Asset allocation ETFs were revolutionary when they appeared in 2018, but they were hardly the first products that allowed Canadian investors to own a diversified index portfolio with a single fund.
Way back in 2008, the online bank ING Direct launched what they called the Streetwise Funds. Like the one-ticket ETFs that followed a decade later, these mutual funds held a mix of Canadian, US and international stocks, plus a helping of bonds, all tracking familiar indexes, and rebalanced automatically. Later rebranded as the Tangerine Core Portfolios, they were the easiest and most cost-effective way for small investors to build a globally diversified passive portfolio. Justin Bender and I even wrote a white paper about their virtues, and they were a staple in my model portfolios until 2020.
While I still love the convenience and simplicity of the Tangerine Core Portfolios, their 1.06% MER has made them increasingly uncompetitive. Today you can use an asset allocation ETF at a zero-commission brokerage to build a hands-off portfolio at roughly one-fifth that cost. Or, if you’re willing to pay a little more for convenience, roboadvisors will build and maintain an ETF portfolio for you for less than you’ll pay for the Tangerine funds.
No doubt Tangerine noticed this too, so late in 2020 they launched a new family of three Global ETF Portfolios. In our latest blog-and-video collaboration, Justin and I look at how these funds compare with the Core Portfolios, and consider whether they’re a good alternative to the Couch Potato models.
What’s inside?
Before we look at these portfolios in more detail, let’s get one thing out of the way: despite their name, the Global ETF Portfolios are not ETFs. As we’ll see in a moment, they use ETFs for their underlying holdings, but like the Core Portfolios they are traditional mutual funds you buy directly from Tangerine. They are not traded on an exchange, nor are they available through any online brokerage.
On its Global ETF Portfolio FAQs page, Tangerine argues that this structure “means you get the lower cost benefits of ETFs combined with the benefits of mutual funds—such as automatic contributions, rebalancing and dividend reinvesting.” Well, not really. Those conveniences are certainly real, but you pay for them: the MER of the new Global ETF Portfolios is 0.77%, which is cheaper than the Core Portfolios, but almost 10 times the cost of the underlying ETFs themselves, and triple the cost of most asset allocation ETFs.
Not coincidentally, the launch of the Global ETF Portfolios came just a month after Tangerine’s parent company, Scotiabank, released its own suite of ETFs, becoming the fourth of the Big Five banks to do so. Scotia’s four index ETFs are the main underlying holdings of the new Tangerine funds:
ETF name | Ticker | Management Fee |
---|---|---|
Scotia Canadian Bond Index Tracker ETF | SITB | 0.05% |
Scotia US Equity Index Tracker ETF | SITU | 0.03% |
Scotia International Equity Index Tracker ETF | SITI | 0.15% |
iShares Core MSCI Emerging Markets IMI Index ETF | XEC | 0.25% |
Scotia Canadian Large Cap Equity Index Tracker ETF | SITC | 0.05% |
Source: Scotia ETFs, BlackRock
The Scotia ETFs use Solactive as their index provider: this firm produces indexes very similar to better-known versions from S&P and MSCI, which are the benchmarks used by the Tangerine Core Portfolios.
For example, the Solactive Canada Large Cap Index is a variation of the S&P/TSX 60: both include 60 of the country’s largest companies. Similarly, the Solactive GBS United States 500 CAD Index holds 500 large US companies, much like the S&P 500. On the international equity front, the MSCI EAFE and its comparable Solactive index both track the performance of hundreds of large and mid-cap stocks in developed countries outside North America.
Since Scotia’s ETF lineup does not include an emerging markets fund, the Tangerine portfolios include an allocation to XEC to cover that asset class.
The Global ETF Portfolios combine these five asset classes in three different versions, ranging from moderate to aggressive:
Asset Class | Balanced ETF Portfolio | Balanced Growth ETF Portfolio | Equity Growth ETF Portfolio |
---|---|---|---|
Canadian bonds | 40% | 25% | 0% |
US equities | 35.1% | 43.8% | 57.8% |
International equities | 15.8% | 24.6% | 26% |
Emerging markets equities | 7.7% | 9.6% | 12.7% |
Canadian equities | 1.7% | 2.2% | 2.8% |
Source: Tangerine Investment Funds, as of April 30, 2021
Core differences
A glance at the table above reveals the most significant difference between the Global ETF Portfolios and the Core Portfolios: the asset allocation.
The Tangerine Core Portfolios (as well as the traditional Couch Potato models) include equal amounts of Canadian, US and international stocks. Even the asset allocation ETFs from Vanguard, iShares and BMO have a target of about 25% to 30% for Canadian stocks. Compare that to the new Equity Growth ETF Portfolio, which comprises almost 58% US equities, with less than 3% in Canada. It also adds emerging markets to the mix, an asset class that is missing from the Core Portfolios.
