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.
Thanks for all the great info! After recently discovering your site and podcasts, I’ve been doing a deep dive and learning a ton!
Quick question on bonds … has the current world/financial outlook, extreme low interest rates and inflation changed your approach with respect to bonds? I’ve been read some of your slightly older material stating that you like the “dampening” effect they create in a downturn. Lots of articles in the news these days on how bonds are a waste of resources, is this just much of the same nonsense we’ve been hearing for years or is the situation actually different now?
For context, I’m currently trying to decided on asset allocation for my short/med term investments (VCNS likely) and also, my long term (VGRO or VEQT?)
@Roscoe: To help answer this question I think it’s useful to ask a different one: “If you decide not to hold bonds in your portfolio, then what is your alternative?”
It is, of course, true that a portfolio of 100% stocks has a higher expected return that only that includes bonds. That has always been true, even when interest rates were higher. However, a 100% equity portfolio will be extremely volatile, and short-term losses of 50% or more are possible. Very few investors have the discipline or temperament to manage an all-equity portfolio.
So if you agree that a portfolio should include some assets that will lower overall volatility, what are your options? Bonds are the traditional choice, and they should be expected to continue playing that role, even with low interest rates. If you choose not to use bonds, you could instead use GICs or cash, and these are fine, but they too carry low interest rates, and they have their own drawbacks. (For example, GICs are not liquid, and cash does not go up in value if interest rates fall, whereas bonds do.)
A lot of the bond-bashing advice suggests investors should substitute dividend stocks, REITs, gold, or alternative asset classes in place of bonds. None of these asset classes have the same risk-return profile as bonds, so they will not behave in a similar way. Others argue that investors should just accept the risk of a portfolio with more equities, but anyone who has ever worked with human beings will confirm that telling people to accept more risk is terrible advice. It’s like telling a person who is afraid to fly to “just get over it.” Unhelpful and also disrespectful.
In the end, we probably just need to accept the idea that the return on balanced portfolios will likely be lower than the historical average and learn to adapt by saving more and perhaps working longer than we had planned. As you can imagine, many investment managers don’t want to deliver that discouraging message, so they instead promise to sell you magical solutions.
Wow, thanks for such a thorough response. Yes, you’ve perfectly summarized a lot of the anti bond arguments I’ve read and I’m in agreement, taking on greater risk doesn’t seem like a helpful solution. This gives me much more clarity going forward, thanks!
I am transferring my Tangerine RSP funds to Questrade to purchase (probably) VBAL. I am wondering about cost averaging. Once the funds are in a holding account at Questrade, I wonder if I should just make one full purchase, or make some dollar cost averaging purchases? If cost averaging is a good thing, then what do I do with the remainder earning zero in the holding account? It’s about $5000 so buying something temporarily would result in a fee of $5 -$10, conversely I wonder if earning zero for a period makes any sense. Thank you!
@Brian: Remember that you are already invested at Tangerine, and the only reason you need to sell is that Tangerine won’t allow you to transfer the fund to Questrade in kind. This is just an administrative nuisance, and it should not be used as an opportunity to become a market timer. If the transfer goes smoothly you should only be out of the market for a few days and then you can resume your long-term strategy by buying back in all at once.
Hi Dan, I’m new to DIY after losing my job recently after 18 yrs with the same company that was matching my RRSP contributions. I moved $100K from Manulife to Questrade that I am looking to invest. I also have approx $200K with BMO who we used earlier and I kept that money there when we switched to Manulife due to the limitations of manulife fund offerings. That money is invested in several investments (MFs, Bonds, Equity) and managed by the same FA I’ve used there for years. I have a couple of questions, but the main one is regarding the Questrade account. What would you recommend for a very passive investor who is 45 yrs old with moderate risk tolerance and doesn’t know how to rebalance (yet)? Would you recommend a one ETF portfolio with VGRO for example?
The second question would be if you recommend that I move my other assets from BMO to Questrade at this time? Thank you.
I love your content, and was directed here from a podcast you might find familiar (Rational Reminder). I am currently a university student in my third year, also an aspiring wealth manager. After discovering CCP from the rational reminder pod, I have really doubled down on your philosophy and would like to start investing myself. Considering my age, I’m looking at putting monthly contributions into either XEQT or VEQT. I know that XEQT has more american exposure when comparing the two, and I am wondering which would fund you recommend. In addition, to one of these 100% equity funds i was looking at funds such as QQQ or ARKK to add some additional return.
