Your Complete Guide to Index Investing with Dan Bortolotti

Beyond One-Stop ETF Shopping

2019-01-11T17:03:30+00:00December 31st, 2018|Categories: ETFs and Funds, Portfolio Management|Tags: , |38 Comments

The new asset allocation ETFs launched by Vanguard and iShares in 2018 have made it easier than ever for investors to build a low-cost balanced portfolio. If you want a globally diversified mix of 80% stocks and 20% bonds, for example, the Vanguard Growth ETF Portfolio (VGRO) will deliver that with a single trade. Want a more traditional balance of 60% stocks and 40% bonds? The iShares Core Balanced ETF Portfolio (XBAL) will do all the heavy lifting.

Of course, prefab portfolios won’t fit the needs of all investors. Say, for example, your financial plan calls for an asset allocation of 50% stocks and 50% fixed income. None of the Vanguard or iShares asset allocation ETFs has this mix, so you’ll need to look for a different solution. But that doesn’t necessarily mean you have to build your portfolio from scratch using multiple ETFs. Let’s consider some ways you can combine an asset allocation ETF and other products without completely sacrificing simplicity.

Blend two asset allocation ETFs

Vanguard and iShares both offer funds with a mix of 80% (VGRO and XGRO) and 60% equities (VBAL and XBAL); Vanguard also has a conservative version with 40% stocks (VCNS). If your asset allocation falls between these targets, you might consider combing two of the ETFs.

For example, if you want to build a 50/50 portfolio you could hold equal amounts of VBAL and VCNS. Since the former holds 60% stocks and the latter holds 40%, blending them gives you an overall equity allocation of 50%.

You could do something similar if your target asset mix is 70% equities: just hold equal amounts of VBAL and VGRO (or XBAL and XGRO).

Asset Mix  VGRO or XGROVBAL or XBALVCNS
70% stocks / 30% bonds50%50%
50% stocks / 50% bonds50%50%

You will still need to rebalance from time to time, but it will be so straightforward that you won’t even need a spreadsheet: just try to keep the value of the two holdings roughly equal.

Reduce risk with a bond ETF

If you’re willing to do a little more math, you can achieve other target asset mixes by combining VGRO or XGRO with a bond ETF. This has the benefit of being somewhat cheaper than blending two of the asset allocation ETFs, since bond funds have lower fees.

If you put 62.5% of your portfolio in VGRO or XGRO, for example, and the remainder in a traditional bond ETF, the combined total works out to an even 50% bonds and 50% equities. Here are the formulas for adjusting your overall asset mix in this way:

Asset MixVGRO or XGROBond ETF
70% stocks / 30% bonds87.5%12.5%
50% stocks / 50% bonds62.5%37.5%
30% stocks / 70% bonds37.5%62.5%

Combine them with a GIC ladder

For conservative investors in particular, another option is to combine VGRO or XGRO with a ladder of GICs.

This has a few advantages. First, because GICs do not have management fees, they can further reduce the cost of the portfolio, especially when compared with an option such as VCNS, which is 60% bonds. Second, GICs have higher yields than government bonds of the same maturity. And finally, they are likely to be more tax-efficient than bond funds in a non-registered account.

Just be aware of the key drawbacks with GICs. They are not liquid, which means you cannot sell them before their maturity date, so you need to be comfortable locking up your money for one to five years. GICs are also less than ideal for investors who are regularly adding new money, since you can’t buy them in small amounts without creating an unwieldy portfolio.

Moreover, if there is a sharp downturn in equities and your only holdings are a single ETF and a GIC ladder, there is no opportunity to rebalance until the next GIC matures. So you may want to include a bond ETF or high-interest savings account as part of your fixed income allocation to add flexibility.