That ‘s because the Global ETF Portfolios are based on the relative size (or market capitalization) of each country’s stock market. Since the US currently makes up 58% of the global equity market, that’s the allocation it’s assigned in the portfolio. Canada’s market is only 3% of the global pie, so it gets a much thinner slice.
You can certainly make an argument for building a so-called “globally cap-weighted” equity portfolio like this, though I think there are legitimate reasons to overweight domestic stocks. As you compare these two options, consider the following:
Currency risk. Although the Global ETF Portfolios are bought and sold in Canadian dollars, they have considerable exposure to foreign currencies. In fact, virtually all of the equity portfolio is in US and international stocks, so Canadian investors will be sensitive to the fluctuations in the US dollar, euro, yen and other foreign currencies relative to the loonie. A strong loonie will have a negative effect on its performance, while a weak Canadian dollar will give the portfolio a boost.
Currency risk can add an extra layer of diversification to a balanced portfolio, so it’s not an inherently bad thing. But if you live and work in Canada, and if you plan to retire here, you probably don’t want all of your assets denominated in foreign currencies. A balanced portfolio that includes, say, 40% bonds and 20% Canadian stocks has only 40% exposed to foreign currencies. Compare this with the Tangerine Equity Growth ETF Portfolio, where the number is about 97%.
Recency bias. During the last few years, many investors have asked whether traditional Couch Potato portfolios are guilty of home country bias, which is often based on patriotism, or on the mistaken notion that domestic stocks are safer because they’re more familiar. While some of the criticisms are fair, no one was singing that song during the first decade of the new millennium, when Canadian stocks dramatically outperformed the rest of the world: indeed, deep in the archives of this blog is a 2011 post satirizing the idea that Canada was the only place worth investing, an idea that had been rampant for years.
Today, of course, the opposite bias is everywhere: after a decade during which US equities (and the US dollar) performed extremely well, it’s much easier to make a rational argument for allocating just 3% to domestic stocks. If Canada enjoys another multi-year period of outperformance, the pendulum will likely swing the other way.
My point here is not that one or the other strategy is fundamentally better: as Justin points out in his video, during the two decades from 2000 through 2020, a portfolio equally weighted between Canadian, US and international stocks delivered virtually identical performance compared with a globally cap-weighted equity portfolio.
Annualized returns | One-third Canada, US, and international | Globally cap-weighted |
---|---|---|
2001–2010 | 1.3% | –0.4% |
2011–2020 | 10.6% | 12.5% |
2001–2020 | 5.8% | 5.8% |
Source: Justin Bender, PWL Capital
So use whichever strategy you’re most comfortable with, but only if you can stick to it for the long term.
Evolving asset mix. If your strategy is to hold roughly equal amounts of Canadian, US and international equities, you will need to rebalance from time to time, trimming the best-performing asset classes, and using the proceeds to top up the laggards. But with a cap-weighted strategy, like that used by the Tangerine Global ETF Portfolios, there is no rebalancing in the traditional sense.
Over time, the relative size of each country’s stock market will evolve. For example, today the US makes up almost 58% of the global equity market, but as recently as 2018 that number was closer to 43%. The Tangerine Global ETF Portfolios should be expected to shift their asset allocation over time to reflect changes like this.
Are they right for you?
So, where do the Tangerine Global ETF Portfolios fit among the options available to Canadian index investors?
If you’re already using the Tangerine Core Portfolios, switching to the new family is easy: you simply log into your account and click “Switch my Portfolio.” This might seem like a no-brainer if you’re only looking at MER. But if you’ve read this far, you should appreciate that you will be making a dramatic shift in your strategy, from holding approximately one-third of your equities in Canadian stocks to holding a negligible amount. This decision should be made carefully: cost is not the only factor to consider.
As Justin notes in his video, the Global ETF Portfolios may be an attractive alternative to roboadvisors, at least for those inclined to traditional indexing. Roboadvisors often build portfolios with active strategies—sometimes quietly, sometimes overtly—while the Tangerine strategy is much more passive. Both options offer similar convenience and similar costs, once you add the roboadvisor’s own fee (often 0.50%) to the cost of the underlying ETFs.
For my part, I prefer the strategies of the Tangerine Core Portfolios and was hoping the company would simply reduce their management fees to make them more competitive. But until that happens, the Global ETF Portfolios at least offer a cheaper alternative for investors who prefer not to trade ETFs directly.