Thanks for your time and hopefully you can find some time to reply!
I received an inheritance of 600k three months ago, I have been reading/researching lots, and opened an account with Questrade. I have been sitting on the sidelines for the last couple months as it seems (US tech stocks in particular) were going nuts and reading that alot of ‘smart money’ are sitting on the sidelines.
Last week I converted 40K Cad in to USD using Norberts Gambit (was easy enough an made a bit extra as the US dollar jumped 1% during the lag time), and earlier this week i bought a couple of APPL and GOOG shares to finally dip my toes in.
This was more out of fun/interest as getting used to the platform, as using an ETF passive investing strategy is what I have decided to do (your blog has been a wonderful resource btw). I am looking to do the ‘typical’ type of CP portfolio between CDN, US and International (Developed and Emerging) ETFs. I’m 34yrs old, have no debt, and little retirement savings before this windfall; will look to buy a house, car, furniture in a couple years, so have decided that about 200K is not for long term investing.
So a couple of questions if you wouldn’t mind:
1 – Timing – I know that time in the market not timing the market is the time-tested saying, but is this time (with COVID 2nd wave, US election, Govt support schemes ending) an exception to the rule? Or would you just view it as another volatile time which comes around every so often? If I’m going to use the 400K should I start putting in now or perhaps wait a bit longer? I am leaning towards cost-dollar averaging instead of deploying it as a lump-sum (despite research saying that typically lump-sum investing will out perform in long term)…recommended or not? If so, any suggestion on amount and timeline to do so? If monthly would you add more in a month after a dip and less after a massive gain or just stick to a pre-determined schedule?
2. CAN vs US domiciled ETFS – Have read a couple articles about this, just wondering your thoughts for myself? Would it be worth it to invest in US ETFS for US and INTL exposure? Would also love any portfolio ideas/recommendations you may have.
3. How to handle the Cash I will use short term – For the 200K I will want in 2 or so years what suggestion would you have for it? Bond ETF? Keep it as Cash?
3. Am I trying too hard? As said I’ve been reading alot over the past months, I do find it interesting, and do know that simple passive investing and time in the market will give me my highest chance of performance (and probably lower risk). With this amount of money is it worth it trying to minimize fees, use US domiciled ETFS, etc. as I’ve have read with other lower amounts of money it usually isn’t worth the hassle as aren’t saving yourself too much.
Wow, huge ramble there, guess the point is I have the account, funded, ready to go, research done and ideas formed but just like double checking and maybe need a bit of a push. I grew up poor and to have this windfall (albeit from a tragedy) is life changing and do not want to squander it.
Any input is highly appreciated.
@Corey: Thanks for the comment and the thoughtful questions. As you can understand, I cannot give you specific investment advice but I can do my best to clarify some of these issues.
1. This time is not different: market timing is as futile now as it has ever been. That said, if you receive a windfall that has profoundly increased your net worth (as appears to be the case here) there is nothing wrong with using dollar-cost averaging to invest a lump sum. This is not about timing the market, and it’s not about trying to increase your returns. It’s simply a recognition that investing a large sum all at once is terrifying, and doing it gradually can make you much more likely to follow through with your long-term plan. The key here, though, is to follow a schedule, not to “wait for the dips.” You could consider, for example, investing in six or eight equal installments with one- or two-month intervals. There’s no magic number, but I would not stretch it out for more than a year.
2. Have a look at my model portfolios. I would strongly encourage you to use asset allocation ETFs to keep things as simple as possible. All of these include US and international equities as well as Canadian. There is no need to use US-listed ETFs to get this exposure.
3. Cash you will need in the next two years should only be held in a savings account or short-term GIC. A bond ETF is not appropriate for this goal.
4. You’re doing all the right things. This is a big decision and you want to get it right, so taking the time to research the options is crucial. But it’s very common for people in this situation to overthink things, and to fall prey to analysis paralysis. The best advice I can give you is this: simply deciding to invest in a low-cost, broadly diversified portfolio and stick to your plan over time will get you about 95% of the way there. Tweaking the portfolio in an effort to optimize it for lower fees and minimal taxes might make a difference at the margins, but it is just as likely to cost you more in mistakes and missed opportunities. As Preet Banerjee likes to say, “Take the easy A-minus.”
