For DIY investors, asset allocation ETFs may be the greatest gift to come along in decades. It’s never been easier or cheaper to build a globally diversified portfolio that needs almost no maintenance. But compared with a balanced mutual fund, even one-ETF portfolios have a few potential drawbacks.
First, at most brokerages you still need to pay a commission of up to $9.99 any time you buy or sell ETF shares. If you’re making smallish monthly contributions, that’s a major obstacle. It simply isn’t cost-efficient to trade unless you’re investing at least a couple of thousand dollars each time.
Moreover, mutual funds give you the opportunity to automate your purchases. With the money taken from your chequing account every month, your savings become more consistent, and soon you may not even notice them. Unfortunately, when you use ETFs, you don’t get that benefit.
Finally, mutual funds make it easy to reinvest all distributions (dividends and interest payments), which means there’s no cash sitting idly in your accounts.
Of course, index mutual funds have their own drawbacks. The Tangerine Investment Funds, for example, offer all the benefits mentioned above, but carry a fee of 1.07%, which is no longer competitive. The TD e-Series funds offer these three benefits at about one-third the cost of Tangerine, but you need four funds to build a globally diversified portfolio, and you need to rebalance these yourself from time to time.
You can argue that robo-advisors combine many of the benefits of mutual funds and ETFs. It’s easy to set up automatic contributions from your bank account, and any time dividends or new contributions land in the account, the cash is quickly reinvested in new ETF shares. And most robos don’t charge commissions for trades. Problem is, these services aren’t free: robo-advisors typically charge about 0.50% annually (less on large accounts), which is $250 a year on a modest $50,000 portfolio, and that’s in addition to the management fees on the ETFs themselves.
What if you were able to combine the useful features of a mutual fund or robo-advisor with the lower fees of an asset allocation ETF? If you’re willing to put in a little effort at the beginning, it turns out you can create a DIY portfolio with the ideal mix of low cost and hands-off convenience. Here’s how.
1. Choose a brokerage with zero commissions
While most online brokerages charge between $4.95 and $9.99 per trade, there are a few options for trading asset allocation ETFs with zero commissions. These brokerages are ideal for investors who are regularly adding small amounts of money to their portfolio.
• Questrade offers all ETF purchases for free. (The normal commission of one cent per share—minimum $4.95, maximum $9.95—applies when selling ETFs.). While this presents an opportunity to build a portfolio of multiple funds, using an asset allocation ETF means you never need to rebalance, which has behavioural benefits even if you’re not paying commissions.
• National Bank Direct Brokerage now offers commission-free trades on all ETFs, the only big-bank brokerage to do so.
• Disnat (Desjardins Online Brokerage) also offers commission-free trades on all ETFs.
• BMO InvestorLine has a menu of commission-free ETFs, including 14 asset allocation ETFs. The list includes the major one-fund portfolios from Vanguard (VCNS, VBAL, VGRO) and iShares (XCNS, XBAL, XGRO) as well as BMO’s own family (ZCON, ZBAL, ZGRO).
• Scotia iTRADE lets you trade about 50 ETFs with no commissions. Unfortunately, the list is no longer on their website: you need to have an iTRADE account to access it. While most of these ETFs are not useful for traditional index portfolios, eligible funds include XBAL and XGRO.
• Qtrade offers a selection of commission-free ETFs, and the list includes both XBAL and XGRO.
A note for investors who are starting from zero: some brokerages charge a quarterly $25 inactivity fee on small accounts. The minimum balance to avoid these charges is $1,000 at Questrade, $10,000 at Scotia iTRADE, and $25,000 at Qtrade. Read the fine print before you open your account.
2. Automate your deposits
In general, you can’t set up an automatic purchase plan for ETFs the way you can with mutual funds. But every brokerage allows to you set up regular deposits of new cash to your accounts. Even if that cash doesn’t get invested immediately, there’s value in automating your savings rather than relying on ad hoc contributions that can easily get forgotten—or spent.
