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:
| Fund | 2017 Return |
|---|---|
| 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.
I didn’t buy in January but February and I got :
Zag -1
Vnc 4
Xaw 11
Does it make sense?
I may not be fully understanding it correctly but you said that “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.”. The U.S. fund in the portfolio is TDB900 which tracks the 500 Total Return Index. Are these considered large-cap? I hold TDB903 which tracks the DJIA Index.
George, sounds like your results are missing distributions.
@Lloyd: Yes, the S&P 500 is a large-cap index. The DJIA is more of a “mega cap” index that, in my opinion, is so small and arbitrary that it makes a poor benchmark for investment (it made sense in 1896, but it’s a historical relic). XAW also includes index funds tracking mid-cap and small-cap US stocks.
Learn something everyday.
Are the quoted rates of return dependant on the type of account? Thinking of US withholding tax on non RRSP accounts.
I put all my money in VFV ETF and got a got 13.24%
My question is, should I sell now that is so high and re-buy when it goes low? or hold for 2018?
Thanks for taking the time to update us!
@Lloyd: To put this in context, the total number of stocks available in the US market is about 3624 (the number held by the Vanguard Total Stock Market ETF (VTI). So, a mutual fund that tracks the S&P 500 index is holding the largest 14% of companies in the market. The DJIA holds 1.7% of the total stocks available. As I understand it, the selection criteria for inclusion in the 60 is not solely based on size, and is somewhat arbitrary.
Great work Dan, thank you for all your hard work in keeping us (potatoes) updated. I’ve been following your Blog and Justin’s too for many years. Thank you.
@Steve Shaw: These are before-tax returns. After-tax returns would be specific to the individual investor.
MAW104 comes in with 10.0% using 60/40, just a smidge below the ETF 75/25.
I am new to all of this. Do you use the same 4 funds every year and rebalance of course, or do you make different recommendations each year? I am interested in the TD eSeries. Also, I have some $ set aside to invest. Is it generally better to do a single purchase in January or break it up and purchase weekly or monthly instead?
@Brent: I update the fund choices occasionally if cheaper, more diversified or more tax-efficient ETFs become available. But the TD e-Series funds have been around for over 18 years now. As for making weekly or monthly purchases, that’s usually not necessary unless the amount of cash is very large.
@Manny
Impossible to time the market. You could sell now and perhaps it goes down and you rebuy in a few months. Perhaps the market will continue its upward bull for the next 4 years. Now you’re out XX%.
Buy and hold.
No one can time the market and presumably these ETF holdings are for your retirement, you’re not touching the money for the new few decades. The long term average of the markets is what you’re going for, not short discrete samples.
@Canadian Couch Potato – most “all weather” / “permanent” portfolio allocation strategies recommend holding a portion of your portfolio in an inflation hedged asset class, such as TIPS or commodities like Gold. I noticed your recommended ETF portfolios seem to avoid any specific allocation specifically to an inflation hedge – any specific reason for that?
I know you previous included RRBs in the mix (according to http://www.moneysense.ca/save/investing/bonds/the-real-problem-with-inflation-protected-bonds/ ) , but it seems like you did so because of a lack of true TIPS equivalents in Canada, rather than a strategic reason to avoid the addition of a specific inflation hedge all together. Are there any new options since you wrote that article in terms of adding an inflation hedge to a ETF portfolio?
Quick Question: For the ETF Portfolio and a TFSA, is buying XAW equivalent to buying XUU,XEF,and XEC? Buying XAW just seems better on the surface due to less trading fees, am I missing something?
@Nicholas: Yes, XAW is simply a more convenient way to get foreign equity exposure:
https://canadiancouchpotato.com/2016/06/20/cost-versus-convenience-in-ex-canada-etfs/
For the model portfolios is the % breakdown by cash or by unit? If you want to invest 25% in each e-series is it equal cash distribution or equal unit distribution? Thank you!
Quick question – yesterday, the US markets were closed. XAW surged 2% while none of the underlying holdings rose more than 0.5%.
I ‘broke the rules’ and sold yesterday at $26.17, and sure enough this morning XAW was back down to $25.70, still up from yesterday’s opening, but in line with the underlying holdings. I bought back in, locking down a 2% profit on that portion of my RRSP.
My question is this – clearly, this is an unusual situation. What caused XAW to surge yesterday? And what made it come back down to tracking the underlying holdings overnight?
Was it corrective action by the fund administrators? Did enough institutional investors etc sell overnight to bring the price down?
I feel like a decent percentage of XAW is held by Couch Potatoes, the vast majority of them would not have noticed the blip, and if they had, would not have been inclined to sell as that’s not really in line with ‘passive investing’.
@Brian: It’s impossible to know all the factors that impact the price movements of a fund during a single day. Certainly there can be some pricing anomalies when US markets are closed and a Canadian ETF has underlying US holdings. But I suspect you just got lucky yesterday: any attempts to capitalize on these price anomalies is just as likely to go the other way. Under no circumstances would I ever recommend trying to profit from short-term trades like this.