One more suggestion: given the stakes here, you might want to consider consulting a fee-for-service planner who can give you more specific advice and help you carry out your plan. I wish you all the best!
@Matthew: Welcome aboard. Both VEQT and XEQT are options in my model portfolios and I’m completely agnostic about which one people use. They are both excellent funds and the differences in performance over the long term will likely be very small. That said, I would not recommending adding other funds that have performed well recently because you expect them to “add some additional return.” If you accept the premise of index investing, this just undermines the strategy.
@Tony: If you are new to DIY investing with ETFS, then I would definitely recommend using a one-fund portfolio. You definitely don’t want to build a complex portfolio if you’re just getting your feet wet. Which one-ETF portfolio to use is a different question, and I can’t make a recommendation for you. I will say that VGRO is 80% stocks and very aggressive: it does not fit with your “moderate risk tolerance.”
As for moving your BMO assets to Questrade, there is clearly a benefit to having all of your investments in the same place. It will allow you to reduce costs and complexity, and you’ll be able to use a consistent strategy rather than dabbling in multiple products. But make sure you are comfortable with DIY investing at your new brokerage first. Good luck!
Hi there. Echo everyone else’s comments in appreciation of your blog and resources.
I was reading you updated 2020 model portfolios and am getting 404 errors for each of the “option” links (for both Option 1 ETFs and the Option 2). Very interested in the info so just wanted to check to see when they’d be back online? Thanks again
@Dylan: Thanks for the comment. Looks like the links were broken on the mobile site: they are now fixed. Cheers!
Thank you for this helpful information. This may be a naive question, but when you say it is easier to “mop up extra money” from non-registered account dividend rather than starting a DRIP, what exactly does that mean? I am suffering from analysis paralysis because I am worried about tax implications. Thanks!
@Jennifer: Sorry if that comment was unclear! All I meant was that if you do not have a DRIP set up then all of the dividends from you ETFs will build up the cash balance of your account. So you will have to log in to your account from time to time and place an order to reinvest (“mop up”) this cash.
I should stress that there is no tax benefit to using a DRIP. Some new investors believe that reinvesting dividends allows them to defer the taxes, but this is not true. The dividends are taxable every year whether you take them in cash or reinvest them with a DRIP.
Hi I have recently been learning a lot about DIY investing and started a self directed TFSA on questrade and put all my portfolio into VEQT. But I have a corporation and wanting to start investing from it by opening a corporate margin account with questrade. I have about 100k to put in initially and my question is, should I still use the same approach in my corporate account as I do in my personal or would it be more beneficial to use a different ETF/s since it’s non registered and different tax laws being from a corporation?
@cashnoob: In general, you can use the same equity ETFs in a corporate account that you would in a TFSA.
About Drip, I read somewhere that calculation of adjusted cost basis is complicated and you should double check brokers calculations as there.could be mistakes there.
@Reza: It’s true that DRIPs can make calculating ACB a little more complicated. Some brokerages do a good job with this, but many do not, and you should always double-check their calculations:
Love the blog. Great stuff. For the 1st time investor, I am attracted to the VANGUARD ETF’s. Should I be setting up all my funds in one of the VANGUARD (VEQT or VAB) or doing a 50/50 combo of both of them?
@Brent: That’s a big question and it depends on many factors. This article should help, then look at the Model Portfolios.
Thanks for the response. I understand the concept of the risk factor etc. Still don’t understand. Focus on one fund or multiple funds at the same time when investing say $5000 to get started? I am wanting to move move my current investments from my bank into the Couch ETF’s. I am 50+ so I’m fine with at least 50% equity mix.
@Brent: If you are investing a smallish amount, then holding multiple ETFs is very inefficient. You will be making multiple trades to manage the portfolio (often at $9.95 per transaction) and you would be receiving no benefit compared with the much simpler solution of using a one-fund portfolio. In fact, I have no hesitation in recommending one-fund portfolios for these with $100,000 or more except for the most experience DIY investors.
Did Scotiabank remove the commission-free ETFs? I cant seem to find them, and the website doesn’t show any. Thanks as always for the great info.