Here’s an example of how a couple with $400,000 spread over five accounts could set up a relatively easy-to-manage portfolio with an overall allocation of 50% equities. They could start with 62.5% of the portfolio ($250,000) in VGRO or XGRO and then build the fixed income allocation ($150,000) using a bond ETF, a GIC ladder, and some cash:

Account  VGRO or XGROBond ETFGIC ladderCash
TOTAL250,00020,00080,00050,000
TFSA65,000
TFSA65,000
RRSP60,00010,00040,000
RRSP60,00010,00040,000
Non-registered50,000

Don’t take it too far

One word of caution here: while the new Vanguard and iShares asset allocation ETFs can be combined with other products, there is a danger of going overboard. Remember, the goal of these ETFs is to make portfolios simpler, not more complicated. If these ETFs are just going to be a small part of a portfolio with a dozen or more moving parts, don’t bother with them at all.

If you want the easiest solution, then just choose one of the asset allocation ETFs and hold it in all of your accounts. And if you want a little bit of customization, you can use one of the strategies I’ve outlined above. But if you’re one to obsess over your precise allocation to emerging market equities, or if your goal is to save every basis point in taxes, then a customized portfolio of individual ETFs is more appropriate, though it always comes at the cost of more complexity.

38 Comments

  1. Miwo December 31, 2018 at 4:59 pm

    Hi Dan,

    I have been partaking in some tax loss selling with my 3 fund Couch Potato Portfolio in my Canadian Professional Corporation.

    Would holding VGRO in a CCPC be something you would ever recommend to your clients? Perhaps with some laddered GICs for instance?

  2. Shannon Dean December 31, 2018 at 6:43 pm

    Hi Dan,
    How would you advise an RDSP be structured? I have the maximum in of $200,000 and I am on year 3 of taking the mandated withdrawal. It’s very difficult to find recommendations re: RDSP, and if I do come across any, it for the accumulation phase. I would appreciate any feedback you might have. Thank you and a very Happy New Year to you!

  3. Marko Koskenoja December 31, 2018 at 7:10 pm

    Good article Dan. This information is helpful for many people who need/want one of the new asset allocation ETF’s from Vanguard or iShares. I would follow the methodology you laid out if I wasn’t already invested in BMO, Vanguard and iShares ETF’s.

    Happy New Year!

  4. Reza January 1, 2019 at 1:00 pm

    Hi Dan,
    I have followed the CCP portfolio for my RRSP so far. If I want to make my life easier and get rid of rebalancing, would it be wise to change all my portfolio to one of the equivalent EFT solutions offered by Vanguard or iShare?
    Thank you

  5. Paul January 1, 2019 at 7:04 pm

    Hi Dan,

    I like the idea of these one-stop-shopping funds, but I’m wondering if I have to use a different strategy. With a significant government pension, it seems I already have all the fixed income I need. It’s bombproof, backed by the taxpayer (sorry to all who don’t have one!). It would seem the correct strategy is to invest 100% in equities since the pension is already such a large part of my retirement plan.

    Even with early retirement a very short 5 years away, after firing my financial advisor it seems I should purchase all the equity components of VGRO individually, and avoid purchasing the FI components of VGRO. If I try estimate the present value for the pension, that would put me at 50% equities and 50% FI. Seems no sense in buying more FI when the pension alone is enough for survival.

    Does this make sense? Avoid the convenience of VGRO in order to maximize equities outside of my pension, since my pension is already the best kind of FI imaginable?

    Thanks, and Happy New Year.

  6. Canadian Couch Potato January 2, 2019 at 7:41 am

    @Miwo: There’s nothing specifically wrong with holding VGRO in a corporate account, although we don’t do it with our clients. Remember that any ability to harvest losses or gains would be very limited in the future if you use a one-ETF portfolio, however.

    @Shannon Dean: This is a big question that I cannot answer for you: it depends on your individual circumstances and should probably be determined the help of a financial planner.

    @Reza: This is a personal decision: if you are finding your current portfolio difficult to manage then, yes, it would be worth considering using one of these single-fund portfolios.

