Model Portfolios

The following model portfolios can help you get started as a Couch Potato investor.

The suggestions below include portfolios built from ETFs and index mutual funds. Both options include  several asset mixes: you should choose the one best suited to your risk profile. Conservative investors should allocate more to bonds and less to stocks, while aggressive investors can do the opposite.

How do you decide whether ETFs or index mutual funds are right for you? Many investors make their choice based solely on management expense ratios (MERs), ignoring all the other factors. Costs are always important, but they need to be kept in perspective, especially when your portfolio is modest in size. A difference of 0.10% in fees works out to less than $1 per week on a $50,000 portfolio.

And MERs are not the only costs to consider. While ETFs have lower management fees, they also carry higher transactions costs and can make portfolios more difficult to manage, especially for less experienced investors. Index mutual funds have higher annual fees, but they have no transaction costs and tend to be more user-friendly.

Remember that your ability to save and to stick to a plan with discipline is much more important than keeping costs to an absolute minimum, especially if you’re new to DIY investing.

Model Portfolios: ETFs and index mutual funds

 ETFsIndex mutual funds
Management expense ratios (MER)About 0.12% to 0.25%About 0.36% to 0.41%
Transaction costsZero to $9.99 per trade, depending on the brokerageNo cost
DiversificationPortfolios may include non-Canadian bonds, mid- and small-cap stocks, and emerging marketsPortfolios include Canadian bonds, large and mid-cap stocks, and developed markets only
Preauthorized contributionsGenerally not possibleEasy to set up for as little as $25 per month
Ease of tradingRequires placing orders (based on number of shares) on a stock exchangeOrders can be placed in dollar amounts at any time
RebalancingNot necessary with one-ETF portfolios; straightforward with two-ETF portfoliosRequires managing four different funds
Bookkeeping for tax purposesMay require manual tracking of adjusted cost baseGenerally done at the fund level, requiring little or no work by the investor

The model portfolio PDFs include 25-year performance histories (from 1995 through 2019), including the lowest 12-month return during that period. Pay special attention to this number and make sure you can stomach a loss that large: the surest way to blow up your investment plan is to sell in a panic during a bear market.

Note that the data include actual fund returns when available and index returns (minus fees) when necessary. Past performance is no guarantee of future results.

Option 1: Asset Allocation ETFs

Since their appearance in early 2018, asset allocation ETFs have become the easiest way to build a balanced index portfolio at very low cost. They are “one-fund solutions” that hold several underlying stock and bond ETFs, allowing you to invest in a globally diversified portfolio with a single trade.

These convenient products are less flexible and slightly more expensive than a portfolio built from individual ETFs for each asset class. However, they are much easier to manage, since all the rebalancing is done for you.

Vanguard and iShares offer four balanced ETF portfolios, with options for 20%, 40%, 60% or 80% equities. Most investors will find one of these options suitable for their situation.

For those who want something in between, both firms also offer an all-equity ETF that can be combined with a traditional bond ETF in any proportion you want. The model portfolios include two-fund options for 30%, 50% and 70% equities.

The Vanguard and iShares asset allocation ETFs are both excellent choices, and their differences are relatively minor. You won’t go wrong with either option.

Model Portfolios Option 1 – Vanguard ETFs
Model Portfolios Option 1 – iSHARES ETFs

Option 2: TD e-Series Funds

TD’s e-Series funds are among the cheapest mutual funds in Canada and are an excellent alternative to ETFs for investors who make small, regular contributions to their portfolios, since they’re free to buy and sell, and you can set up automatic monthly contributions. Index mutual funds are also more user-friendly than ETFs, as you can place orders using dollar amounts (rather than number of units), even when markets are closed. 

You can build a globally diversified portfolio using four e-Series funds: one each for Canadian, U.S. and international stocks, and one for Canadian bonds. The model portfolios include five suggestions ranging from conservative (30% equities) to aggressive (90% equities).

The e-Series funds were formerly available only to TD customers, but since 2019 they’ve been offered through any online brokerage. 