Automating cash deposits is particularly easy if your online brokerage is associated with the bank where you hold your chequing account. But even if you’re using Questrade or Qtrade to take advantage of commission-free trades, you can arrange an automatic transfer of, say, $500 per month to your TFSA from your third-party chequing account. If you can’t find the forms on your brokerage’s website, call them and ask for instructions.
You’ll still need to log in to your investment account to make a trade and invest that cash. But if you forget from time to time, it won’t make much difference: you can just make a larger trade next month. The important thing is that you won’t neglect to save.
3. Set up a dividend reinvestment plan (DRIP)
Robo-advisors automatically reinvest the cash when ETFs pay dividends or interest, which allows you take full advantage of compounding. For small portfolios, this is a pretty minor benefit, especially if you’re able to reinvest that cash with commission-free trades. But, hey, every little bit helps.
If you’re using an asset allocation ETF in a self-directed account, you can get the same advantage by enrolling in a dividend reinvestment program (DRIP). All discount brokerages offer these plans, and you can usually enroll easily online. Unfortunately, not every ETF is eligible at every brokerage, so it’s worth a call to the customer service desk if you’re not sure whether your asset allocation ETF is on the list.
When you’re enrolled in a DRIP, you’ll receive your dividend and interest payments in the form of new ETF units rather than cash—with the caveat that only whole units can be purchased. For example, if the ETF is currently trading at $25 per unit and your holding pays a $127 dividend, you’ll receive five new units plus $2 in cash. (No commissions are ever charged on DRIPs.)
DRIPs are a great way to way to keep your investments compounding in a TFSA, RRSP or other tax-sheltered account. But I generally don’t recommend them in non-registered accounts, as they can complicate your recordkeeping. If you’re making a few commission-free trades every year anyway, it’s easier to just mop up the idle cash in your taxable account at that time.
The (minimal) effort is worth it
If you’ve put the above three steps in place, then you’ve ticked the important boxes for a solid investment plan: you’ve got a broadly diversified portfolio that requires no rebalancing, your annual fees are super-low, you’ve got a regular savings plan, and your transaction costs are close to zero.
The investment plan I’ve suggested here isn’t entirely hands-off compared with, say, the Tangerine Investment Funds or a robo-advisor. With those options, once you’ve opened your account and set up your regular contributions, you could safely lapse into a coma for a few years and your portfolio would likely be in great shape when you woke up. But you do pay a significant amount for that benefit.
I’ve long argued that paying a little more for convenience is well worth it: that’s the reason I recommend asset allocation ETFs rather than assembling a portfolio from three or four funds, which would have a lower MER. What I’ve outlined above, in my view, strikes the right balance: it’s not the absolute cheapest option, and it’s not the absolute easiest, but it scores very high in both categories. If you can muster the energy to log into your accounts a few times a year and make a single ETF trade each time, then you’ll be well on your way to long-term success as a DIY investor.
Hi Dan,
Thank you very much for the response. I surely do hope you make a review for the new Tangerine portfolios soon. In the meantime, I have some follow-up questions if that’s alright.
Between the Balanced Growth ETF portfolio (75% equity / 25% bonds) and the Growth Equity ETF portfolio (100% equity), it seemed to make more sense to go with the 100% equity one because of stuff I had read here about bonds being tax inefficient in non registered accounts.
However, I also read previous posts here that it’s best to have majority Canadian equity in these accounts. Seeing as there’s only 3% Canadian equity in that portfolio, it seems the new Tangerine ETF portfolios wouldn’t be a good choice for non registered accounts at all – is this correct? I can’t quite grasp exactly how important the tax inefficiency aspects are – is it to the point where people should most definitely avoid the Tangerine Global ETF portfolios in non registered accounts? Or are there other benefits that may outweigh the tax inefficiencies that I am not aware of?