@Marco: Here’s the link to the list of commission-free ETFs available at Scotia iTRADE:
It still lists CBD and CBN, the former names for XBAL and XGRO. :(
Love the Blog, in my early 40s and new to Index Investing. Thought I needed someone to help me with this and had a Financial Advisor for a few years when I lacked confidence with my work investments. Consistently outperformed the Advisor on my own and have since fired him. He made no arguments as he knew that it was in my best interest. A couple of questions as a result:
(1) Looking at your example portfolios if I decide that I am in the middle for risk tolerance, would it be better to buy both XGRO and XBAL in equal proportions to get the true split or do you recommend XBB as you indicated? Curious given XBB only gives exposure to the Canadian Bond market whereas XGRO and XBAL gives exposure to both Canadian and US. If I did this, as I age and tolerance declines I could sell off XGRO every few years and buy XCNS and work my way down the ladder so to speak. I’d do this based on the Risk Ladder from the Swedroe book article.
(2) For RESP Contributions, my kids are 13 and 10, so we would be starting to access to the funds in 5 and 8 years respectively. These funds are currently held at TD. For ease of investment, I was considering keeping them there and investing in the TD e-Series funds. Would the 70% Bonds/30% Equities option be suitable for this horizon? If so, would you bother to convert to GICs once the eldest starts, or leave it invested and slowly draw out as needed? Or pull 50% to GICs and leave the rest? I suppose the answer here would be to judge depending on market conditions at the time.
@Jay: Thanks for the comment.
(1) You could choose to hold equal amounts of two asset allocation ETFs instead of my suggestion of combining an all-equity fund with a bond ETF. The non-Canadian bonds in the asset allocation ETFs, in my opinion, does not add much diversification. I’m agnostic on whether you need non-Canadian bonds. The advantages of using an all-equity fund plus a bond fund are lower cost and some opportunity for asset location, i.e. keeping all equities in your TFSA and bonds in the RRSP. But either one is fine.
(2) I’ll refer you to this article, which quotes my colleague Justin Bender:
Hey Dan, thank you for the amazing work you’re doing on this blog! For someone like me with no family in Canada and doing DIY investing, it’s been a life saver!
I’m a 28 year old, making about 80K/year, no debt. I’ve already maxed out my TFSA (using the TD E-series). I also have about 10K in a Questrade account, currently invested in XGRO.
I have another 10K left to invest and about 2k/month ready to contribute which I think I’ll continue to use to invest on XGRO.
Would you say it makes more sense to invest this leftover money using a margin account and save the leftover RRSP contribution room for later years (hoping to make more money in the near future)?
@Gabe: Thanks for the comment, and kudos on your success so far: it sounds like you’re a diligent saver.
If your income is $80K, an RRSP almost certainly makes sense compared with a taxable account. In most provinces that’s getting you a tax refund of about 30%. There are not many situations when it makes sense to invest for the long-term in a taxable account when you have RRSP room and you’re way above the lowest tax bracket.
Keep up the great work!
Thanks for your response to @Jay’s Nov 13 question about RESP’s. I would love to read the article you referenced but it is only available to people with a Globe Advisor account. (I subscribe to the Globe but can’t access it with a regular subscription). Can you give some suggestions as to what to do with RESP investments (currently in 70/30 equity/bonds) as the child is approaching the end of high school, or different resources that are accessible to the public? In my case, my son is currently 15 (grade 10) so we have just under 3 years before he will be in post-secondary.
@Heather: Sorry about that. Here are the relevant paragraphs from the article:
Thanks for all the awesome information, such a great resource for a new investor like myself. I was wondering what your thoughts were on the new Wealth Simple trading platform with zero fee’s, is this a viable alternative to discount brokerages such as Questrade when trying to assemble your own core portfolio of hands off ETF’s with some satellite investments in individual companies?
@Al: I don’t have any first-hand experience with Wealthsimple Trade, but I think it’s fair to say that it is not a full-service brokerage like Questrade. Its offering’s are much more limited. I would also argue (and you probably guessed this) that the ability to trade individual stocks is likely to be be counterproductive rather than helpful!
