Your Complete Guide to Index Investing with Dan Bortolotti

Model Portfolio Update for 2017

2018-05-29T21:26:35+00:00January 13th, 2017|Categories: ETFs, Index funds, Indexing Basics|Tags: |337 Comments

After two years with no changes to my Couch Potato model portfolios, the 2017 edition comes with an update to the ETF version.

Before I get to the details, I feel compelled to stress that if you’re currently using the older ETF portfolio, there is absolutely no reason to change. The funds I’ve swapped here are a wee bit cheaper, but the cost of selling your existing ETFs and buying the new ones almost certainly outweighs the benefits. And if the transactions would involve realizing taxable gains, then making a switch is downright nutty. To put this in perspective, the new portfolios will reduce your management fees by 0.03% annually, which works out to 25 cents a month on every $10,000 invested.

I’ve also updated my model portfolios page with historical returns to the end of 2016. As always, we’ve used actual fund performance wherever possible: for earlier periods we’ve used index data, subtracting the fund’s current MER to account for costs.

With that out of the way, here are the changes.

Zigging over to ZAG

First, I’ve replaced the Vanguard Canadian Aggregate Bond Index ETF (VAB) with the BMO Aggregate Bond Index ETF (ZAG). BMO’s aggressive cost-cutting has made ZAG the cheapest bond ETF in the country, with a management fee of just 0.09%. (Don’t be fooled by the old MER of 0.23% that still appears on the BMO website: the fee reduction took place in June 2016 and the fund needs 12 full months before it can report its updated MER.)

Another benefit of using ZAG is that it has a companion fund, the BMO Discount Bond Index ETF (ZDB), designed for taxable accounts. So if your portfolio includes bonds in both registered and non-registered accounts, you can use ZAG and ZDB to get similar exposure in both accounts with maximum tax-efficiency.

One small point to be aware of: VAB and ZAG have slightly different risk exposures. The Vanguard ETF is roughly 80% government bonds and 20% corporates, while ZAG is closer to 70% government and 30% corporates, which explains its slightly higher yield to maturity.

Worlds apart

The second change replaces the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC) with the iShares Core MSCI All Country World ex Canada Index ETF (XAW). These funds cover the global equity markets outside Canada: they’re both about 55% United States, 35% international developed markets (Europe and the Asia-Pacific region), and 10% emerging markets.

XAW was launched just weeks after I launched my simplified ETF portfolios in 2015, and two years later it has emerged as a slightly better choice than its Vanguard counterpart. The lower fee is the most obvious advantage: with an MER of 0.22%, the iShares fund it’s five basis points cheaper. Less obvious is XAW’s tax advantage.

Although both of these funds hold several underlying US-listed ETFs, the iShares version uses a Canadian-listed ETF for international developed markets. This difference in structure means the Vanguard ETF will be subject to a greater amount of foreign withholding taxes. According to Justin Bender’s detailed analysis, this amounts to a drag of about 0.10% in an RRSP or TFSA (the difference would be smaller in a taxable account). Add that to VXC’s higher fee and the cost difference becomes significant in registered accounts.

Which option is right for you?

I haven’t made any changes to the other two model portfolio options, though I have stopped including performance data for the Tangerine Equity Growth Portfolio. This fund, which is 100% stocks, recently changed its target asset mix: it was previously 50% Canadian, 25% US, and 25% international. As of last November, it now holds equal amounts of all three asset classes. I think this makes it a more diversified fund, but the change makes its historical performance meaningless for anyone considering the fund today.

One of the age-old questions I get from readers is, “How do I know which option is right for me?” Many new investors look only at the differences in MER and immediately gravitate to the ETF version, even though one of the index mutual fund options would be more appropriate.

To help answer this question, I recently wrote a feature in MoneySense magazine that walks you through the decision-making process. It even includes a selector tool that asks you to describe your preferences and then suggests one of the three options. Both the article and the quiz are now linked on the model portfolios page.



  1. Canadian Couch Potato November 14, 2017 at 12:58 pm

    @Ash: Yes, I update the model portfolios every year, but the update will not include a recommendation to split XAW. I would not recommend this for a $25K portfolio, especially since you specifically mention a desire to “keep it simple.” You actually need three ETFs to replace XAW (which includes emerging markets as well as US an international), which means more rebalancing and more trades. Remember, too, that the international and emerging markets ETFs have fees of 0.22% or higher anyway. Only the US component would be cheaper, and if you use VTI you would be trading in US dollars, which means currency conversion costs. It’s almost certainly not worth it.