If one were to go with the TD Series for a non registered account, would it make sense to leave out the bond index fund entirely and go with something like 50% Canadian equity, 25% US equity, and 25% International equity? From what I gathered reading here it seems a mix like this would be tax efficient. But again, I am not sure if I am placing too much importance on the tax efficiency aspect.
Lastly, if one were to invest in the TD E Series, would there be one T3 or 3-4 T3s, depending on how many index funds are in the portfolio? And when the units are sold, is there one slip for capital gains/losses, or 3-4?
Sorry for the ultra newbie questions. Although I learn a lot when I read your blog and responses, I also somehow come up with many questions.
@Linda: Your questions are all common in the early stages. The first crucial point is that you can’t put the cart before the horse: in other words. your first decision should always be, “What is the right mix of stocks and bonds for my time horizon and temperament?” That question always, without exception, comes before tax-efficiency and asset location.
For example, a 100% equity allocation is much too risky for most investors. Even 75% is aggressive, so you need to make sure you that makes sense for you. The decision also depends on what the rest of your portfolio looks like. It may be fine to hold all equities in a non-registered account if you hold bonds in your RRSP and your overall asset allocation is appropriate.
RE: Canadian equities, again, tax-efficiency is only part of the question. Diversification is much more important. Holding 50% of the portfolio in Canadian stocks is probably too much. (Although again, it depends on what the rest of your portfolio looks like. If you hold US and international stocks in your TFSA or RRSP, then it’s different.)
In my experience, asset location (which fund goes in which account) and tax-efficiency are the most misunderstood parts of DIY investing. People adopt rules of thumb, ignore the larger context, and end up making poor decisions as a result. By looking for “optimal” instead of “good enough” they end up with poorly designed portfolios with inappropriate diversification. That’s why I feel the one-ETF solutions are a better choice for most people, especially those just getting started.
Finally, regarding the T-slips, you would likely get a single T3 slip for all TD funds held in the same account. Any holdings sold during the year would appear on a single T5008.
Good luck, and above all, keep things as simple as possible. A commitment to regular savings, low cost, broad diversification and disciplined rebalancing is probably 98% of successful investing. The other issues you’re worrying about now will barely move the needle if you get the other steps right.
Hi Dan,
Thanks for the advice!
I am now trying to decide between the SRI and Standard Portfolio. I am leaning to the SRI option.
Before I make my decision I wanted to test my logic on you – if for example ESG/SRI companies end up competing better in the stock market, does that mean that a standard index fund that shifts its positions based on index targets would end up also reflecting those ESG/SRI qualifiers?
I hope that makes sense, thank you so much in advance.
@May: If I understand your question, you’re asking whether a company’s weight in a traditional index will increase if that company grows larger as a result of its better ESG characteristics. The answer is yes, but I’m not sure that makes your decision easier. The choice to use an SRI portfolio should really be driven by your values and not any expectation of outperformance.
Hi Dan, thanks so much for all these posts and help.
I am an international student that arrived to Canada and faced a completely new world of investment which I was not familiarized (still feel like that).
Initially, I started using Scotiabank (just random choice) and at the moment of investing I open a TFSA account with them and bought some mutual funds that I am still contributing monthly. Also, since I have some extra income, I opened an Non-Registered Account to buy more funds.
After finding this blog, now I am a bit more educated financially and I have been planning to move my investments to a CCP strategy. However, my biggest confusion now is how to start…. I mean from a practical point of view. I somehow understand that I can use the model portfolio that you offer and I just need to distribute my investements according my risk tolerance, rebalancing time to time, etc. However, it is still not clear to me how to implement this in practice. I am planning to open an IShare account (since I already have Scotiabank).
I know this question is general, but, I was wondering if you may have some advice or some resources to guide someone that is just starting in the practical implementation of the strategy.
Thanks so much, I really appreciate all the information that you have available!
