of my portfolio. Good luck to all.
Hi Dan. I’d like to first wish you and all your bloggers good health in 2017, and thank you all for sharing
your knowledge and life experiences-it has helped me be less ignorant as far as investing is concerned.
Dan, being a newbie, I’m about to dive into the TD E-series ( for the long haul ), and was wondering what
your opinion on the following is; a few years ago (when I had no clue about investing) I foolishly bought 100k
in physical gold and silver-it was probably at 1600 then, hoping it was going to go way up etc. Now I’m thinking of selling 30k of it ( leaving the rest do it’s thing) and putting it into the E-series( along with another 70k that I have available) to make a total of 100k at TD. Any words of wisdom would be helpful!
Thanks once again to all!
Happy New Year Dan,
Thank you for all the work that you do for investors. Best wishes to you and your family in 2017.
Thanks to everyone for the comments and the good wishes.
@ Alan and others: Yes, I will be revising the model ETF portfolios for 2017. As always the changes are minor and based primarily on cost, not on any change in overall strategy.
@Susanne: The MoneySense article included a comparison of long-term returns in the three options: Tangerine, TD e-Series and ETFs. So for that exercise I used an ETF portfolio that included funds that more closely matched the other two options to make sure it was an apples to apples comparison. (I could not use VXC, for example, because it includes emerging markets, while the other two options do not.) I stress again that the specific fund choices often make no meaningful difference. The decision to use XIC or VCN for Canadian equities, for example, is trivial. Here’s the article for those who are interested:
http://www.moneysense.ca/save/investing/index-funds/ultimate-guide-couch-potato-portfolio/
@Chrissy: Thanks for the kind words. Yes, Justin’s calculators are excellent tools for calculating your personal rate of return, which could be quite different from the returns reported here even if you hold the same funds. If you made large contributions or withdrawals during the year you might want to use both the time-weighted and money-weighted calculated and compare them. If you made only small contributions then they should both return similar results.
http://www.canadianportfoliomanagerblog.com/calculators/
@Donna: I can’t advise you specifically, but in general I don’t think precious metals should make up more than a small fraction of one’s investments. So the answer to your question depends on how large your overall portfolio is. If the gold and silver makes up more than about 5% of your overall portfolio I would consider than an unnecessary risk.
@Chrissy: I use Justin’s rate of return calculator, although it only calculates one year at a time.
Another performance spreadsheet I like is Bogleheads. It was developed by a Canadian and calculates portfolio returns for multiple periods from 1 month to 10 years. It uses time weighted return, so is comparable to the returns CCP posts here.
https://www.bogleheads.org/wiki/Calculating_personal_returns
are the returns based on an investment at the beginning of the year, or monthly investments?
@ rgz
I am well aware that Mawer was underweight in energy stocks. Last year I commented on that fact and how it contributed to the funds outperformance while commodities fell. But I also warned that when commodities rallied again (no one could know when) Mawer funds would likely underperform because of this bet.
Another reason for their underperformance this year is they have long been overweight in the UK which worked in the past but was hit hard with the Brexit news.
Another is that they have been overweight in growth stocks and underweight in value. Growth has been on a tear since the financial crisis and beating value. But in the second half of 2016 the tides turned and value significantly outperformed growth.
The main point I was trying to make is that nothing works all the time and it is dangerous for people to think like Thomas that their fund will win every year. Even those strategies that will win in the future will certainly have periods of underperformance along the way. The hard part is no one knows in advance which strategies are going to win out in the future, so when we see something underperform it makes you wonder if it is a great buying opportunity, or is it an old strategy that will not work in the next cycle.
With regards to the MER I agree that ~1% fee is pretty cheap for a Canadian Balanced Fund. But my point remains that this is still very expensive relative to index funds or mutual funds outside of Canada (recall that Canada has the highest MERs on mutual funds in the developed world). And the MER is not the only cost that active manager need to overcome. Don’t forget about hidden costs like TER, tax inefficiencies, market impact costs as their assets swell etc.
@ Glen
I find it interesting that you see Mawer as a deep value play. Have a look on Morningstar and you will see that in fact everyone one of their equity funds currently has a Growth tilt and has for several years. In other words the average stocks they own have higher price to earnings and price to book ratios when compared to the index. It is true that in the past Mawer had a value tilt and Justin Bender’s regression showed that value tilt explained part of the past performance. My comment here is that active managers can have “style creep” over time and you may not be getting what you though anymore. If it is a value tilt that you want there are much more reliable and cheaper ways to do it such as with the Vanguard global value ETF VVL .