    Remember to keep MERs in perspective. If XAW is 40% of a $25K portfolio, that’s a $10K holding. An MER of 0.22% works out to just $22 annually on that amount. Do you really want to complicate your portfolio to save a few dollars a year?

  2. Ash November 14, 2017 at 5:13 pm

    @Dan: Thanks! Appreciate the help. I think I got a little overwhelmed by all the info with your blog and Justins. I’m going with biweekly contributions via quest trade because I’m more than happy to make the trades on a regular basis, and commission free just makes sense.

    Looking forward to seeing what you have to say on the future of the 3 fund setup in 2018!

  3. Troy November 26, 2017 at 5:01 pm

    I’m a new reader/podcast listener – very educational so a big thank you. My question: your model portfolios exclude NASDAQ Index funds (i.e. e-series portfolio mix). Is there a particular reason. Totally get that technology was higher risk during the dot com days (worked in tech when it blew up) but wouldn’t one be leaving growth on the table, considering technology sectors’ long term growth potential (don’t see it any more risky that a resource/petroleum heavy index).

  4. Canadian Couch Potato November 27, 2017 at 7:19 am

    @Troy: Thanks for the question. I wrote an item in MoneySense about this same issue:

  5. Dave December 2, 2017 at 6:59 pm

    I read your article about replacing your other Bond ETFs with ZAG because it had become the new lowest MER Bond ETF in Canada. When i look on the BMO site however, it lists the management fees at .09% but the MER as of Oct 31, 2017 is reported at .14% which is significantly higher (relatively) to some of the other products. Can you explain? Does this have anything to do with your comment “Don’t be fooled by the old MER of 0.23% that still appears on the BMO website: the fee reduction took place in June 2016 and the fund needs 12 full months before it can report its updated MER.”

  6. Canadian Couch Potato December 3, 2017 at 2:12 pm

    @Dave: Yes, that’s the same issue. I’m not sure why it’s taking longer than expected for BMO to update this number, but they have assured me that the management fee is 0.09%, and one should expect the MER to be only an additional basis point or so.

  7. Matt December 4, 2017 at 6:40 pm

    @Dan: Any hints on when the 2018 update will drop? I may have sold my e-series funds a bit prematurely today to convert to ETFs based on the 2017 model. Might buy back into them and ride the market instead of holding cash for up to 60 days.


  8. Canadian Couch Potato December 4, 2017 at 7:32 pm

    @Matt: I generally publish the updates in mid-January, but I will end the suspense and tell you I have no plans to change the ETFs in the model portfolios.

  9. Matt December 5, 2017 at 7:47 am

    @Dan: Thank you!

  10. James December 16, 2017 at 9:10 am

    Hi Dan – I think I’m using an outdated version of your recommended holdings. I currently have my funds split evenly between XEF, VUN, and VCN. I have a long ways till retirement, so have not bothered much with bonds yet, and considered extra payments on my mortgage as the ‘conservative’ portion of my investments.

    How would I update those three funds? Or is it fine to leave them as they are?

    I am looking to help my wife with setting up her own investments, so that would be a great opportunity to iron out any flaws in my existing distribution.

  11. Canadian Couch Potato December 19, 2017 at 9:39 pm

    @James: No update needed: the ETFs are still good choices. My current model portfolio uses XAW, which could replace both VUN and XEF as well as add emerging markets to the mix. But this is optional.

  12. Jonathan L. December 21, 2017 at 10:29 am

    Hello CCP,

    What are your thoughts on including a Frontier Market ETF as part of a diversified portfolio? Any compelling arguments for or against?


  13. Canadian Couch Potato December 21, 2017 at 3:58 pm

    @Jonathan: In my opinion, the additional risk and expense of this asset class aren’t worth it.

  14. Jason T December 25, 2017 at 4:37 pm

    Hi CCP,

    Was wondering what your thoughts are on the TD Canadian Aggregate Bond Index ETF (TDB). The management fee is higher than the BMO Aggregate Bond Index ETF (ZAG) at 0.10 vs 0.09. However, the MER is lower for TDB (0.11 vs 0.14). Would you recommend TDB over ZAG because of the lower MER? Thanks.