Model Portfolios Option 2 – TD E-Series Funds

Model Portfolios

The following model portfolios can help you get started as a Couch Potato investor.

The suggestions below include portfolios built from ETFs and index mutual funds. Both options include  several asset mixes: you should choose the one best suited to your risk profile. Conservative investors should allocate more to bonds and less to stocks, while aggressive investors can do the opposite.

How do you decide whether ETFs or index mutual funds are right for you? Many investors make their choice based solely on management expense ratios (MERs), ignoring all the other factors. Costs are always important, but they need to be kept in perspective, especially when your portfolio is modest in size. A difference of 0.10% in fees works out to less than $1 per week on a $50,000 portfolio.

And MERs are not the only costs to consider. While ETFs have lower management fees, they also carry higher transactions costs and can make portfolios more difficult to manage, especially for less experienced investors. Index mutual funds have higher annual fees, but they have no transaction costs and tend to be more user-friendly.

Remember that your ability to save and to stick to a plan with discipline is much more important than keeping costs to an absolute minimum, especially if you’re new to DIY investing.

Comparing ETFs and index mutual funds

 ETFsIndex mutual funds
Management expense ratios (MER)About 0.12% to 0.25%About 0.36% to 0.41%
Transaction costsZero to $9.99 per trade, depending on the brokerageNo cost
DiversificationPortfolios may include non-Canadian bonds, mid- and small-cap stocks, and emerging marketsPortfolios include Canadian bonds, large and mid-cap stocks, and developed markets only
Preauthorized contributionsGenerally not possibleEasy to set up for as little as $25 per month
Ease of tradingRequires placing orders (based on number of shares) on a stock exchangeOrders can be placed in dollar amounts at any time
RebalancingNot necessary with one-ETF portfolios; straightforward with two-ETF portfoliosRequires managing four different funds
Bookkeeping for tax purposesMay require manual tracking of adjusted cost baseGenerally done at the fund level, requiring little or no work by the investor

The model portfolio PDFs include 25-year performance histories (from 1995 through 2019), including the lowest 12-month return during that period. Pay special attention to this number and make sure you can stomach a loss that large: the surest way to blow up your investment plan is to sell in a panic during a bear market.

Note that the data include actual fund returns when available and index returns (minus fees) when necessary. Past performance is no guarantee of future results.

Option 1: Asset Allocation ETFs

Since their appearance in early 2018, asset allocation ETFs have become the easiest way to build a balanced index portfolio at very low cost. They are “one-fund solutions” that hold several underlying stock and bond ETFs, allowing you to invest in a globally diversified portfolio with a single trade.

These convenient products are less flexible and slightly more expensive than a portfolio built from individual ETFs for each asset class. However, they are much easier to manage, since all the rebalancing is done for you.

Vanguard and iShares offer four balanced ETF portfolios, with options for 20%, 40%, 60% or 80% equities. Most investors will find one of these options suitable for their situation.

For those who want something in between, both firms also offer an all-equity ETF that can be combined with a traditional bond ETF in any proportion you want. The model portfolios include two-fund options for 30%, 50% and 70% equities.

The Vanguard and iShares asset allocation ETFs are both excellent choices, and their differences are relatively minor. You won’t go wrong with either option.

Model Portfolios Option 1 – Vanguard ETFs
Model Portfolios Option 1 – iSHARES ETFs

Option 2: TD e-Series Funds

TD’s e-Series funds are among the cheapest mutual funds in Canada and are an excellent alternative to ETFs for investors who make small, regular contributions to their portfolios, since they’re free to buy and sell, and you can set up automatic monthly contributions. Index mutual funds are also more user-friendly than ETFs, as you can place orders using dollar amounts (rather than number of units), even when markets are closed. 

You can build a globally diversified portfolio using four e-Series funds: one each for Canadian, U.S. and international stocks, and one for Canadian bonds. The model portfolios include five suggestions ranging from conservative (30% equities) to aggressive (90% equities).

The e-Series funds were formerly available only to TD customers, but since 2019 they’ve been offered through any online brokerage. 

Model Portfolios Option 2 – TD E-Series Funds