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.
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|
|Emerging markets equities||7.7%||9.6%||12.7%|
Source: Tangerine Investment Funds, as of April 30, 2021
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|
Source: Justin Bender, PWL Capital
So use whichever strategy you’re most comfortable with it, 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.