Edmund
@Edmund: Thanks for the comment. First, can you confirm that your accounts are at Scotia iTRADE, as opposed to a Scotiabank branch? Scotia iTRADE is an online brokerage that gives you access to all types of securities, including ETFs. If you opened accounts at your branch, these might allow you access to mutual funds only. You would not be able to buy ETFs this way.
Once you’re opened accounts with iTRADE (or any other brokerage) I’d suggest checking YouTube for some tutorial videos about how to place trades.
If this seems intimidating, you might want to consider using a robo-advisor, which is much more user-friendly.
Hi, Thank you for the article,
1. I just get discouraged by the low ranking of google reviews of brokerages, what are the real concerns that people using brokerages aren’t satisfied?
2. If it wasn’t the fee, would the banks brokerages be fine?
2. To contribute to an asset allocation through a brokerage, can we contribute from Saving accounts and TFSA together?
3. Is it a good idea to have two asset allocations: one conservative, another balanced?
4. Would you know how long it takes to wire transfer between own bank to and from the brokerage?
Regards
@Adrian: The main complaint with online brokerages seems to be down time (brief periods where you’re not able to make transactions) and poor customer service (inability to get hold of someone to address problems). Bank brokerages are certainly not immune to either of these. But in my opinion, if the only reason you’re avoiding the bank-owned brokerages is because you’d have to pay $8 or $10 a trade, then you’re trading too much. With asset allocation ETFs you should be able to invest with just a few trades per year.
I’m not sure why it would be necessary to use two asset allocation ETFs, one conservative and one balanced, unless the investments had different time horizons: for example, a conservative fund for an RESP you’ll need in five years, and a retirement portfolio you won’t need for 20+ years.
Electronic funds transfers (EFTs) to a brokerage typically take two business days.
Hi Dan, thanks so much for this article (and the blog!)
I am one of those who have been convinced to move from “conventional” mutual funds to ETFs and DIY investing. However, I feel I am not ready to do it since I have several questions in mind.
I am 30 years old and I have moved to Canada 5 years ago. At the time, I opened a TFSA and non-register account with my bank, and I acquired some mutual funds (I am still doing period contributions for both).
So far, I have purchased around 32 K in my TFSA (almost the limit) and around 14 k in the non-registered account. In addition to that, I have another 30 k that I also want to invest (in a regular saving account). The total is around 70 k.
At this moment, I would like to transition to an ETF portfolio, but I am not sure what will be the best strategy. What would you suggest? Just to sell all the mutual funds I have, and buy the ETFs? Also, if I decide to open an online brokerage account, can I transfer the money from TFSA to TFSA accounts? Does it have any tax implications? What about the contribution room?
Also, how would you suggest distributing the portfolio between TFSAs and non-registered accounts? Do you have a post related to that?
Would you suggest getting an appointment with some kind of financial advisor to do this transition in a clean manner?
I hope that I didn’t ask too many questions!
Thanks!
Lucas
@Lucas: Thanks for the comment. At this stage of your investing career, I would not recommend looking for an advisor. You’re likely to just end up with different mutual funds and little or no service.
If you would like to set up an ETF portfolio with an online brokerage, you can indeed transfer your assets from one TFSA to another with no tax implications. If you eventually sell the funds in your non-registered account there may be capital gains taxes to pay, but these will be modest if the balance is $14K. To start the process, you’ll need to open a TFSA and a non-registered account at your new online brokerage, and they will assist you in requesting the transfer from your bank.
Good luck!
Hi Dan,
You have been very helpful and I have set up a VGRO EFT portfolio for my retirement.
How should I invest money for my dream vacation 10-15 years from now with a goal of $30,000? I’m 30 years old so I am willing to be more aggressive.
Should I use the VEQT EFT for this purpose? Or put money into my existing VGRO and withdraw the amount required when the times comes for my vacation?
Is there another solution you recommend?
Thanks!
