Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 15: The Value of Simple

2018-06-21T08:45:56+00:00March 17th, 2018|Categories: Podcast|Tags: , |39 Comments

The latest episode of the Canadian Couch Potato podcast focuses on the relationship between cost and complexity in your investment plan.

You can often lower fees in your portfolio with a few simple changes that require no additional skill or effort. But there are times when accepting slightly higher costs in exchange for simplicity and convenience is actually a wiser choice. There’s no single solution: every investor needs to find their sweet spot along that continuum.

My guest on this episode is John Robertson, author of The Value of Simple, which has just been published in a revised second edition. John’s book does an excellent job of stressing these ideas. In the book—and in our interview—he discusses the various options available for investors looking to get started with indexing. These include the three options in my model portfolios, as well as a discussion of how robo-advisors fit into the landscape.

For those interested in comparing robo-advisors, John co-created a tool called AutoInvest.ca, which allows you to compare the all-in costs of the various options. This is not as straightforward as it might seem, as robo-advisors use different pricing models. I suggest clicking the “Advanced Filters” tab on the calculator to take full advantage of the tool. (You should also be aware that the site receives affiliate commissions.)

John has also adapted this material into an online course called Practical Index Investing for Canadians. It expands on the ideas in the book and includes step-by-step tutorial videos showing you how to open new accounts and build your portfolio at Tangerine, TD Direct Investing and Questrade.

Switching to Vanguard’s one-fund portfolios

In the Ask the Spud segment of the podcast, I take a detailed look at Vanguard’s newly launched asset allocation ETFs. These funds, which I introduced in an earlier blog post, have led some investors to suggest they have made all other options more or less obsolete.

Certainly these one-fund portfolios with a management fee of just 0.22% are among the most useful ETFs to come along in the last few years. But if you’re successfully using an option such as Tangerine or TD’s e-Series funds, make sure you understand the trade-offs. Using ETFs will always result in lower management fees, but these are not the only factor. Consider the following:

The size of your portfolio. Any time you compare annual fees, be sure to understand the differences in dollar terms, not just percentages. Lowering your fees from 1% to 0.25%, for example, makes a much bigger impact on a $100,000 portfolio than it does for someone who is still in the early stages of building wealth.

Here’s a rule of thumb you can use when considering whether to dump your index mutual funds in favour of the Vanguard ETFs: switching from the TD e-Series funds to one of the new ETFs will save you less than $2 a month for every $10,000 you have invested. Switching from Tangerine will save you closer to $7 a month.

Whether you make regular contributions. One of the best ways to build wealth is to save a little every month and to have those contributions invested automatically. Index mutual funds and robo-advisors allow you to set up plans that automate this process, which has value for those who prefer being hands-off. You can’t do this with ETFs, so your savings plan will not only involve more work, but also more potential to fall into behavioural traps. (“Should I really invest this month with all of the volatility in the market?”)

Your experience trading ETFs. Learning to invest with an online brokerage isn’t terribly difficult, but it can be intimating and confusing if you have no experience placing orders on an exchange. Do you know the difference between a bid price and an ask price? Between a market order and a limit order? If not, take the time to learn before you bail on your user-friendly index mutual funds.

The number and types of accounts in your portfolio. If you’re investing only in a TFSA or RRSP, or even both, then the new Vanguard ETFs are an excellent choice. But if you have a more complicated portfolio that includes multiple accounts for yourself and a spouse, then a one-fund solution is probably not ideal. More complex situations require more flexibility than a balanced ETF can offer. This is especially true if a significant amount of the portfolio is taxable, since the Vanguard asset allocation ETFs are not particularly attractive in non-registered accounts.

Your target asset mix. The new Vanguard ETFs are best suited to investors who want to hold either 60% or 80% equities: those are the targets for the Balanced (VBAL) and Growth (VGRO) versions. If your target allocation is 50% or 70% stocks, there isn’t an ETF with either of those asset mixes. And the Conservative version, VCNS, with 60% bonds, including a lot of U.S. and global fixed income, is not as attractive as the other two ETFs. If you’re a conservative investor, I’d suggest adding some GICs to your portfolio instead of holding 60% bonds.