Weirdly resolved after posting. Was occuring both in portrait and landscape mode. Now just see Facebook on one half and + on the other of a lower border, much less intrusive.
Thanks for the Tangerine funds update.
Just wondering whatever happened to your podcasting. I’m recycling thru your past podcasts, which were very informative, but the last one I see is almost two years old…
@Rick: Thanks for the comment. I stopped doing the podcasts because of the enormous amount of time it took to create them.
@Rick: Dan has also been learning to play Tool’s “Invincible” on guitar, which takes up most of his free time ;)
And I still can’t play it.
Thanks for review, Dan!
My sister and mom both currently have the tangerine core investment funds. My mom is retired and my sister is decades away from retirement.
Since they both prefer to keep things simple and stay with Tangerine, would you recommend they stick with the core investment portfolios for now?
I agree, I would have liked to see Tangerine just lower the MER fees for their original portfolios.
@Kris W: Unless you feel strongly that the asset allocation in the ETF Portfolios is superior, it probably is not worth switching.
Thanks for the model portfolios all these years!
Any chance you could please release the annual historical data that was used to get the 25 year averages? So the return per year (similar to the 1yr return) is what I’m looking for going back that far, to do some rough napkin failure simulations on my retirement plan.
I’m specifically interested in VBAL. As an amateur beginner, recreating the data doesn’t seem trivial and I can’t seem to make things lineup even for a single year.
Either way, thanks for everything and please keep it up!
@Finn: Thanks for the comment. Justin does most of the heavy lifting on the historical returns and I don’t think he has plans to publish the year-by-year data. It would be a huge job, and I’m not sure it would have much value in terms of financial planning. If you’re looking for a source of yearly data for the major asset classes, Libra Investment Management publishes a spreadsheet that you may find useful: https://libra-investments.com/LIMI/Total-returns.xls
Thank you for the article! I currently have $40,000 of my RRSP account invested in Tangerine’s Balanced Growth Core portfolio.
I’ve also used your TD e-Series model portfolio to invest $80,000 of my TFSA into 75% equities and 25% bonds.
The portfolio make-up of my RRSP and TFSA accounts respectively are very similar, is there any benefit to this? Or is one of the accounts better off being invested elsewhere?
I’m fairly new to investing and any advice would be greatly appreciated. For context, I’m in my mid-thirties with a bit of runway before retirement.
Thank you very much for your article. I found it very interesting and helpful. Best regards.
@Ellie: In my view there is no benefit to holding the two accounts at different institutions. In most cases it’s easiest to use one brokerage for all your accounts. And if both your TFSA and RRSP have the same objective (e.g. to fund your retirement), then it makes sense to use the same asset allocation for both accounts.
Why not just go with the much cheaper vanguard ETFs you can buy on TSX?
You can mix them in any ratio you want too.
@Bram: That’s the first choice in my model portfolios, too. But many investors are not comfortable trading ETFs, and for small portfolios index mutual funds offer many conveniences, such as automatic contributions.
Hey Dan, I have 40k cash in my TFSA and love your passive investing strategies. I’m with TD Direct investing currently. I plan to buy XGRO (80/20) or XBAL/XGRO (70/30). Would it be fair to buy all 40k in one shot for the $9.99 commission (or x 2 if XBAL and XGRO), then only pay commission once a year when adding with my new contribution room? Or should I set up with ie. Questtrade and space out my buys for the 40k worth? Would also avoid any fees. I have my RRSP invested with TD also and I plan on moving it to an ETF portfolio also to avoid the high MER fees I currently pay. And I read a lot about rebalancing on your site, just wanted to clarify that’s more so with TD E series as XGRO is rebalanced on its own as per the fact sheet? Sorry for all the questions, long time reader, finally acting on the strategies.
Thanks!
@Mike: Unless you plan on making frequent small trades, I don’t think it’s necessary to switch brokerages and let a couple of $10 commissions drive your decisions. Using a one-fund portfolio in both your TFSA and RRSP will give you a very well diversified, cheap and easy-to-manage portfolio for the long term. I’d encourage you not to complicate it.
Thanks for the reply Dan.
I’m going to buy XBAL/XGRO split to avoid being too weighted in stocks even if it doubles the commission.
In your opinion would you buy the ETF’s in increments over some time, or, just buy 20k of each the same day? And sorry stupid question, but just to confirm I don’t think ongoing rebalance is required for those?
Thanks again.
@Mike: If you’re planning on investing that $40K over the long term, and if you’ll be adding to your TFSA every year, then I don’t think you need to worry about dollar-cost averaging over time.