@Charley: It’s hard to be too specific here, but VGRO may be appropriate for a 10- to 15-year time horizon. Just remember to revisit this as the date gets closer. You don’t want to still beholding VGRO when you’re a year or two away from the trip.
Thanks Dan, this material is very useful. I would like to go all VGRO and keep it simple, diversified and no need to rebalance – bliss for a newbie like me! However I have a complex portfolio that has it all – TFSA, RSP, LIRA and LRSP. Likely VGRO is not a good option for the LIRA and LRSP especially so is it better to use VAB in these and VEQT or similar in the remaining accounts? From what you’ve said about tax implications its probably best to keep dividend earning ETFs like VEQT that have foreign component out of the registered accounts since they get better treatment in non registered. Going VAB/VEQT will mean rebalancing of the 2 funds, adding more complexity. I would like to keep it as simple as possible – What do you suggest for a person with multiple types of accounts?
@Nad: There is absolutely nothing wrong with using an asset allocation ETF such as VGRO in all of your accounts. In fact, in my experience, trying to “optimize” across multiple accounts is the main way DIY investors sabotage themselves. Not only does this create unnecessary complexity, but sometimes the decisions are based on misunderstandings, e.g. “it’s probably best to keep dividend earning ETFs like VEQT that have foreign component out of the registered accounts since they get better treatment in non registered.” This is definitely not true:
https://canadiancouchpotato.com/2015/01/30/the-wrong-way-to-think-about-withholding-taxes/
If you are confident that 80% equities is appropriate, and if all of your accounts are intended for retirement (as opposed to some shorter-term goal), then I would encourage you to consider using a single ETF in all of your accounts.
Hi Dan, I have just retired @55 and switched from adding to depleting my accounts – what a change!
I have most of my money in the 5 ETF structure you used to recommend, spread over an RRSP, TFSA and non-registered account. I also have 5 years of living expenses in fixed income (laddered GICs). The whole thing is about a 35% equities. I recently added a LIRA in which I joyfully put all the money into VCNS – no work required in future!
Is it worth selling all my individual ETFs and putting them in one all-in-ETF across all my accounts? I plan to keep the living expense money (ie 5 yrs of living expenses on a rolling basis) – should this increase my risk tolerance? ie should I then buy perhaps VBAL vs VCNS since I have a few years to ride out a crisis? Or should I just hold on to my existing ETFs?
I don’t mind having multiple ETFs but I fear the rebalancing might get too much for me at some point. Thanks!
@Lise: Using a single ETF in all of your accounts would certainly make your portfolio easier to manage, and you would not likely be giving up much in terms of MER or tax-efficiency. The one caveat would be that liquidating your non-registered account could trigger significant capital gains. That might be too high a cost to pay, though you could plan to do this gradually over two or three tax years.
Yes, the addition of the GIC ladder should be factored in to your overall asset allocation. For example, if hold VCNS (60% bonds) as well a GIC ladder, your overall allocation to fixed income is significantly higher than 60%, so VBAL may indeed be more appropriate.
Hi Dan,
I came across your site back in 2016 and followed your then current advice regarding an XAW, ZAG, VCN portfolio. Which one? I can’t remember! And your pdf doesn’t appear to be accessible anymore (foolishly, I didn’t save it)
I wish I could see the pdf so that I could try to remember the whys about the choices I made.
I notice this portfolio isn’t what you’re recommending anymore. Should I be concerned?
@Steve: The new model portfolios offer almost identical market exposure (bonds, Canadian stocks, US stocks, international stocks), but with one fund instead of three. If you’re using the older three-ETF portfolios and are comfortable rebalancing, then they are absolutely fine. But if you would like to take a more hands-off approach, then the one-fund portfolios are ideal.