@Abel: Always calculate the percentages in cash. The unit price of an ETF or mutual fund is arbitrary and irrelevant.
@Canadian Couch Potato
What could have caused XAW’s price anomaly to go the other way?
Long time reader/follower of your blog. First post.
Thanks for all your efforts with these annual portfolio updates! Much appreciated!
Thanks for the work you guys have put into this over the years.
You’re probably the best source of advice for do-it-yourself Canadian investors. Yours and Justin’s advice and whitepapers on ACB’s, foreign withholding taxes, Norberts Gambit, and the likes have, clarified much for Canadian investors who can’t rely on their bank or brokerages for honest and accurate information.
Some years ago I switched my holdings to the e-series aggressive portfolio, and that, along with living a simple, minimalist, and frugal life, has resulted in a significant increase in financial security and time.
If I come across some high net worth individuals who need more specialized advice, I will refer them to the PWL Capital team in Toronto.
@Bill: The problems with RRBs in Canada have not changed since that article, so there really is no reliable inflation hedge equivalent to TIPS. I don’t believe gold is a meaningful inflation edge, at least not over the medium term, as I discuss here:
https://canadiancouchpotato.com/2011/09/06/is-gold-a-hedge-against-inflation/
Equities still provide some inflation hedge: though it’s certainly not a tidy correlation, it’s probably the best we can do.
@Lucas: Many thanks for the kind words, which I will share with Justin as well.
Re: lack of specifically inflation hedged investment opportunities in Canada, that’s really too bad, as at least here in Ontario we are pretty much guaranteed to see a jump in inflation this year (at least in terms of purchasing power of a dollar, via the recent minimum wage increase and corresponding price increases we’re seeing).
Hello Dan,
More and more I enjoy reading your articles and replies to readers and the more I learn ( at least I think I’m :) ) so yeah I’m happy that soon I’m going to be a Couch potato myself .
Dan , reading about the rates of returns on your model portfolios and reading your comments about emerging markets which is I think is totally missed in the e-fund portfolio so does the mid and small cap US stocks , so my question is since I’m gonna have my active money moved into an e-fund portfolio would it make sense to have a small percentage invested as etf in those two sectors ? this way I’ll have even more exposure ? or maybe since I’m still new with passive investing just to stick to the four funds that you recommend .
The only problem that i see in my case with buying etf is that i do live in vancouver and from what i read over and over that etf’s has to be purchased during market hours .
Again and Again thanks a lot for all the time and effort .
Are your TD eSeries recommendations suitable choices for RSP, Non-Reg and TFSA?
Hi Dan,
I really enjoy your column and your podcast, keep up the great work. Based on extensive research I decided last spring to move all of our investing accounts from TD mutual funds to TD index funds. These include two RSP and three RESP accounts. The question I have is about tracking the bonds performance though. Looking at the TD site is pretty easy to tell how the stocks are doing based on the Market vs Book values. However, looking at the Market vs Book values for the TD CND Bond Index-e is not straightforward since they include the Re-invested Dividend in the Book value, but not in the Market value making the bond to look worst than actual is. Is there an easier way to look at the TD CND Bond Index-e performance? Please let me know your thoughts. Thanks!!
@Canadian Couch Potato
Which US-listed ETF would be a good replacement for XAW or is it better to get 3 ETFs (US, emerging, international)?
@Tony
Vanguard’s VT is basically an “all-world” ETF. You won’t be able to find any ex-Canada ETF’s that are US listed. But it’s easy enough to use a spreadsheet to account for the wee little bit of Canadian exposure in VT, which is typically around 3% or so. Going with a single ETF instead of 3 makes re balancing and the like easier to manage and reduces trading commissions.
First of all I cant thank you enough for the exemplary work that has gone in creating and updating this site, keep up the great work.
I am wondering if you can explain why the US markets tracking etfs took off like crazy around Sept whereas US market indices rose continuously through the year. if we look at some of the popular ETFs in Canada like VUN, XUU, VSP the charts were declining in summer 17 but US markets were rocketing up at the same time.
Without the sept lift off the etfs and e series funds eould have ended in negative territory even. The CAD currency swings may have been a factor but still they should have been going up throughout the year. Any ideas?
Interesting the 20year cagr went down. Also aggressive cagr similar to more conservative.
Would like to see another 10 years added to return chart, just to show what past 30 years would have been like.
Anyway this bull market is getting mature and slowly I am allocating more bonds.
@jaguar: Many thanks for the kind words, and glad you are enjoying the site. Index ETFs tracking US equities will move identically with US markets, by definition. So I think what’s happening here is that you are looking at US equity indexes that report their returns in USD and comparing them to Canadian ETFs (such as VUN, XUU and VSP) that report their returns in CAD. Any differences are the result of the changing USD/CAD exchange rate.
Thank you for updating the returns.
A quick question:
I have an RSP, TFSA and an investment account, all of which contain individual stocks. If I want to transition these accounts over to the model ETF portfolios, should I own ZAG, VCN and XAW in each of my 3 accounts, meaning in total, I would own 9 ETFs:
RSP – ZAG, VCN and XAW
TFSA – ZAG, VCN and XAW
Investment account – ZAG, VCN and XAW
total – 9 funds
Thank you
What is the best approach for someone looking to purchase a large amount ($500k) of an ETF? Concerned that such a purchase will influence its price.