If your comment on how Mawer is conservative means that you believe that they cannot experience large losses equal to or greater than the index then you are fooling yourself and this is a dangerous mindset. No one can know what the next major downturn will look like or what stocks, sectors, countries will get hit hardest. A belief that your fund can not get hurt bad is setting yourself up for a surprise at the worst possible time when you are most prone to making a big mistake.
Good luck to you as well.
@stella: the Boglehead spreadsheet calculates returns are as of the most recent month end including monthly cashflows. It would not be as accurate as Justin’s spreadsheet which includes daily cashflows, but unless you add or withdraw very large amounts relative to your total balance the difference should not be significant.
It’s interesting, I finally switched my portfolio over from the e-series to the ETF version. My returns were between the e-series and ETF at 6.95 for an Assertive like mix. Wish I’d switched earlier in the year :P
@stella: https://canadiancouchpotato.com/2015/07/20/how-contributions-affect-your-rate-of-return/
My 4 year return on a global couch potato e-series mix is 9.3%, outperformed my actively managed portfolio and cheaper!!
Dan, I really appreciate all the learning your site has provided to me over the last many months and to others for many years, from which we can easily access.
I just noticed that you are quoting NAV, not Market, performance returns for the Vanguard ETFs.
Yet Market returns are achievable while NAV are not, though they are usually close (enough?).
Has this also been the case for your Model Portfolio year-end performance analyses all along?
@dave d: Thanks for the comment. Yes, I have always reported returns based on NAV. That is the traditional way to report fund returns, and it is the most easily available data. Not long ago some of the ETFs did not even report both. This may be interesting:
https://canadiancouchpotato.com/2013/03/13/two-ways-to-measure-an-etfs-performance/
Reviewing past years’ January posts I came across this nugget from our head spud (A Reality Check for Couch Potatoes” January 24, 2014.
“That’s why I’m uneasy when I receive e-mails from readers who tell me how pleased they are with the results of Couch Potato portfolios they’ve built in the last couple of years. Obviously I’m happy to hear from folks who have embraced indexing, but I worry their expectations may be unrealistic if they believe recent performance is typical. It’s hard not to love indexing when equity markets are soaring to new heights: it’s much harder to maintain confidence during a brutal bear market. And it’s been a while since we’ve seen one of those.”
Wise words indeed, particularly now, and worth reading again. These past posts are an easily referenced source of much detailed information!
Thanks for the great information. My question is does the TD Cdn Index e-series fund include dividends? I don’t have the numbers in front of me but when I compare calendar year returns to those of Canadian dividend funds such as RBC’s for example, the eseries lags significantly and consistently. I am only taking about true Canadian dividend funds, not those that say Canadian but have 25% in US equities for example.
Also, the problem with the TD bond eseries is the total lack of global diversification. If I’m not mistaken it is completely Canadian bonds many of which are government bonds which are poor holdings with rising rates. What would be a good global alternative?
@Roy: Then returns presented here include all dividends. In any given year there will always be many funds that outperform the e-Series, and in the last few years dividend funds have done very well in Canada. Over the last 15 years, according to Morningstar, the TD Canadian Index Fund outperformed its peers by an average of 1.19% annually and ranked 12th among the hundreds of funds in that category.
My take on global bonds:
https://canadiancouchpotato.com/2014/08/29/ask-the-spud-should-i-use-global-bonds/
I have been using the TD e-series balanced portfolio on here for the last 3 years now. I only buy RRSPs in one lump sum around Feb, at which point I reblance to achieve 60% in equities. Comparing my balance from Feb-2016 (when I last purchased RRSPs) to today (just before purchasing RRSPs), my market value has increased by 7.5%! Is there a reason I made 2% more than you did? Should I be looking at the Book Value instead?
FWIW, I’ve been working for the last 13 years and have about $60k in RRSPs, plus another $18k repayable balance for the HBP. I like the convenience of the e-series funds, as all my other banking is through TD. I’m also really bad at investing, and prefer only having to rebalance and buy RRSPs once a year. Not sure if I’m ready to take the plunge to ETFs yet!