Hi Dan, Thank you for your informative site. I am 59 and retiring next year at 60. I have Company defined pension, GRRSP that will need to be rolled over after termination, TFSA account, as well as my own RRSP and RESP Account for my son with traditional mutal funds at the bank. I will not require to dip into my GRRSP and own RRSP for another 5 years, I will hold off applying for my CPP, etc. for several more years. I am thinking of moving to ETF and index investing now. (roll all them over). I was thinking one of these Asset allocations like XBAL or ZBAL(maybe 40% of my portfolio and finding bunch of passive income producing ETF’s with higher dividends and REITS for the next 60%. Would that be a good strategy? Or should I move everything to passive income/dividends now? (Drip in the meantime before withdrawing). Thank you.
@Bahram: Thanks for the comment. I hope you will understand that I cannot make recommendations for your specific situation. In general, I don’t see any need for investors to add dividend or REIT ETFs to the mix: a simpler portfolio using asset allocation ETFs only is appropriate in almost all situations.
Thanks Dan. I thought when it comes to withdrawal time, you would want more income/dividend, as you are not in a growth mode anymore per se.
@Bahram: That is the conventional wisdom, but here’s my take on the issue:
https://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/
Thank you Dan for sharing. Interesting! One last question: A robo advisor like Quest wealth balanced ETF portfolio for 100K has fee of .20% and MER OF .13%. So, total .33%. All in one like ZBAL/XBAL have MER OF .20% and Fee of .18% for total of .38%. So Robo is actually lower cost, or am I missing something here? I thought robo ones would be more costly.
@Bahram: For all ETFs (and mutual funds) the MER includes the management fee. So for XBAL, your total cost is 0.20%. If you use a roboadvisor you will pay the ETF fees plus an additional fee to the roboadvisor. This is from the Questwealth site:
They will then add their own fee of 0.20% to 0.25% on top of that.
Got it. With many thanks.
I have about $500k to invest, which I don’t need to draw down on for about 10 years. I was going to put it into the described model portfolio of 70/30% portfolio XEQT/XBB and rebalance as necessary. However, forecasts on bonds are mostly negative. Would a suitable substitution for XBB be XMV? Final portfolio would be 70% XEQT / 30% XMV with yearly rebalancing.
@John: The expected return on bonds is indeed low. However, it’s important to understand the trade-offs if you would like to remove them from a balanced portfolio. XMV is a Canadian equity fund, so 70% XEQT and 30% XMV is a portfolio of 100% stocks with a large overweight to Canada. It would have a completely different risk profile than portfolio that includes bonds.
Hi Dan,
I made the jump to CCP investing 2 years ago with no regrets, thanks for all you do.
I will be opening my first non-registered account (RRSP/TFSA maxed using VEQT/VAB). I’m trying to educate myself on maximizing tax efficiency in this new account. I don’t want to over-complicate things by re-allocating all my assets from the other accounts so I was wondering whether you would suggest the same type of ETFs as good options for a tax-sheltered account as well or whether it is better to look into something more efficient (e.g. focus on Canadian stocks with dividends)? I am willing to take a small loss in tax efficiency to keep things as simple as possible. If it matters, I’m in my 30s. Thanks again!
Hi Dan, Love to use one ETF asset allocation for simplicity, but the bond side kills it. Any alternative for bonds? Could one use preferred ETF like ZPR or even ZMI or even covered calls instead for the fixed income side? I know they are mainly equity. Then come with XIC/VCN and a VXC. Or just take the risk and go with 100% equity like XEQT/VEQT at this stage? I am retiring next year, but will not need to draw down for few years.
Hi Dan – thanks for this post! I was an early roboadvisor adopter but since starting with Wealthsimple (now Wealthsimple Invest) my portfolio has grown and the additional WS management fee is a more painful pill to swallow. That said, I do really like the Wealthsimple platform. I was wondering if Wealthsimple Trade is an appropriate online brokerage, given it’s $0 trading commissions, or if you are aware of any any drawbacks to using it. Thanks!
