As long-time readers will know, I review my model portfolios once a year and, if necessary, make minor changes when better or cheaper funds have been launched. I made no updates for 2018 or 2019, except to add the new Vanguard and iShares asset allocation ETFs as a fourth option last year.
For 2020, however, I’ve done a little remodelling.
Before explaining the changes, I’ll offer my usual caveat. These models are intended to be a default choice for investors who aren’t sure how to build a diversified portfolio, or are confused by the enormous variety of funds available. The specific fund choices are not definitive: in almost all cases, the major ETF providers (Vanguard, iShares and BMO) have options that are very similar and equally good. The changes I’ve made over the years have usually been subtle, with minor reductions in cost or improved simplicity. If you’re currently using one of the older portfolios successfully, please don’t feel the urge to switch.
All right, on to the changes. The new portfolios and their backtested returns (now going back 25 years) can be found on the Model Portfolios page.
Tangerine gets squeezed
First off, I’ve removed the Tangerine Investment Funds, which had been a staple of my model portfolios for close to 10 years.
For investors with a small RRSP or TFSA and a desire to be almost entirely hands-off, the Tangerine mutual funds used to be an excellent choice. But there are now much more attractive options, even for those with modest accounts and a desire for simplicity. Despite the competition from robo-advisors and an industry-wide trend toward lower fees, Tangerine has stubbornly kept its fund MER at 1.07% for more than decade. It’s hard to justify that anymore.
The E-Series gets an A
For those looking for an alternative to ETFs, I’ve kept the TD e-Series funds, which are now more attractive than ever.
In 2019, the funds changed their structure and now hold underlying ETFs rather than individual stocks and bonds. This change came with a modest fee reduction of 0.05%, but that wasn’t the big news. More important was the announcement that these funds—which for almost 20 years were only available to TD customers—are now available through any online brokerage. For index investors who want the benefits of mutual funds over ETFs, the e-Series funds are the best choice, by far.
ETFs just get easier
Finally, my model ETF portfolios have been simplified even more, and I’ve bumped them up to Option 1, which means they should be the first one to consider.
ETFs still aren’t right for everyone, but the launch of “one-fund portfolios” (also called asset allocation ETFs), combined with the low- and no-commission trades at several brokerages, have made them more appropriate even for small portfolios. For the vast majority of DIY investors, I believe these one-ticket solutions are the best way to build a diversified portfolio that balances low cost with ease of maintenance.
To add more flexibility, I’ve also included options for balanced portfolios that don’t have a ready-made solution—for example, there is no single ETF with a 50/50 mix of stocks and bonds. So I suggest some two-ETF model portfolios, which combine a bond fund and a globally diversified equity fund. These, of course, can be used to build a portfolio with any asset mix you deem suitable.
For example, the Vanguard Balanced ETF Portfolio (VBAL) is 40% bonds and 60% stocks, while the Vanguard Growth ETF Portfolio (VGRO) is 20% bonds and 80% stocks. If you decide you want something in between, my new model portfolios suggest a 30% holding in the Vanguard Canadian Aggregate Bond Index ETF (VAB) and 70% in the Vanguard All-Equity ETF Portfolio (VEQT).
These two-fund portfolios will require occasional rebalancing, but the trade-off is they actually have slightly lower fees that the one-ticket asset allocation ETFs.
Models are not optimal
I’m expecting some pushback about the changes to the model ETF portfolios. After all, the MER on the one-fund solutions is up to 0.10% higher than that of the three-fund portfolios I’ve been recommending for the last few years. There are still many DIY investors who believe that MER is the only factor to consider when building a portfolio.
But let’s remember that a model portfolio, by definition, is not designed to be optimal—if such a thing even exists. It’s a default for investors who are looking for a place to begin. And indeed, even more experienced DIY investors may benefit from using asset allocation ETFs, since they enforce disciplined rebalancing, reduce transaction costs, and discourage tinkering. All of these benefits are easily worth a few basis points of MER.
If you’re managing a multi-ETF portfolio successfully now, you should continue to do so. But if you’re new to DIY investing—or if you’re struggling to maintain a more complex ETF portfolio with discipline—embrace the simplicity.