  15. Chris January 2, 2018 at 6:55 pm

    I often wonder about the use of ETFs such as XAW or VXC that ‘replace’ multiple other ETFs. As I understand it, the benchmarks that XAW and VXC use are cap-weighted. Does that not mean, for example, that if the US market grows relative to the rest of the world, its weighting in the benchmark will also grow? Since the benchmark doesn’t rebalance to maintain a target percentage, your portfolio weighting will change. If you are only holding an “all-in-one” ETF, you have no way to rebalance.

  16. Canadian Couch Potato January 3, 2018 at 8:50 am

    @Chris: You’re right that the weight of each country in the index will evolve over time, but isn’t that a reasonable strategy? If, for example, emerging markets grow from 5% of the world market cap to 10%, wouldn’t it make sense to allocate twice as much to them in your portfolio? The rebalancing benefit is really greatest for bonds vs. stocks and less so among the various equity asset classes. Remember, the goal with a simple model portfolio is not to be optimal but simply to be “good enough.”

  17. Chris January 3, 2018 at 12:05 pm

    One of the strengths of the couch potato portfolio, is the ‘automatic’ buy-low/sell-high which rebalancing forces you to do. By letting your allocation change with the growth/recession of a particular country, are you not ignoring that very principle?

  18. Canadian Couch Potato January 3, 2018 at 2:56 pm

    @Chris: Not really. In practice, this matters a lot less than you may think. See for example:

    With the three-ETF portfolio you are still able to rebalance foreign equities with Canadian equities and bonds. Slicing and dicing further than that is not likely to make a meaningful difference. Again, the model portfolios are a starting place for inexperienced investors: they are not meant to be perfect solutions. If you want to split the foreign equities into three funds, that’s fine. It’s just not essential.

  19. Chris January 3, 2018 at 5:05 pm

    That seems to make sense and the article is interesting. So how about just buying some VT (Vanguard Global All Cap index) and calling it a day? All the markets of the world are in there (including Canada) and cap-weighted similar to XAW/VXC.

    It would be interesting to see numbers of standalone VT vs splitting into VCN and VXC/XAW.

  20. Canadian Couch Potato January 3, 2018 at 8:03 pm

    @Chris: By using VT you would be going from about one-third of your equities in Canada to about 4%. It wouldn’t necessarily be a bad choice but there are good reasons to overweight one’s home country:

    You would also need to make all of your trades in USD, which I would not recommend.

  21. Andy L January 12, 2018 at 1:24 pm

    Hey CCP, been following for quite some time now.

    Question, once I max out my TFSA with XAW and VCN I start to contribute to my RRSP.
    My struggle is deciding whether to invest in VTI or VUN. Should I continue to use CAD listings or should I take advantage of the RRSPs FWT savings and cheaper MERS. I use Questrade and of course there is conversion fees. Whats the general rule of thumb here?


  22. Sam January 16, 2018 at 3:16 pm

    Looks like XAW hit a 2.5% speed bump yesterday and today, but its underlying holdings didn’t. Any thoughts on what caused that?

  23. Gordon January 26, 2018 at 12:31 am

    Where can I buy the 2017 MoneySense Guide to the Perfect Portfolio?

  24. Canadian Couch Potato January 26, 2018 at 7:14 am

    @Gordon: Unfortunately there is no 2017 version: the book’s last edition was in 2014 and it is now out of print.

  25. Sven February 25, 2018 at 9:01 pm

    It looks like VAB bumped ZAG out of first place… Glad I didn’t change anything – buy and hold.

    “As of February 13, 2018, the management fee for VAB was reduced from 0.12% to 0.08%” – Vanguard Canada

  26. Thomas March 28, 2018 at 11:53 am

    In your model portfolio option 3 PDF, are the performance numbers based solely on the ETFs chosen for this year, or do they include the various ETFs chosen over the years? I started using the model portfolio when VXC/VCN/VAB were suggested so I’m wondering if those numbers are still relevant to me, or if they’re solely based on ZAG/VCN/XAW now.

    Another question – should I continue buying VXC/VAB or switch to XAW/ZAG? Is it OK to leave my existing VXC/VAB alone and start buying XAW/ZAG?