@Rob: I wouldn’t characterize Wealthsimple Trade as a brokerage: it’s a trading app. It can be used to invest in an asset allocation ETF, and that would likely reduce your costs by about 0.50%. But it would also be worth looking at an online brokerage that offers not only no-fee ETF trades but also a range of other services.
Thanks Dan! Could you elaborate on what other broker services might be relevant for a couch potato investor (or point me to a post on this)?
@Rob: A traditional online brokerage offers access to more products (such as GICs and HISAs) , as well as more account types. These may or may not have any value for you, however. This is a decent comparison between Wealthsimple Trade and Questrade:
https://www.moneysense.ca/save/investing/questrade-vs-wealthsimple-which-online-investing-service-is-right-for-you/
Hi Dan.
We have enjoyed your excellent books and are very interested in the balanced ETFs that are now available. However our main question is this:
Is it desirable to invest differently within registered accounts vs unregistered accounts?
I retired about a year ago at 59 and have a DB pension that seems to meet most of our current needs. My wife is currently not working and our daughter is in her first year of university and has an RESP. Our current topped up registered plans amount to about $370k but with an inheritance there is about $500k available for unregistered investments.
Is there any advantage to treating registered vs non-registered differently especially considering the need to rebalance over time and the limitations in moving funds in or out of registered accounts?
I suspect this is a common scenario these days as co-workers who retired recently have expressed similar concerns.
Thanks!
Hi Dan,
I think it worth mentioning that Desjardins, through their Disnat Platform, decided to also remove the fees on ETFs since Sept 13, 2021:
https://www.newswire.ca/news-releases/desjardins-makes-online-brokerage-even-more-accessible-by-letting-clients-trade-stocks-and-etfs-for-free-894518072.html
https://www.disnat.com/en/platforms-and-fees/pricing
@Etienne: Thanks, I have updated the list!
In regards to the question another user by the name of Bahram asked in the comment section a few months ago about the Questwealth portfolio fee being added on top of the ETF MERs(50% cheaper than WeathSimple btw), compared to the all-in-one ETFs from Vanguard/ishares/BMO; isn’t the difference in the extra fee because Questrade actively manages the Questwealth portfolio for the user? In other words, it’s not just a passively managed robo-advisor. Are you saying that the benefit of Questwealth’s active management is negligible and not worth the added management fee compared to the all-in-one ETF MERs?
@Patrick: You’re really asking the fundamental question about investing, i.e. is it worth paying active managers to try to beat the indexes? The evidence is clear that the vast majority of active managers fail to do that over the long term.
Hi Dan,
Thanks for taking the time to educate us here at CCP – and now with your new book too! After going through many articles and podcast episodes, as well as seeing the Couch Potato philosophy confirmed by other sources, I am convinced of its rationale & justification and am following it in my own portfolio (using the single-fund approach, with XGRO).
What stumped me is when a financial advisor told me they agreed with the statement above: “the vast majority of active managers fail to [beat the indexes] over the long term”.
She went on to emphasize the “vast majority” part, suggesting that if exceptions could be identified that have consistently beat the indexes over a long period, then those need to be taken seriously. Her example was the Fidelity Canadian Growth Company Fund, with an annualized return of 10.8% over a 25-year period (vs. ??? for XGRO) and 15.7% over 10 years (vs. 7.8% for XGRO).
My question is what should I watch out for, in this comparison? Is it apples-to-apples? Are there any gotchas?
I know XGRO is asset-allocated and this Fidelity Fund is not diversified, but that’s still a 2x difference over 10 years. Also, the Fidelity one has a higher MER, yes, but the net return is still several points higher than XGRO’s. What am I overlooking here?
@Oswin: Many thanks for your feedback, and glad you enjoyed the book.
The financial advisor is making a tired argument, and you’re right to be skeptical. Briefly:
– Saying the majority of funds underperform the market is only half the story. The other half is that the minority that do outperform cannot be reliably identified in advance. Pointing out that the this Fidelity fund beat its benchmark over the last 25 years is as useful as me telling a sports bettor who won the Super Bowl in 1997. It’s only useful information if she could have identified this fund as a winner 25 years ago. Past outperformance is not a predictor of future outperformance (see pages 10-11 of the book).