 

39 Comments

  1. Russ March 17, 2018 at 4:31 pm

    Thank you Dan for doing what you do, you’ve set me and I’m sure many other people on the right track.

    Quick question;

    Is there a reason there’s no single truly global equity-only ETF listed in Canada? There’s XAW but that doesn’t have Canadian equity and now there’s VGRO but it has 20% bonds. I can’t be the only person looking for a ETF like this.

  2. Guillaume March 18, 2018 at 12:18 am

    Just to be thorough, you can get your target asset mix by adding a tiny bit of complexity and using 2 of those funds or more. For instance :
    – If you use 50% of VBAL and 50% of VCNS, you effectively have a 50%/50% equity/bond mix that is automatically rebalanced
    – If you hold 50% of VBAL and 50% of VGRO, you effectively have a 70%/30% equity/bond mix that is automatically rebalanced

    Great podcast as usual! Thank you very much!

  3. Canadian Couch Potato March 18, 2018 at 8:10 am

    @Guillaume: Other readers have suggested this as well, but to me it defeats the purpose of a one-fund solution. The portfolio would not be automatically rebalanced, as the asset mix would only remain on target if you held equal amounts of your two ETFs. Over time, the ETFs would grow at different rates and would still need to rebalance.

    If you want to change the asset mix of one of these ETFs it would be cheaper to start with VGRO and add a bond ETF (with a much lower MER) until you reached you target asset mix. For example, to get a 50/50 portfolio you could combine 37% in a bond ETF with 63% VGRO. But again, this is no longer a one-fund solution.

  4. Canadian Couch Potato March 18, 2018 at 8:22 am

    @Russ: XWD includes all developed markets (including Canada) though it excludes emerging markets. I’m not sure why no ETF provider in Canada has launched a product like Vanguard’s VT, which covers the whole world.

  5. Kevin March 18, 2018 at 3:21 pm

    Hi,
    Will you be changing your model portfolios with the launch of these new ETFs from Vanguard?
    Also, with robo-advisors charging .5% to manage an account, do these new ETFs change the game? The new ETFs at least in my eyes are one and done solutions (buy it once, hold it for a long time). Can always add fresh money to the other funds or the one you currently hold. Likely can’t control risk much better than that (although you might be giving up a few basis points due to the tax disadvantages of bonds and global stocks in a taxable account).

  6. Michael March 19, 2018 at 9:27 am

    Hello,

    I am debating switching from Tangerine to the new Vanguard one-fund portfolio. I understand this a personal choice and that the decision depends on a lot of criterias.

    However, I would like your advice as whether or not it would be a big mistake to stay with Tangerine until retirement. Right now, I have around 100K invested and I am planning to retire in 20 years.

    I know the amount I have invested suggest that I should switch but on the other hand I make weekly contributions which I really like.

    My initial plan was to contribute to my Tangerine fund until I retire but I am starting to feel I will just leave money on the table because of lazyness.

    In your opinion, would it make absolutely no sense to stay with Tangerine until retirement or is it still a viable option?

  7. Canadian Couch Potato March 19, 2018 at 10:25 am

    @Michael: This is a great question, and I’m sure you will hear opinions that are different from mine. But I would say this is a classic example of choosing to pay more for convenience, peace of mind, and enforced discipline. There’s nothing wrong with that. There is a pretty good chance that if you switch to an online brokerage account you will not manage your portfolio with the same consistency you’re enjoying now, and your returns may not improve as much as you might think.

    If it’s really nagging you, you can always leave your Tangerine account where it is and open a new account at a brokerage like Questrade, and then start making your weekly contributions there. See how it goes for six months or so and then decide which platform you prefer.