    @Paul: This is a good question that depends on how much risk you’re comfortable with. I approach the question this way: with a secure pension, you have the ability to take more risk with your personal savings, so if you are comfortable with 100% equities, then that may be a reasonable strategy. But very few people can handle that volatility, especially in retirement. Moreover, you can make the opposite argument: that with a secure pension you have no real need to take risk with your personal investments, so it would be reasonable for you to hold a balanced (or even conservative) portfolio for a smoother ride. In the end, this is about what makes you most comfortable.

  7. GregJP January 2, 2019 at 10:58 am

    Good article. I would also argue that these one-stop shop ETFs are not a good choice for those who are living off their portfolio. I have 30% in fixed income and if there is a prolonged market downturn, I intend to use this until equities recover (5%/yr x 6 yr max. downturn). If I have to sell these, I have to sell both the fixed income and equity components.

  8. Miwo January 2, 2019 at 11:25 am

    I had an interesting day with my last tax loss selling. It was last Xmas Eve.

    I hit my bands for selling my ETFs (VCN & VXC). I entered my trades as you suggested with 2 cents below the bid price. Those sold immediately.

    The problem was that when I tried to get back into the market with my XAW, The prices were at times 9 cents between the bid-ask. I was unable to get into the market with 2 cents above the ask price.

    Since I was only trying to tax loss sell, I did not want to try timing the market. Thus I eventually had to enter a market order which bought my entire XAW at a much higher percentage than the sell price for my VXC. Usually I notice there is about a 0.5% difference between the prices of XAW & VXC. My XAW was bought about 1.6% difference higher in price.

    Do you think it was because I preformed this trade on Xmas Eve and perhaps there was less liquidity in the markets that day? I avoid the first and last half hour of trading day as many of you advise but was definitely caught in the whipsaw of the market for that trade.

    Any further suggestions for how I might perform this better next time?

    This is why I am asking about just using VGRO in my CCPC. If there is the risk of this slippage on an ongoing basis, I should just use these asset allocation funds instead.

    Please advise if I am doing this all wrong as well. Thank you in advance Dan.

  9. taz January 2, 2019 at 11:32 am

    Honestly, I think all of this is “taking it too far”. If you’re not going to use a one-fund portfolio *as* a one-fund portfolio, you just shouldn’t use one. These are for people who don’t want to worry about balancing multiple ETFs. Once you’re balancing 2 of them, you might as well be balancing 3 or more. The temptation to change allocation based on feelings is still there whether it’s Canadian and international ETFs, or a VGRO, bonds and cash. If you have 2 ETFs and understand that you should sell one when it’s high or buy when it’s low, you can easily use the same logic with more than 2. It doesn’t need to be absolutely precise. The couple with $400,000 is essentially spending $250 just to avoid having one more ETF.

  10. KG January 2, 2019 at 12:21 pm

    Happy new year and thanks for all the info. I especially love the podcast.

    I have set up an RESP for my newborn and would like to implement a strategy you recommended in an old blog article: start with an all-equity portfolio for the first 10 years or so, then add bonds and annually increase the proportion of bonds until you end up with an all-bonds portfolio at the end of 18 years. To that end – do you know of any single ETF made up of 100% stocks that includes the World and Canada? I want the simplicity of holding a single ETF, if possible, rather than holding, say, XAW plus VCN and having to balance them.

    Thanks in advance.

  11. Canadian Couch Potato January 2, 2019 at 12:41 pm

    @KG: Thanks for the comment. There is no ETF that is 100% equities with an overweight to Canada. (There is XWD from iShares, but it holds only the market weight in Canada (about 3% or 4%) and no emerging markets.) But, really, I think a fund like VGRO or XGRO is ideal in an RESP. Remember that for the first few years an RESP is likely to be very small, so you’re really not giving up much by going “only” 80% equities instead of 100%.

