They contained no marijuana stocks and no bitcoin, but the Couch Potato portfolios put up another good year in 2017. Once again, investors were rewarded for simply following a disciplined, low cost, broadly diversified strategy and ignoring the blather of market forecasters. Before we get to the portfolio performance, here’s an overview of how the major asset classes fared in 2017:
- What a strange year for bonds. How many more reminders do we need that guessing on interest rates is as futile as trying to time the equity markets? The Bank of Canada raised rates not once, but twice during the summer, and for the 12 months ending September 30, the FTSE TMX Canada Universe Bond Index was down 3%, the biggest 12-month decline in two decades. But for the full calendar year, the index was up 2.5%, which is almost exactly the current yield to maturity on broad-based funds such as the BMO Aggregate Bond Index ETF (ZAG). Had you just tuned out the noise and held on to your bond fund for the whole year you would have enjoyed a respectable return—again.
- Canadian equities followed up their banner 2016 with another solid performance: the S&P/TSX Capped Composite Index returned 9.1% in 2017.
- Donald Trump’s first full year as POTUS seemed to stoke the already red-hot US market, which climbed more than 21% in its local currency. The strengthening loonie reduced that return for Canadians, but US equities still returned over 13% in CAD terms during 2017.
- International developed markets (Western Europe, Japan, Australia) rebounded from a poor showing the previous year to deliver over 18% in 2017, despite a Canadian dollar that rose against most foreign currencies. But the big winner for the year was emerging markets (primarily China, Korea, Taiwan, India, and so on), which soared by about 28%.
Now let’s put these pieces together to see how the three versions of my model portfolios performed in 2017. A reminder that these returns include all dividends and interest, which are assumed to be reinvested as soon as they are received. (This is the way all mutual fund and ETFs calculate and publish their returns.)
Option 1: Tangerine Investment Funds
The Tangerine Investment Funds offer a one-fund index portfolio with three choices ranging from the conservative Balanced Income Portfolio to the more assertive Balanced Growth Portfolio:
|Fund||Asset Allocation||2017 Return|
|Tangerine Balanced Income Portfolio||30% equities / 70% bonds||4.6%|
|Tangerine Balanced Portfolio||60% equities / 40% bonds||7.8%|
|Tangerine Balanced Growth Portfolio||75% equities / 25% bonds||9.5%|
Option 2: TD e-Series Funds
The TD e-Series funds, which allow you to customize your portfolio with any asset mix. Here are the 2017 returns for the individual mutual funds:
|TD e-Series Fund||2017 Return|
|TD Canadian Bond Index – e (TDB909)||1.99%|
|TD Canadian Index – e (TDB900)||8.74%|
|TD US Index – e (TDB902)||13.30%|
|TD International Index – e (TDB911)||16.65%|
And here’s how the returns look for the five different asset mixes in my model portfolios:
|Model e-Series Portfolio||Asset Allocation||2017 Return|
|Conservative||30% equities / 70% bonds||5.3%|
|Cautious||45% equities / 55% bonds||6.9%|
|Balanced||60% equities / 40% bonds||8.5%|
|Assertive||75% equities / 25% bonds||10.2%|
|Aggressive||90% equities / 10% bonds||11.8%|
Option 3: ETFs
Finally, these three funds are building blocks of my model ETF portfolio. They posted the following returns in 2017:
|BMO Aggregate Bond Index ETF (ZAG)||2.29%|
|Vanguard FTSE Canada All Cap Index ETF (VCN)||8.46%|
|iShares Core MSCI All Country World ex Canada Index ETF (XAW)||15.88%|
Put these funds together and the portfolio returns look like this:
|Model ETF Portfolio||Asset Allocation||2017 Return|
|Conservative||30% equities / 70% bonds||5.6%|
|Cautious||45% equities / 55% bonds||7.3%|
|Balanced||60% equities / 40% bonds||9.0%|
|Assertive||75% equities / 25% bonds||10.6%|
|Aggressive||90% equities / 10% bonds||12.3%|
Understanding the differences
When comparing the returns of the three model portfolio options, investors often believe the only difference is fees. Certainly one would expect the ETF portfolios (with an average fee of just 0.14%) to deliver higher returns than the comparable Tangerine funds (with a fee of 1.07%). But there’s more to it than just costs: some of the differences are random and short-lived and should be ignored by long-term investors.
- The Tangerine funds hold only large-cap Canadian, US and international developed stocks. The TD e-Series portfolios include a broad-market Canadian equity fund, but they too hold only large-caps for the US and international developed markets. Meanwhile, the ETF portfolios track broader indexes that also include hundreds of additional mid-cap and small-cap stocks. During some years this will make a significant difference. In 2017, large caps generally outperformed small, which gave a modest boost to the Tangerine and e-Series portfolios.
- The Vanguard FTSE Canada All Cap Index ETF (VCN) tracks an index of Canadian equities that is slightly different from the one tied to the TD Canadian Index – e (TDB900). In 2017, the S&P index outperformed the FTSE version by 0.54%. (Last year the FTSE index outperformed, and over the long term these differences have evened out.)
- The ETF portfolios are the only ones that include emerging markets (this asset class makes up about 12% of XAW). Because emerging markets had such a big year in 2017, the ETF portfolios enjoyed an edge over the other two options.
Finally, if you followed Option 2 or 3 of the model portfolios, don’t assume your personal rate of return was the same as what’s reported here. That would only be true if you held the funds in the same proportion as the models on January 1 and didn’t make any trades during the year. The Tangerine funds may be more expensive than the other options, but they impose a valuable discipline on investors inclined to tinker: anyone holding one of these funds for the whole 12 months enjoyed the full return published above.
Note also that these are time-weighted returns, and if you made significant contributions or withdrawals during the year, your money-weighted rate of return could be quite different. See this post for more about how these methodologies differ, and for links to calculators created by my colleague, Justin Bender.
Longer-term rates of return for all of the portfolios are available in PDF format on the Model Portfolios page.