Exchange Traded Funds (ETFs) – Part II

Building a balanced portfolio with ETFs is pretty straightforward. Similar to mutual funds, as their popularity started rising, companies started providing pretty nifty sector-based or currency-based ETFs. If there is a certain type of market or sector you want to target, there is probably an ETF for it. That being said, the MERs for these products are a lot higher, and your diversification is reduced. So remember, KISS is the way to go. Only reference to Valentine’s Day; I promise! 🙂

Once your accounts are set up and funded, then what? How do you choose what to invest in? Determine your asset allocation and choose the corresponding funds. Since I am 30, I will have 30% in bonds.

30% Canadian bonds – XBB (MER of 0.30% for 2011)

24% Canadian equities – XIC (MER of 0.25% for 2011)

23% US equities – VTI* (MER of 0.07% as of April 29, 2011)

23% International equities – VEU* (MER of 0.22% as of February 25, 2011)

* VTI and VEU are Vanguard products. As they are traded on the US stock exchange, you will be subject to additional costs based on how our Canadian dollar is doing compared to the US dollar. It is currently around par, but you have to remember that the brokerage will take some fees to transfer between the currencies. The lower MERs should make up the difference, but it is something you should be aware about. Another option is to replace VTI and VEU with XSP and XIN which are the i-Shares equivalent. The corresponding MERs are 0.24% and 0.50% respectively.

Assuming your portfolio allocation is IDENTICAL to your ideal asset allocation, your portfolios’ MER is approximately 0.2167% a year. The MER for the TD e-series portfolio is 0.435% a year. Compare these to the average mutual fund in Canada which boasts an average MER of 2.50%. You are saving yourself over 2% every year! Add in the magic of compounding

Sound familiar? It should! I wanted to keep the message consistent; it will seem very intimidating to start, but once you set your allocation and know what your investment plan is, it will become more manageable. You’ll wonder why you didn’t do this earlier! (I know I did!)

Now that you are armed with all this additional information, take a look at the update I did for my own portfolio. (Yup, definitely due for a new update!) You can see that it is pretty messy! I have a lot of ETFs that are overlapping (VTI and XSP for example). This was a result of setting up my target allocation, but also learning new things along the way. My portfolio is the guinea pig! I could just sell all the extra ETFs, but I have to be mindful of the transaction costs, so I made the decision to only re-balance when I put in new money. It is slowly becoming cleaner!

As I mentioned before, I want a well-balanced and diversified portfolio, but I also want to achieve it the easiest way possible. You can always add a couple other ETFs to tweak the annual return and risk factor (i.e. I am looking into adding a REIT ETF into my portfolio, and I’m definitely a fan of the Complete Couch Potato portfolio) but I do strongly believe that the simple portfolio above is sufficient enough to beat your current bank or investment company portfolio in the long run. Once you become more comfortable with investing, you can always learn more and add ETFs to tweak the return, but if investing is intimidating enough for you, the above portfolio is great!

What do you think? Ready to dip your toe in and start building your own portfolio of ETFs?

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5 Comments (+add yours?)

  1. Leigh
    Feb 15, 2012 @ 03:09:41

    I still can’t believe how high mutual fund expense ratios are in Canada! 2% is INSANE.

    There are some brokerage firms in Canada that allow you to keep a US account and a Canadian account, no? Though that would make it trickier for rebalancing, that’s not a bad plan since then you’re not constantly exposing yourself to the fluctuating exchange rates.


    • Vicky Vo
      Feb 15, 2012 @ 13:50:59

      There are some brokerages in Canada that allows you to hold US accounts; usually its in the registered accounts. I find that the exchange rate they charge is still pretty crazy (2.5%!). I like to diversify a bit by holding both iShares and Vanguard, although iShares is now combined with Claymore, and together they account for most of the ETFs currently provided in Canada.


  2. Trackback: The Dividend Ninja » The Weekly Lineup: From Valentines to Volcker
  3. My Own Advisor
    Feb 19, 2012 @ 20:38:33

    Quality stuff here Vicky 🙂

    I own XBB above. I prefer owning XIU vs. XIC, because the MER is lower. I’m a cheap guy!


    • Vicky Vo
      Feb 20, 2012 @ 15:30:49

      I’ve been debating XIU as well! I was thinking of using it as an alternative to XIC; do you find that you are less diversified because of the choice?

      Thanks for dropping by!


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