  12. Mike January 2, 2019 at 4:00 pm

    Interesting question by @KG. This got me thinking…. Dan, are you aware of any plans of introducing “target date funds” to the Canadian market? I think a solution like that would be appropriate for both RESP and RRSP. How popular/well-received have these been in the US? Admittedly, there is usually a delay with respect to the US in terms of financial products…

  13. Canadian Couch Potato January 2, 2019 at 7:28 pm

    @Mike: Target-date funds are quite popular in Canada, but only in employer-sponsored plans. Vanguard Canada offers them, for example:
    https://www.vanguardcanada.ca/institutional/articles/vanguard-news/news-from-vanguard/vg-two-new-target-retirement-funds.htm

    But as far as I know the only ones available to DIY investors are RBC’s Target Education Funds, which are designed for RESPs:
    http://funds.rbcgam.com/investment-solutions/portfolio-solutions/rbc-target-education-funds.html

  14. Canadian Couch Potato January 2, 2019 at 7:39 pm

    @Miwo: It’s impossible to know exactly what would have caused the bid-ask spread to get so wide on the day you made your trades. Low trading volume should not have made much of a difference if the market makers were doing their job. The fact that markets closed early on Dec 24 might have had something to do with it. And I’m not sure using VGRO or XGRO would solve the problem, as there are days when these funds seem to deviate more than expected, too. There are definitely days when the market prices seem to diverge from the NAV:
    https://canadiancouchpotato.com/2013/03/13/two-ways-to-measure-an-etfs-performance/
    https://canadiancouchpotato.com/2013/03/18/the-etfs-price-is-right-except-when-its-not/

  15. SS January 3, 2019 at 4:06 pm

    Hi Dan,
    As it is for many, I’m sure, the turning over of a New Year has reminded me of the importance to get my finances in order. I’m relatively new to investing, and have maybe $5k in various stocks that I don’t really pay any attention to (because my parents bought them for me eons ago), and $25k sitting idly in an RRSP waiting for me to make a plan about where to put it. I’m married, in my mid-30s with no children and no debt. Reading through your website, along with the MMM website, I feel like so much of these recommendations are for folk with significantly more money than me, not to mention knowledge about investing. I don’t have any! Can you please tell me your top three steps/recommendations/tips for a young(ish) female dipping her toes into the investing world for the first time?
    Thank you!!
    SS

  16. Ivan January 4, 2019 at 10:02 am

    Hi Dan,

    I have been using the couch potato strategy for my kids RESPs and it has worked well so far. I sold most of my equities this past summer as everything was at an all time high and bought more bonds. I now have 85% bonds and 15% equity in the portfolio. Since I just contributed more money into the RESP for 2019, I am wondering if you have recommendations on what to buy this year? It would be a long term hold, probably 7-10 years. More equities probably makes sense to better balance the portfolio, but with the markets having corrected over the last 4 months, I’m wondering if buying more XAW or VXC makes sense? It could be looked at as a good buying opportunity or do you think there is a further correction coming?

    I realize that this is a tough question to answer. I prefer a conservative approach for their portfolio, and try to keep 70% bonds in there at all time.

    Thanks

  17. Canadian Couch Potato January 5, 2019 at 10:57 am

    @Ivan: My recommendation is to have a long-term target for your asset allocation and to stick to it with discipline. Once you start trying to forecast the market you’ve lost sight of the strategy.

  18. Daryl January 5, 2019 at 6:39 pm

    How are the withholding taxes on these two funds?

  19. Canadian Couch Potato January 7, 2019 at 8:01 am

    @Daryl: In a TFSA or a non-registered account the effect of foreign withholding taxes is generally the same as with other Canadian-listed ETFs. In an RRSP, there is an extra layer of withholding taxes on US and emerging markets equities compared with holding US-listed ETFs directly. But again, these ETFs are not designed for optimal tax-efficiency, they’re designed for convenience.