Hi Dan. I am considering VEQT for our various Questrade accounts. I like that I don’t have to put bonds into the mix and that I can add to my funds whenever I like because there are no trading fees at QT. I’m not sure that I need bonds at this point because we have ample cash on hand and dividend income from our stocks. I am also considering VFV and XQQ. Is it necessary to have all three? We opened a self-directed RDSP at TD even though we are not TD customers because that is the only self-directed RDSP we could find. I was excited though because I heard of the e-funds years ago and wanted to try them. So now that we have looked into it, we realize that the MER on those funds is higher than on other products and we are wondering if we should bother or just go with ETFs, even though there are trading fees for them at TD. The money will go into that account in lump sums, so I’m not sure if investing in small amounts is necessary. Since we are new to index funds in general, we are wondering if is it necessary to diversify in this area or just go with one or two funds? I guess my main question in all this is if there is significant difference in these funds. When I looked at what our financial adviser had us invested in, it all looks the same, but our returns were not great and of course part of that was due to the extra cost of mutual funds. I guess I am also wondering how the e-series funds compare to the more glamorous ETFs. Thanks for your help.
> I am also considering VFV and XQQ. Is it necessary to have all three?
No. VEQT includes a large allocation to US stocks, so adding VFV and/or XQQ is just doubling down on this asset class (presumably because it has been the best performer in recent years). The whole point of VEQT is that it provides all the equity exposure you need.
> We are wondering if we should bother [with e-Series funds] or just go with ETFs, even though there are trading fees for them at TD. The money will go into that account in lump sums, so I’m not sure if investing in small amounts is necessary.
If you are only contributing to the RDSP once or twice a year, then it is probably best to go with a one-ETF portfolio and just pay one or two commissions per year. This also saves you from having to rebalance: there is no good “one-fund solution” with the e-Series, so you would need to build the portfolio from several funds, which is more complicated.
> I guess I am also wondering how the e-series funds compare to the more glamorous ETFs.
Please see the table of pros and cons of ETFs v. mutual funds here:
Thank you so much, Dan. Your answers are very helpful. I have been an avid dividend investor for just over ten years, so the thought of putting everything into a fund is really foreign to me. I have read your comments about dividend stocks before, so I know that you believe a person can do as well or better by purchasing ETFs or mutual funds than he or she can by picking individual stocks. I’ve always heard not to put all your eggs in one basket so if a person had a lot to invest might it be unwise to rely on one all-in-one fund? We will likely keep our current portfolio of stocks that we have built up over the years. They are solid companies that are reinvesting each dividend payment, but we recently cashed in our mutual funds and it is that money that we would like to put into ETFs. If we go with VEQT, and we don’t have a pressing need for cash, would you advise purchasing VAB or ZAG or would it be wiser to pick a fund with bonds built in to include that component, since bonds are not a priority for us? Its tough for me to buy bonds but I know they are always recommended, especially as we age. They just seem so lame to me, so I am so reluctant to buy them. Can we get as good performance from a fund like VCNS or VBAL as we can from VEQT combined with some bonds in a separate fund? We are retired, but as I said, our income is adequate and we are not concerned about cash. We would like growth.
I have begun a new career with a municipality and expect to have a decent pension by the time I retire, but want to supplement a bit and have therefore decided to continue investing in my RRSP that was started by my previous employer. I have moved the RRSP to control it myself and begun investing in ETFs with it – so thank you very much for your website as it has helped me a lot.
I was hoping to get your insight on what the best practice would be while saving for a down payment for a house. I currently have about 10K in a TFSA within a bank earning essentially 0 interest (the RRSP I have transferred from my old workplace also currently has approx. 10K in it). I have read that for short term goals (I’m hoping 2-5 years) to stick with high interest savings accounts or GICs, but I was curious about the possibility of instead investing in a 20% stock/80% bond ETF within my TFSA while working towards my down payment? Is this a big no-no? The plan would be to put approx. 10K into it each year, while putting a few thousand into the RRSP. Thanks.
@Brad: With a time horizon of five years or so (two is too short) I wouldn’t say it’s a big no-no to save using an allocation of 20% stocks and 80% bonds. You would just need to be prepared for the possibility that your savings could lose some value over that time. Any losses would likely be small, but it’s a risk to be aware of. Once your goal gets closer, then I would start to shift that down payment savings to cash to make sure it’s all there when you need it.
@Dianne: One of the challenges for investors unfamiliar with ETFs is getting past the idea that more holdings equals more diversification. People often worry that using an asset allocation ETF is “putting all their eggs in one basket.” But remember that these funds hold thousands of stocks and bonds from all over the world. A portfolio of 30 or 40 individual stocks might appear more diversified because it includes more holdings. But this is an illusion. I would go so far as to say it would be almost impossible for a DIY investor to assemble a portfolio of individual stocks and bonds that would be more well-diversified than an asset allocation ETF.