  8. John March 19, 2018 at 10:26 am

    Hi Dan;

    Just listened to this very interesting podcast; thank you. In particular, I really liked the review of the 3 new Vanguard products. When they were first announced, I was almost giddy and thought liquidate all and buy one of those. I had just gone through several agonizing weeks of trying to re-balance mine and my Wifes portfolios. OMG, what a pain that was. The very next week, these came out. Wow salvation. But, then I started to think a little deeper about this and some of your points, though not all, crossed my mind. Admittedly, you described me to a tee; I tinker too much, have a number of specialty ETFs, even one last (no load, low cost) mutual fund in the portfolio. Have pared back, a lot, but as you describe, find it really hard to sell a long term winner and buy something more conservative. Am victimized by market noise as well. Will mention here that wife is retired and I am seriously considering packing it in, or dialing down. So this was very timely and informative. The conclusion I have come to is that I will allocate new future purchases to VBAL. That may mess up my asset allocation a bit but plan take other actions with the holdings in future to fix that. These address another concern I have; managing the portfolio in a few years when the cognitive synaptics in the brain slow down. We have no kids and will need to have a more easily managed way to maintain the portfolio. These ETFs will help meet that bill, along with the fee only advisor we have hired.

  9. Barry March 19, 2018 at 2:47 pm

    Hi Dan,

    Thanks for another great podcast. After reading much about TD e-series funds, along with your and John’s thoughts/opinions on them, I opened a TD Direct Investing account and transferred in some funds from an existing TFSA I had with Fidelity. I have to say, the process to open the account with TD was quite painless. It did involve spending a bit of time with one of their telephone representatives, but I was able to do it all on-line and over the phone. I did have to make one visit to a TD branch to provide a “void” cheque (from another institution as I don’t bank with TD) to set up my bi-weekly contribution, but that took all of 10 minutes with a branch representative. So far I’ve found the interactions with TD staff to be excellent. They have been very courteous, knowledgeable and helpful. The trading platform is quite intuitive and easy to navigate and I’m up and running your TD e-series model portfolio. So for anyone contemplating the switch from Tangerine (or any other firm) or starting out with TD e-series funds, go for it.

  10. Canadian Couch Potato March 19, 2018 at 2:54 pm

    @Barry: Thanks for the comment, and glad to hear things went well at TD. I have never known there to be significant issues with TD Direct Investing. It’s only the TD Mutual Funds accounts that can be a major hassle to set up. Good luck!

  11. Rob March 21, 2018 at 4:31 pm

    Here’s more evidence (if any were required) that indexing is better:

    https://www.zerohedge.com/news/2018-03-20/study-reveals-95-finance-professionals-cant-beat-market

  12. Joey March 23, 2018 at 2:53 pm

    @Michael: If your money is in a registered account (RRSP or TFSA) then you don’t have to worry about incurring capital gains when selling, so you can do what I’m doing with my RESP:
    Spend the year buying tangerine funds (I’m using the TD e-series). Once a year, sell the funds and buy VGRO,VBAL or VCNS. If you’re retiring in 20 years, then VGRO is good. It’s the best of both worlds.

  13. Canadian Couch Potato March 23, 2018 at 3:04 pm

    @Michael and Joey: This won’t work, because you cannot buy Tangerine funds and ETFs in the same account. You would need to open accounts at Tangerine and a brokerage, and then fill out a transfer form every year to move money from one to the other. There will be fees every time, and this is extremely inefficient.

    The idea of combining mutual funds and ETFs only works efficiently if you are at TD Direct Investing using e-Series funds, since that is the only brokerage that allow you to hold both in the same account.

  14. Oldie March 24, 2018 at 10:36 am

    “And the Conservative version, VCNS, with 60% bonds, including a lot of U.S. and global fixed income, is not as attractive as the other two ETFs. If you’re a conservative investor, I’d suggest adding some GICs to your portfolio instead of holding 60% bonds.”

    You had previously said you were agnostic regarding mixing US and Global bonds in with the Canadian Bonds of your conventional Couch Potato fixed income portion (assuming costs and hassle were not an issue, which in this case they are not). With the Conservative version where this portion rises to 60%, has there been any new insight that affects your recommendation? Has the hedging to Canadian Dollars got anything to do with this?