  20. Nicolas January 7, 2019 at 1:21 pm

    Hi Dan,
    Thank you for this very interesting analysis. I’m investing a six figures lump sum in a LIRA account, and thinking a all-in-one ETF might not me the answer because of the foreign withholding taxes. My Question : why is there such a strong Canadian equities component in your (and others) model RRSP portfolio? Canada represent a small portion of world markets (less than 4% I think) so why giving our country’s economy such a heavy exposure? Is it related to currency i.e. investing everything in XAW for exemple exposes one to currency fluctuation on top of normal market fluctuations? Thanks!

  21. Canadian Couch Potato January 8, 2019 at 8:23 am

    @Nicolas: These should help explain the home bias:
    https://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/
    https://www.moneysense.ca/columns/bias-towards-canadian-stocks/

    Note that both Vanguard and iShares came to similar conclusions when designing their all-in-one ETFs.

  22. Nicolas January 8, 2019 at 9:30 am

    Thank you Dan! Much appreciated. Happy investing.
    Best,
    Nicolas

  23. Roy January 8, 2019 at 11:13 am

    hi Dan!

    Do you recommend using questrade for buying ETF’s for TFSA in Canada?

  24. Canadian Couch Potato January 8, 2019 at 3:18 pm

    @Roy: I don’t endorse any specific brokerage, but certainly Questrade’s zero-commission offer makes it attractive for ETF investors.

  25. Mark January 9, 2019 at 4:18 pm

    Hi Dan!

    Do you think that with the advent of the All-in-one ETF’s, as well as the low cost options offered by a number of robo-advisors, that some of your model portfolio options may need to be refreshed or replaced? Specifically the Tangerine and TD eSeries options. The Tangerine option is definitely on the high end of fees now, while the TD eSeries option still needs to be rebalanced v.s. a robo with a similar fee that would not.

    Please do not take this as a criticism, it is not. Just looking for your thoughts on the developing landscape. I love your work and am looking forward to see what your 2019 model portfolios look like!

  26. Canadian Couch Potato January 9, 2019 at 4:42 pm

    @Mark: It’s a fair question, and certainly robo-advisors have become another possible option, though I don’t think they render the Tangerine or e-Series options obsolete as model portfolios.

    Tangerine is slightly more expensive than most robos (which often come in at about 0.70% including the underlying fund fees), but the difference is usually very small in dollar terms when you consider that this option is primarily for people just starting out. Moreover, I like the simplicity of the Tangerine portfolios compared with the more exotic options offered by most robos.

    The e-Series funds are cheaper than robos, though you are right, you do need to rebalance them manually.

    Finally, in the context of model portfolios, it’s not helpful for me to suggest robo-advisors generically: I would need to be comfortable endorsing one or two specific ones, and I am not ready to do that.

    Hope this helps.

  27. Oldie January 10, 2019 at 5:41 pm

    As I hold my couch potato portfolios for longer periods of time I am gradually becoming instinctively aware that rebalancing need not be an exact science, and indeed may not even need to be done at all, because it is based upon an asset allocations ratio that one has arbitrarily decided on that is more or less within one’s comfort zone.

    In relation to that idea, I have been managing my son’s TFSA for years as he spends a lot of time out of the country, and quite frankly he says he does not want to bother with the day to day details, which is a reasonable approach. Given that he doesn’t even want to look at the portfolio values, even annually (he understands very well the long term implications — why look at it if I’m not going to be changing anything? — and he is in it for the decades-long time scale) would it be reasonable to assume his comfort level is very high with a a very high equity-rich mix (it actually appears to be very high, period), and that, as the expected appreciation over the long haul is highest for equities, it would be reasonable over the years to top up only the well diversified equities mix annually from the annual cash contributions?

  28. Dheepak Jeevaraj January 10, 2019 at 11:19 pm

    Individual ETFs do have the advantage of tax loss harvesting since we would be able to sell the particular ETF that is causing losses.