If you use a mix of XBAL and XGRO to get an overall allocation of 70% equities, then you actually would need to rebalance occasionally: you’d need to make sure you hold roughly equal amounts of each fund. In practice, though, you should not have to do this very often: once a year perhaps. The amounts don’t need to be exact.
Dan you’ve been so helpful, like many investors I’ve made lots of mistakes buying individual stocks and it took me until my mid 30’s to realize I need discipline and a great strategy like index funds w/ low fees.
I’m buying XBAL and XRGO now. Final question I promise! Have brain fog on this. Do I buy equal shares or equal cost?
Ie. buy 700 shares of each or $19,000 of each?
Thanks! Take care.
@Mike: Happy if I could help! You’ll need to buy equal dollar amounts of each ETF, not equal share amounts.
Hey Dan, would you (or Justin) consider discussing the Longevity Pension Fund (by Purpose investments) in one of your future blog posts?
Thanks
@Alex: I have tried to confine my commentary to index funds and ETFs. The Purpose fund is neither, so it’s outside my scope.
Hi Dan, it’s been a while since I last visited your page, and was glad to read this article. I invested in the core Tangerine funds back in 2016 after looking at your model portfolios, and now wish to drop the 1.07 MER and transfer from Tangerine to TD. My question is how to implement this in the most effective way? My fund is in a TFSA account. Should I just sell at the end of December and buy with TD in early January, or if there would be a better way to do it?
@Natalie: As long as you transfer the Tangerine TFSA directly to a new TFSA at TD, this would not be considered a withdrawal. So you do not have to worry about the December/January timing.
The first step is to open a new TFSA at TD Direct and then initiate the transfer from there. You will need to request the transfer “in cash” (as opposed to “in kind”). If you have difficulty, just call TD customer service and they will walk you through the process.
Great post again Dan, thanks. I must say I’m missing the podcast although Justin has helped fill the void but even his podcast isn’t all that active. I realize you are doing all this for free and so if I ever win millions I’ll be calling PWL.
Thanks for sharing, Dan. What is your take on industry specific ETFs?
@Jason: Choosing industry-specific ETFs is just a type of stock picking: it presumes you have insight into which sectors will outperform in the future. I recommend holding broad-market ETFs (and therefore all sectors) rather than trying to make forecasts.
Dan, thanks for your great website! I have been “couch potatoing” for many years but am concerned about the future of bonds. Currently I use cash to replace bonds. What are your thoughts on bonds with interest rate increases on the horizon?
@Craig: Thanks for the comment. “Interest rates are going to go up” has been a common concern for over a decade. This blog from 2015 is still (unfortunately) relevant today and sums up my thoughts on the cash v. bonds question:
https://canadiancouchpotato.com/2015/05/07/should-you-replace-bonds-with-cash/
Thanks for helping people like us who are doing DIY investment. You are doing great job.
I have a question that many ETF hold another ETF which holds the stock. Are we paying the MER fee twice ? Like ETF1 holds ETF2 ETF1 has 0.1% and ETF2 has 0.3%. If I hold ETF1, Am I paying 0.4% actually for ETF1 in total ?
@Paul: Thanks for the comment. No, there is no “double dipping” on fees when an ETF holds another ETF. This is common, for example, with the asset allocation ETFs from Vanguard, iShares and BMO: they are all built from several underlying ETFs, but you only pay the MER once.
Thank you! I never touched Tangerine ETFs cause of the MER as you mentioned.
I think people like the simplicity and Tangerine is taking advantage of the fact many get their paycheques inside their Tangerine account.
My advice: Just open a Wealthsimple or Questrade account and pay almost no fees for low-cost ETFs. You can even do Rob advisors and pay much less fees than using Tangerine ETFs. I covered all Canadian Robo Advisors in my blog in case someone is interested to learn more.
Hi Dan
I noticed the Tangerine Global Balanced ETF fund now indicates a MER of 0.76% and a Trading Expense Ratio (TER) of 0.27%, for a total of 1.03% (almost the same as their Core Portfolios). I don’t recall seeing the TER previously. Why was it just added recently?
@Jeff: I’m not sure anyone can explain the specific reasons for TER costs other than the fund managers. There may have been some startup costs involved when the new ETF portfolios were launched. I would be surprised if we saw such a high TER going forward.
Are the annualized returns is net of ETF Fees or are they index level performance numbers? I am referring to the 2001-2020 and 2011-2020. … if they don’t reflect ETF costs, how do we get net of fees returns, specially when the ETF fees change. i can’t assume todays fees of 0.05% for the entire period. .. Thanks.
@Dexter: All mutual fund and ETF performance numbers are reported net of fees. (Dividends are assumed to be reinvested.) Whenever Justin or I do backtested returns we use index data and subtract the fund’s MER.