  15. Analogdino March 24, 2018 at 2:06 pm

    Useful, thanks. I am already with TD Direct, so will use it to buy ETF VBAL.

  16. Weekend Reading: Get LIT(erate) Edition March 24, 2018 at 2:46 pm

    […] In the latest Canadian Couch Potato podcast, Dan Bortolotti interviews The Value of Simple author John Robertson about the relationship between cost and complexity in your investment plan. […]

  17. colin March 28, 2018 at 5:30 pm

    Dan,

    I listened to your podcast and you suggested that VBAL, VGRO are not going to work for someone that wants 70% equities to 30% bonds as they are 60/40, 80/20. If someone wanted – let’s say a 70/30 – could they not just buy a 1:1 ratio of each and in turn get a 70/30 split? Is there any reason someone would not want to due this other than having to do some very basic math and hold two etfs?

    Thanks

  18. Canadian Couch Potato March 28, 2018 at 8:46 pm

    @colin: See my response to @Guillaume below.

  19. Tony April 3, 2018 at 10:55 am

    Dan,

    Wouldn’t be more convenient to have different market ETFs at the time of selling as one ETF may be doing better than the rest?

    Thanks

  20. Jeff April 5, 2018 at 1:25 am

    Hi Dan,

    Interested to hear from you whether you think investing in this single fund is a good idea for a non-registered account. As someone with multiple accounts (RRSP, TFSA all maxed out) and looking to open a taxable account, I am interested to see if I can use this as a taxable vehicle through Questrade or another broker, or whether I ought to rely on a roboadvisor instead to have the added tax opimization of right assets in their right places. Hope you can assist.

    Thanks,

    Jeff

  21. Canadian Couch Potato April 5, 2018 at 10:20 am

    @Jeff: I think these ETFs are less than ideal in taxable accounts because the bond component includes a significant amount of premium bonds, which are quite tax-inefficient. However, I am not aware of any robo-advisor that pays much attention to asset location, and therefore I’m not sure that option would be a significant improvement.

  22. Jake April 7, 2018 at 1:53 pm

    @CCP

    Off topic but maybe you could answer me.

    I moved a couple years ago and have gone to an accounting service to get my taxes done on a recommend by my boss at work as I was new to the town.
    I have had TDB661 in my non reg account for a few years and my tax preparer before I moved claimed the foreign income tax paid, box 34 on the T3. I noticed on the tax filing paper for 2017 there was no foreign tax credit nor was there when I checked 2016 papers but it showed on years before 2016 as long as I had the fund. I questioned the person and was told there was nothing on the T3 to indicate which country the tax was paid to so they entered “other” in the box for the country. The person told me to find out which country the tax was paid to and whether there is a tax treaty with the country. To me this person seems clueless about investments. It’s a basic index fund following the S&P 500, I would assume the taxes likely was paid to the USA. Told me they would call CRA to find out. I haven’t heard back.

    I’m confident I can claim the tax paid on the T3 for TDB661.

    I’m pretty ticked off that this accounting service seemed to be sneaky about just putting in “other” country without looking into it or even advising me of the issue. Most people trust accounting places and don’t pay attention to their taxes.

    My question is I have a CRA account which has an option for changes to past tax returns, the accounting place is my representative to act on my behalf if CRA comes looking for docements,
    So can I go into my CRA account to fill in the amounts to get the foreign tax credit for the past 2 years or does the accounting place who is my representative needs to do this??????

  23. Jeff April 10, 2018 at 4:13 pm

    @CPP – thanks Dan.

    While Wealthsimple won’t re-arrange all of your assets, they do offer some tax-efficient portfolios for non-registered accounts. For example they use Horizons S&P/TSX 60 ETF (HXT) which converts dividends to capital gains, and uses iShares Core MSCI EAFE (XEF) in TFSAs which is subject to smaller withholding tax.

    Not sure this makes much of a difference. I suppose the biggest concern in income from bonds/fixed income which is taxed at the full rate.

    Still, this is better than the efficiencies in the Vanguard funds, no?