@Moe: It is unlikely that your order will move the price, as ETFs do not work like individual stocks. While your purchase is large, its impact on the value of the underlying stocks will be minimal. Just place a limit order at the ask price (or perhaps a penny above) and you should be fine. If you still have concerns, you could contact the ETF provider and they may be able to arrange a trade with their market makers.
@Tim: https://canadiancouchpotato.com/2012/03/12/ask-the-spud-investing-with-multiple-accounts/
Hi Dan,
XSH now has management fee as low as 0.09%, lower than VSC. Do you think XSH is now a better choice than VSC?
XBB also lowed the management fee to 0.09%.
Thanks
@zwzlife: The model portfolios are just one possible option. All of the ETF providers have similar products and investors should feel free to choose these instead.
Hi Dan,
I hold VSC (Vanguard Canadian Short-Term IG Corp Bond) in my taxable account, together with VTI, VCE and VIU(Equity funds). The purpose of VSC is for annual rebalancing, so I want to keep the duration short.
Do you think this is a good idea?
Thanks
I have a small question concerning ETF Bond fund. If, 3 years ago, I bought shares in VSC(Vanguard Cdn Short-Term Bd), which has a maturity of about 3 years, should I now sell those shares or leave it there?
Hi Dan – thank you as always for the incredible work you put into this blog! I feel more confident bout investing for myself than I ever have.
I use Option 3 (ETFs) with a balanced portfolio. Normally, I would rebalance at the end of January and right now, my portfolio is 37.27% in BMO AGGREGATE BD INDEX; 42.6% in ISHARES CORE MSCI and 20.01% in VANGUARD FTSE CDA ALL CAP.
My question – since the BMO bond fund hasn’t done particularly well, and the ISHARES is, is it worth paying trading fees ($10/trade) to rebalance back to exactly 40/40 in these funds? Or just call is close enough at 37% and 42% and watch it over the next year?
I know you can’t give specific advice – but in general, when the differences are not that great, is it worth it to spend money rebalancing?
Many thanks as always!
@Kris: Thanks for the comment. Probably not necessary to rebalance at this stage:
https://canadiancouchpotato.com/2011/02/24/how-often-should-you-rebalance/
@Syl: Bond funds do not have a maturity date: a fund like VSC, with an average maturity of about three years, will always have an average maturity of about three years because the bonds in the fund are periodically replaced to provide consistent exposure.
Hi!
I’m only starting to explore this blog and it looks very, very informative.
At the same time, I now feel a bit overwhelmed with the number of choices…
Could I ask for some general recommendations?
I am trying to invest about $90K in something better in the long run than regular savings accounts.
I was thinking of maxing out TFSA first (which I “emptied” in December, and that would be almost $60K), but I will also have to invest outside of it.
I was looking into Tangerine funds since they seem to be the easiest option and I already bank with them.
However, it looks like because of the fees those are recommended up to about $50K, which I am above of.
I also saw comments saying that doing more than one Tangerine fund at the same time doesn’t really make sense. Finally, I saw that investing in funds that include bonds doesn’t make sense in taxable accounts. I do, however, have a lot of contribution room in RSP.
So I was debating if I should go with one of the balanced funds for the TFSA, and then the equity one outside of it. I was also looking at the dividend one, but it looks like it’s not a recommended option here ;)
At the same time, a lot of articles about balanced funds and bonds were written before the rates started to go up (and it seems that increasing rates are bad for bonds)…
Or maybe I should be trying completely different options altogether. However, I have absolutely zero investing experience, so DIY feels scary.
I am not worried that I would have to do something every year or so (re-balancing?), but the bigger problem might be “how”. Also, I’m not sure if doing more complicated things within TFSAs or RSPs makes it more difficult.
I was also reading about robo advisors, but based on some comments, I had a feeling that they invest in a bit more “exotic” things. Also, people are praising their lower fees (vs Tangerine), but when I looked at historical returns it looked like Tangerine funds typically did better. I do know that historical results do not guarantee anything about the future, but maybe Tangerine’s strategy tends to be better?
Oh, I’m in my mid-30s, so I guess I should be still fine with some risk…
At the same time, it looks like market has been doing great for the past few (10?) years,
and the longer it goes up, the scarier it feels to jump in…
I’m not even sure if I should be thinking about things like the impact of potential NAFTA-related issues on the market (And I feel stupid writing that…).
I’ll be grateful for anything that could point me in a direction that makes sense :)
Thank you!
Thanks for the link and the info on rebalancing strategies. I just assumed I should always rebalance once/year and obviously overlooked this post on different approaches. Much appreciated!
Firstly, Dan thanks for sharing your insight and knowledge. It’s meant a lot on my investing journey.
Any idea why ZAG (BMO’s bond ETF) is listed as Low risk on BMO’s site and Above Average on TD Direct Investing’s site?