RE: “Can we get as good performance from a fund like VCNS or VBAL as we can from VEQT combined with some bonds in a separate fund?” Again, it’s important to to understand what is under the hood of a fund like VCNS or VBAL: these two funds hold significant amounts of VAB, so buying VAB separately and combining it with VEQT just leaves you with two holdings instead of one, with no additional diversification. (In fact, VCNS and VBAL add a little more diversification because they include US and global bonds as well as VAB.)
I encourage you to look into the individual holdings of the asset allocation ETFs so you have a good understanding of them before you jump in:
I am about to open an RESP through quest trade for my daughter. Thoughts on using the one fund solution (like VGRO) in the RESP to begin with? How would one transition throughout the years as you need to alter ratios?
@Caitlin: Asset allocation ETFs are ideal for RESPs. You can simply sell the fund and repurchase a more conservative one at a couple of different stages of the child’s life. Since an RESP is tax-sheltered, there are no tax consequences and just one or two commissions to be paid.
For example, start at 80% stocks (VGRO or XGRO) until the child is 8 or 9, then move to 60% stocks (VABL or XBAL) until about age 11 or 13, then to 40% stocks at about age 14 to 16. Then you can gradually start moving some of the money into cash or GICs once the child is about 16. By the time the child enters post secondary school it usually makes sense for the whole RESP to be in very conservative investments.
For the record, there’s nothing wrong with starting off more conservative, i.e. using VBAL/XBAL from the beginning.
Hi Again Dan,
I am warming up to the asset allocation ETFs. I am looking to purchase these funds for my husband and me (both retired but not needing to draw on the funds for income, although my husband turns 71 next year and will need to begin taking the minimum withdrawals beginning then in a RRIF. I won’t turn 71 for three more years). We are beginning with cash because we sold our mutual funds and would like to invest this money ourselves. We have both registered and non-registered accounts. We were thinking of buying dividend stocks and using the dividends for withdrawals, but then thought it would be easier to use the all-in-one funds. I have read various things about not putting bonds in a non-registered account due to the higher taxes, so I was wondering if the bond component of the all-in-one fund means not to put it in a non-registered account either.
I am also wondering if we should break our investments up to allow a percentage to be invested in a more aggressive allocation for growth. I know that based on our age, we are likely looking at the more conservative funds, but since we don’t need this money for income, although we will be drawing on it to some degree based on the requirements for withdrawals, would it not be smarter to invest in a more aggressive fund like VBAL at the least so that it will grow?
I am also managing a TFSA for a 90-year-old who is in great health, does not need her investments for income and wants to see a better return than her mutual funds which are giving her an annualized return of 2.1%. Mostly she wants to see her portfolio grow for her family who will inherit the money. I have her in dividend stocks and she has been doing better in her TFSA than her mutual funds, so she wants me to continue. I would like to keep her money safe but get some growth as well. Will she see growth in the VCIP fund or will it basically just give her the returns that she is getting with her mutual funds? I am aware of the uncertain time frame here and don’t want to unduly risk her investment but I also don’t want it to just sit and do nothing. There is also the concern that when she dies, the funds will have to be sold.
Third person needing funds is a 43-year old family member who will let his investments sit and grow for the next 25-30 years. He is not able to manage his own investments, so I want to set him up and let it ride. He likely won’t need the funds either for income until he retires. Does a person just do a basic age calculation or weigh the risks according to the person’s situation? I always tend to go aggressive, because I don’t like bonds and consider the dividend stocks and the dividends they pay as my bonds, and was looking to combine both type of investments (meaning dividend stocks and ETF) in one portfolio, but I want to be prudent and for this person, it should be easy and not require much management so an all-in-one fund is perfect. He has only registered accounts.
I have been told not to overthink ETFs, and not to double up on funds, etc, but it’s hard not to do both when I check the returns on various funds and see that there is genuine difference in returns between various products. Even comparing an all-in-one like VGRO and VEQT to VCIP or VRV to XQQ to ARKK! There is such a range of returns that it is hard to just trust that one vehicle will do it all.
Thanks! I know this is a lot, but I have been running in circles trying to pull this all together. Any help that you can give me would be very appreciated, even if you don’t address all of my concerns.
I forgot to ask about hedged funds within the all-in-one. I have read your comments in other posts about hedged funds not being advantageous but I noticed that the Vanguard all-in-one funds are hedged. I was looking at that regarding XQQ versus HXQ wondering if the difference between a hedged and a non-hedged fund was worth worrying about.