  24. Oldie April 10, 2018 at 11:14 pm

    @Jeff: If you are comfortable with the idea of a swap arrangement as used in HXT, you might consider Horizons Canadian Select Universe Bond HBB, which is an intermediate term bond ETF, except that in a similar fashion to HXT, a total return swap is used in a reciprocal arrangement with a counterparty, National Bank to “mop up” ongoing interest payments and to reissue substitute shares which incorporate the interest payments as increases in the value of the shares. The interest is never paid out to the holders of HBB, so in a non-registered account no tax is due until the shares are sold, at which time a capital gains tax is payable on the accumulated increase in share value.

    This was described in the Couch Potato May 6, 2014 post.

    https://canadiancouchpotato.com/2014/05/08/a-tax-friendly-bond-etf-on-the-horizon/

    I hold HBB in my non-registered portfolio. (I also hold HXS, a total return swap ETF tracking the US S&P 500 but using a similar total return swap arrangement to absorb ongoing dividend payouts and to convert them into capital gains on which tax is payable only when the shares are sold.)

  25. Canadian Couch Potato April 11, 2018 at 12:26 pm

    @Jeff: It might be true that the Wealthsimple portfolios are more tax-efficient, but of course this needs to be weighed against their 0.50% fee, which of course is not applicable to the Vanguard ETFs.

  26. GregJP April 12, 2018 at 2:23 pm

    Why hold a bond ETF in a non-registered account when you can go to Tangerine or EQ and get 2.3% to 2.5% with guaranteed principal plus CDIC insurance? The 1 year performance on HBB is 0.94% according to their website. The only reason I hold a bond ETF is because you can’t get this kind of deal in a registered account.

  27. Canadian Couch Potato April 12, 2018 at 2:44 pm

    @GregJP: The Tangerine and EQ rates you quote are promotional (teaser) rates that usually only apply for a short period and can change at any time without notice. If you can get them, then go for it, but they should not be the basis of a fair comparison with bonds.

    It’s also important to remember that during any period when interest rates rise, the return on cash will go up and the return of a bond fund will be low or even negative. During any period when rates fall, the opposite will be true. So looking at the most recent one-year performance of bonds does not tell you anything useful. Over the long term, bonds have significantly outperformed cash as compensation for “term risk” (i.e. you are rewarded for locking up your money for a given period).

    These may help:
    https://canadiancouchpotato.com/2015/05/07/should-you-replace-bonds-with-cash/
    https://canadiancouchpotato.com/2015/05/18/how-changing-interest-rates-affect-fixed-income/

  28. Oldie April 12, 2018 at 4:45 pm

    @Canadian Couch Potato: You said

    “Over the long term, bonds have significantly outperformed cash as compensation for “term risk” (i.e. you are rewarded for locking up your money for a given period).”

    I suppose the underlying principle of the above can be extrapolated to

    (performance of cash)<(performance of short-term bonds)<(performance of intermediate term bonds)

    Just to get a ball-park measure of the time scales required to exploit these value expectations, assuming we are comparing basic transparent comparative rates, no promotional teasers, etc., would it be fair to say that the outperformance of intermediate term bonds over short-term bonds can only be certain if the intermediate term bonds (or ETFs) are held for the full duration of the term? Or could you get a high likelihood of this outperformance if you held them, say, up to a point in time halfway in between the respective terms?

  29. Oldie April 12, 2018 at 5:32 pm

    For all you fellow strugglers like me who have an uncertain grasp of the complexities involved when cash with a guaranteed return seems like such a sure-fire advantage over bonds, I just read (again)

    https://canadiancouchpotato.com/2015/05/07/should-you-replace-bonds-with-cash/

    that Dan flagged for us above, and it really makes complete sense now (as it did 3 years ago when I first read it, but then I forgot the details, as no doubt I will again).