– Comparing XGRO and this Fidelity fund is apples and grapefruits. The Fidelity fund’s benchmark is 70% Canadian stocks and 30% US stocks. XGRO holds 20% bonds and roughly 20% Canadian stocks, 36% US stocks and 24% international stocks. Moreover, XGRO has only been around in its current form for a little over three years. The earlier version of the fund was completely different, so any performance numbers before that date are irrelevant.
As I argue in the book, there is no point in engaging with an advisor about indexing versus active management. You will never win over the advisor. Their argument eventually boils down to, “The vast majority of active money managers underperform, but I am one of the exceptions.”
Hi Dan,
Thanks for your reply. I see your point. If you would be so kind, here are my follow-up questions, in order:
1. If data over 25 years is not a sufficient or reliable indicator of a fund’s future performance, what is?
If this was a fund that’s only been around for 5 or 10 years, I might not have taken the data seriously. (In fact, this is exactly what I did when the advisor also pitched the Fidelity Global Innovators Class Fund, which has only been around for 4.5 years).
2. What is a better index fund to compare against the Fidelity Canadian Growth Company Fund?
If “the vast majority of active managers fail to [beat the indexes] over the long term” I would have thought it would be easy to find index funds with a higher annualized rate of return (over 25 years) than this Fidelity fund. But I couldn’t. I probably just don’t know enough, so wondering if you can shed some light here.
3. (Bonus) Is there an ETF solution you recommend which has a higher rate of return than XGRO?
It would seem that XGRO is a low-medium risk fund. And I have enough horizon + risk tolerance that I think I’d be better off with a more aggressive or volatile portfolio instead. Would that just something like 95% XEQT + 5% XBB or even 100% XEQT? (It’s just strange to me that Blackrock still classifies XEQT as low-medium risk).
Many, many thanks for your time!
Cheers,
Oswin Rodrigues
VEQT, XEQT, and the like have about a 2 to 3 year track record. There are other Global equity ETFs like XWD with a much longer track record. Does that make it a better option?
@Khalil: ETFs like VEQT and XEQT do not have long track records, but they hold several underlying ETFs that do. Index ETFs from providers such as Vanguard and iShares should be expected to track their benchmarks closely, and the short track record of the asset allocation ETFs should not be a concern.
I wish there was a way to automate purchase of ETFs…for BMO
Hello Dan, and thank you for everything you’ve done for us Canadian investors!
I’m currently following the 3 fund portfolio: VXC, VCN and VAB.
I don’t have an issue with rebalancing. What I’m worried about is everyone buying into XEQT/VEQT –
The trading volumes are 4-8x greater than VXC – does this have an impact at all? Will VXC slowly die off if people stop trading it? Will it not continue growing if people aren’t buying into it? Should I sell off and buy VEQT/XEQT since they are what everyone seems to be buying these days?
I have my TFSA maxed with pure VXC right now, next year I plan on maxing my RRSP, then funding a non-refundable.
Here is the plan I am choosing to follow. Please let me know if this makes sense putting each ETF into what account or if it’s better to just use an all-in-one ETF and put them into each account. I’ll definitely be investing $500,000+ so shooting towards the 3 fund portfolio to save a bit of money.
Priorities are top-down – (TFSA first) and stocks are left to right.
(e.g., I put VAB in my RRSP, then VXC, then VCN if there’s room).
TFSA:
VXC
RRSP:
VAB / VXC / VCN
Non-Registered:
VCN / VXC
@Jordon: Thanks for the comment.
VXC has over $1.2 billion in assets, so it is not in danger of being shut down any time soon. If you are comfortable using it, then there is absolutely no reason to switch.
Your asset location seems just fine. Good luck!