    My main issue is you do a great job updating those numbers in the spreadsheet and since they’re losing relevance to me ideally I’d like to buy what you suggest and/or somehow get equivalent metrics for the old portfolio.


  27. Canadian Couch Potato March 28, 2018 at 8:45 pm

    @Thomas: There is no reason to switch out of VXC/VAB. A lot of the past performance numbers are based on index returns, not actual funds, since many of the the ETFs have not been around long. (See the methodology on the second page of the PDF.) I would encourage you to ignore the historical returns of your current portfolio, as they don’t help you make any decisions going forward.

  28. Mark Pomerantz June 22, 2018 at 10:22 am

    Can anybody explain why ZDB trades significantly above it’s NAV (Net asset value) as reported in Yahoo finance
    Today, for example, Yahoo finance shows that ZDB closed at $15.73 and it’s NAV is $15.67. This means that if you’d bought ZDB at 15.73, you’d have overpaid an astounding 0.4% (15.73-15.67/15.67 x 100).
    I’m wondering why this is, and if this is a reason to avoid ZDB even in my non-registered account where I know ZAG and VAB are less tax efficient though they trade below their NAV.
    Dan: Thank you so much for this outstanding website!

  29. Canadian Couch Potato June 22, 2018 at 10:34 am

    @Mark: One of the first rules of DIY investing is not to trust online services like Yahoo or Google for any meaningful information. They are fine for informal checks of current prices, etc., but notoriously unreliable in other ways, especially when it comes to ETFs.

    The information about ZDB on Yahoo is wrong. You can always download the historical NAV and market prices of ETFs from their web pages. For ZDB you’ll find the difference is generally a penny or two, which you should expect. Visit the link below, click “Price & Performance” and find the “Download Historical NAV” spreadsheet. For June 21, the closing price was $15.73 and the NAV was $15.7198.

  30. Adam July 25, 2018 at 8:50 pm

    Hi Dan,

    For now, all of my savings come in biweekly and are put into eseries inside my TFSA. I plan to max that before I contribute to my RRSP given my current tax situation.

    I had some RSP money from an old group matching program that I need to transfer out in cash to my personal account when I left my job. This was a measly 2.5k. I elected to begin the ETF portfolio (VAB, VCN, VXC).

    I have had another career change and I will be transferring another 2.5k out in cash from the group plan to my personal account.

    I am curious if you think this would be a good time to update my ETF portfolio to your latest update. I understand the loss due to fee’s for selling 2 of the funds to get up to date (TDDI) but given I have only made initial purchases and have not contributed any further, now might be a good time to update to the 2017/2018 model. I also won’t be making any further contributions until my TFSA is maxed.

    What are your thoughts? Stand my ground or take the early hit in preparation for when I max my TFSA?

  31. Canadian Couch Potato July 25, 2018 at 9:08 pm

    @Adam: If your total RRSP is $5K, then I don’t think ETFs are appropriate at all. If you are already at TD, why not use e-Series funds for the RRSP as well?

  32. Peter Szkraba October 28, 2018 at 9:05 pm

    I have been using VSB as my bond investment on the basis that interest rates are going up. It hasn’t done that well in the last few years. Would you stick with it?

  33. David November 4, 2018 at 6:01 am


    Your Option 3 ETF’s, into which accounts would I place each one of 3 options. RRSP’s, TFSA, Non-registered. I have some room in TFSA and lots in RRSPs, I also prefer the ability of cashing out in time of trouble. At least to a degree.

  34. Canadian Couch Potato November 5, 2018 at 8:55 am

    @David: The first decision is TFSA or RRSP: asset location can only come after that has been decided.

  35. Jaspal November 9, 2018 at 11:23 am

    Do you feel that ETFs are still good options for steady growth?

  36. Alex February 13, 2019 at 2:10 pm

    I initially set my portfolio up as 65% VXC, 35% VCN in my TFSA. I am interested in switching from VXC to XAW for the small advantages you pointed out in this article. I am curious if you are able to shed some light on whether you think it would be best to sell my VXC and buy XAW, or simply leave my VXC and buy XAW going forward. Are there any advantages/disadvantages to either strategy? Thanks so much for the blog!

  37. Canadian Couch Potato February 14, 2019 at 10:04 am

    @Alex: Thanks for the comment. There is no need to switch from one to the other if you already have your portfolio in place. The differences between the two funds are extremely small.

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