  30. GregJP April 12, 2018 at 6:02 pm

    @CCP: I don’t think the EQ Bank rate is a promotional rate. I’m not advocating ditching bond funds altogether. Obviously you have to match term and, long term, they will provide value. However, in a rising rate environment, I would definitely choose a guaranteed 2.3% in my non-registered portfolio and give up the little bit of volatility reduction that bond funds provide. In the financial crisis when stocks plummeted some 40% to 50%, the 5% or 6% that bonds rallied would not give me much comfort.

    I also understand that “keeping it simple” has its merits and that chasing rates would turn many people off from DIY’ing. For me, however, I like to squeeze every last BP out of my portfolio, especially for guaranteed returns. A bird in the hand…

  31. melwin April 25, 2018 at 12:13 am

    @Dan- I am a regular follower of your blog and like the ever-so-informative podcasts. Thanks for all your hard work and selfless service!
    I plan to move towards a single fund portfolio holding VGRO across all 3 accounts (tax, tfsa, rrsp). I am thinking about buying all units in a tax account and then doing in-kind transfers to tfsa and rrsp; with an intent of saving trading commissions. Do you see any obvious pitfalls with this gambit?

  32. Canadian Couch Potato April 25, 2018 at 7:05 am

    @melwin: Thanks for the comment. You could do this, but I wouldn’t recommend it just to save two trading commissions. If you buy the ETF in your non-registered account and make an in-kind transfer to the TFSA or RRSP, any increase in the value of the shares will be taxable as a capital gain. However, any loss cannot be claimed. Granted, any gains or losses would likely be small (only what occurred in the two days it takes for the trades to settle before you can request the transfer) but there’s a good chance the tax impact would be larger than the savings on the commissions.

    http://www.moneysense.ca/columns/in-kind-transfer-tfsa-tax/

  33. Trish Shwart May 8, 2018 at 1:45 pm

    I would like to start my daughter (early 30’s) who has just started working fulltime with a very small (2K) investment. The idea is to provide an opportunity to learn a bit about the investing world. Rather than just buying a GIC, I thought about buying VBA ETFs. Does this seem like a reasonable plan or would you suggest something else?

  34. Canadian Couch Potato May 8, 2018 at 1:49 pm

    @Trish: I would not recommend ETFs for such a small investment, nor for someone with no experience. Something much simpler (e.g. Tangerine or a robo-advisor) would likely be more appropriate.

  35. David May 10, 2018 at 10:47 am

    Hi, I’m looking at VGRO and VBAL compared to a small collection of scotia ETFs that I can trade commission-free (iTrade).

    The cash distributions of the all-in-1 funds are quite low – only about 1%. Are they reinvesting dividends within the fund?

    The comparison is complex. It costs me $10 to trade VGRO, the distribution is low, and the MER is low. I can trade scotia ETFs for free and the distributions are higher. But the MERs are higher and so are the bid-ask spreads.

    Thanks for the great blog

    David

  36. Ann June 16, 2018 at 7:06 pm

    Hi Dan,

    aiming to retire in 10 years,

    Can you pls recommend a few no-load bond index funds and tax favorable index bond fund?

    Also thinking about building a GIC ladder,what is the best GIC term (1yr, 2yr , 3yr or longer?)you would recommend in today’s market?

    Thanks,
    Ann

  37. Canadian Couch Potato June 17, 2018 at 9:58 pm

    @Ann: Please see the model portfolios for my usual recommendations. For tax-efficient bond funds, have a look at ZDB, BXF and HBB.

    I generally recommend building a five-year GIC ladder to spread out interest rate risk as much as possible. Otherwise you’re guessing about the direction of interest rates.

  38. Mark July 19, 2018 at 5:54 pm

    “And the Conservative version, VCNS, with 60% bonds, including a lot of U.S. and global fixed income, is not as attractive”

    Hi Dan, can you please expand on this statement?

  39. Canadian Couch Potato July 20, 2018 at 8:15 am

    @Mark: I just don’t think US or global bonds are necessary in a Canadian portfolio. I also feel that if you’re a conservative investor it’s better to incorporate GICs into the portfolio rather than using only bonds for the fixed income. So in that situation a one-fund solution is less attractive.

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