@Diane: I would like to help, but your questions are so fundamental, and so unique to your personal circumstances that I cannot offer any meaningful advice here. I strongly suggest you consider using a fee-for-service financial planner who can answer your questions and assist you in designing an appropriate portfolio (although planners generally are not licensed to recommend specific ETFs). This is beyond the scope of what most inexperienced investors can do on their own, and hiring a professional will almost certainly pay for itself by helping you avid costly mistakes.
Hope you’re able to find the help you need.
Love all the work you do sir! I’m 43 and after about 14 years of picking stocks, I’m tired of it. I’m slowly buying Xgro each month.
I have decent positions in Canadian banks, utilities and life insurance stocks in my RRSP. Is it wise to sell all these and move to an etf portfolio, or keep and just continue buying XGRO etc. I can’t find any good resources on switching strategies at my age. Thanks!
@Shane: Thanks for the comment. If you’re tired of picking stocks and all of your investments are in tax-sheltered accounts (and therefore there’s no issue with capital gains), then the only thing standing in your way is the psychological barrier. Assuming that a portfolio of 80% stocks is appropriate for you, then there’s no reason not to simply make a full switch.
Hi Dan, You don’t mention Vanguard Canada as a potential brokerage. Is there a reason you left them off?
(I am trying to help my parents who hold most of their assets in cash (sad…) and are very afraid of potentially losing principle. I want to get them away from big banks who keep advising GICs with guaranteed principle but their returns are terrible ($20 in a BMO GIC that was supposedly tied to a market (for a $40k deposit over 4 years!!!) or TD offered a 0.5% GIC for a year for a $100k deposit). I need something very simple for them to not get overwhelmed and I want to consolidate all of their various bank accounts, RRSPs, etc. into one place.) What would be your recommendation for brokerage)
Lastly – you mentioned in the comments that you would not recommend Bond ETFs for someone who may need the cash in the principle in the next 2 years. Is there a reason you suggest this? 2 years seems like a long enough period to not have to worry about bond ETFs deteriorating principal. I worry that if I purchase bond funds, and they see a slight decline in principle, they will panic and stray from the couch potato strategy.
Thanks so much for managing this great blog.
@Karthik: Thanks for your comments. I’ll do my best to answer your questions briefly.
– Vanguard does not offer brokerage services in Canada, only in the US. You cannot open an account directly with Vanguard: you can only buy their ETFs via another brokerage.
– If your parents are only prepared to invest in GICs, I’d suggest opening an online brokerage account wherever they do their banking. For example, if they bank at Scotia, they can open accounts at Scotia iTRADE, or if they are RBC they could use RBC Direct Investing. By opening a brokerage account they will be able to shop around for the best GIC rates from many banks and credit unions. This is very different from just going to the branch and accepting the terrible rates offered there. (That said, even if you shop around, rates are still very low these days, and there’s not much anyone can do about that.)
– A broad market bond ETF (such as ZAG, VAB or XBB) holds bonds with maturities ranging from one year to more than 20 years, and if interest rates rise they can easily lose value over a year or even two. Any losses would likely be small, but they are certainly possible. And I can tell you from experience that most investors react poorly to any decline in bond funds: they see them as the safe part of the portfolio and they have almost no tolerance for losses.
Hi Dan. Thanks for maintaining the excellent resource.
My question is about switching from your former multi-ETF model portfolios to one asset allocation ETF. What are the considerations? Insofar as I’d be selling off and buying ETFs that track the same underlying indexes, can I just execute this plan anytime? Or should I wait for this period of volatility and repeated all-time highs to cool?
I currently hold $600K in a mixed bag of ETFs (some from following your former models portfolios, some from following Justin Bender’s former model portfolio which includes US-listed funds and a misadventure with Norbert’s Gambit). All are broadly diversified: VCN, ITOT, IEFA, IEMG, as well as XGRO and VEQT. I want to consolidate everything into one asset allocation ETF like XGRO or VEQT.
@Doug: Assuming your holdings are in a tax-sheltered account and you are not significantly changing your asset allocation, then the timing of the switch makes no difference. If you are “buying high” you’re also selling equally high. So fire when ready.
It would be different if selling your current holdings would realize taxable gains: in that case, you would likely want to do it more gradually.