    With VGRO and XGRO, I guess tax loss harvesting is still possible but only during significant market downturn – the investor can sell XGRO and replace it with VGRO and vice versa.

    Reiterating that it won’t be as efficient as Tax loss harvesting in individual ETFs but still possible.

    What do you think?

  29. Canadian Couch Potato January 11, 2019 at 9:11 am

    @Dheepak: You’re right that balanced ETFs like this are not ideal for tax-loss harvesting. Remember, they are not designed for tax optimization, they’re designed for convenience.

  30. Dheepak Jeevaraj January 11, 2019 at 7:38 pm

    Thanks for the confirmation! A bit out of topic, but does Tax loss harvesting actually create a gain, other than deferring the tax on declared losses to a later year?

    I guess the only way of looking at it is that I can use the deferred tax to fuel further investments which can create additional growth, but we could be talking about a $1000 tax deferred a year.

    Also, any idea on how efficient these Asset-allocation funds are when it comes to Tax-efficiency on Dividend distribution?

    Thanks!

  31. Canadian Couch Potato January 12, 2019 at 9:14 am

    @Dheepak: You’re right that tax-loss harvesting doesn’t making taxes disappear, it simply defers them, though there is a lot of value in that. Moreover, if you have gains from past years you can carry back harvested losses to offset these and you may be able to recover taxes already paid.

    As for the distributions on the asset allocation funds, in a taxable account they are the same as if you held the underlying funds directly: your T3 slip will break them down as Canadian dividends, foreign dividends and interest.

  32. David January 13, 2019 at 11:24 am

    Are there USD versions of these? Perhaps AOA and AOR from iShares (the Vanguard equivalents in the US seem to be mutual funds so can’t purchase those)? If you want to hold some US dollars in your RRSP using this asset allocation approach, would these serve a similar purpose?

  33. Canadian Couch Potato January 13, 2019 at 11:51 am

    @David: I would not recommend using US asset allocation ETFs. They include US bonds that are not hedged to CAD (foreign bond exposure should be hedged) and of course there is no overweight to Canada as there is with the Canadian ETFs. If you want to hold US dollars in an RRSP then consider a US-listed equity ETF (something like VT holds all countries) and adjust the rest of the portfolio accordingly.

  34. David January 13, 2019 at 12:20 pm

    Thanks Dan. I am currently using VTI and VXUS for the US and International part of my RRSP CCP portfolio (using VCN and ZAG for rest) so will leave as is. Part of my assets are in US stock (part of compensation from company I work for) that I have been slowly moving over to my RRSP and want to keep the currency in USD for retirement use eventually. Thanks.

  35. Harold January 18, 2019 at 12:43 pm

    Hi Dan,

    What are your thoughts on how the Vanguard and iShares all in one products compare to HBAL or HCON? The Horizons products seem ideal for non-registered investing (such as in a corporation).

  36. Canadian Couch Potato January 18, 2019 at 1:35 pm

    @Harold: These ETFs are very tax-efficient, but I don’t like the asset mix at all: HBAL includes a large allocation to the NASDAQ 100, for example, which is a poorly diversified index that makes no sense as an investment benchmark. It also includes unhedged US bonds and no emerging markets. If you want to use swap-based ETFs in a corp, I would recommend using the individual funds (HBB, HXT, HXS, HSDM) and setting more sensible asset targets.

  37. Oldie January 18, 2019 at 6:20 pm

    Can you hazard a guess as to what Horizons was possibly thinking when they added the NASDAQ component to HBAL? (Maybe this is just a bad question that has no good answer — how could anyone try to explain or justify someone else’s bad decisions).

  38. Canadian Couch Potato January 19, 2019 at 1:29 pm

    @Oldie: Could it have something to do with the fact that the tech-heavy NASDAQ has delivered huge returns in recent years? Just saying. :)

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