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Top ETFs and model portfolios for Canadian investors PERSONAL FINANCE

The investment landscape has certainly developed for the better in the past two decades. Gone are the days when the only way to invest was to work with an expensive broker or investment fund seller. Self-directed investment platforms, robo advisors and all-in-one ETFs have democratized investing – so that investors of all ages and phases can build up a portfolio.

Just as investment funds dominated the investment scene today in the 1990s, exchange traded funds (ETFs) are enjoying increasing popularity as investors flock to inexpensive passive investment products. The challenge for investors is to separate the wheat from the chaff. According to the Canadian ETF Association (CETFA), 780 ETFs are currently offered by 36 ETF providers.

In this article, I’m going to break down the top ETFs for Canadian investors to help you avoid analysis paralysis and make an informed decision about which ETFs to hold in your portfolio.

Then I go one step further and show you a simple portfolio for getting started with a self-directed index investment portfolio and a more complicated version that allows investors with larger portfolios to save fees.

Top ETFs for Canadian investors

First, let’s pick the top ETFs from this list of 780 funds. I will stick to ETFs from the three largest ETF providers in Canada:

  1. BlackRock Canada: 130 ETFs and $ 68.1 billion in assets under management
  2. BMO Asset Management: 112 ETFs and $ 57.4 billion in assets under management
  3. Avant-garde Canada: 40 ETFs and $ 22.8 billion in assets under management

I will also filter out any ETFs that are actively managed or that focus on a specific sector (I see you, BetaPro Crude Oil 2x Daily Bull ETF).

Instead, we look for ETFs that have the broadest possible index to give investors the ultimate diversification of global stocks and bonds. I narrowed the list down to the 20 best ETFs on the market.

Canadian equity ETFs

Each of these two ETFs offers exposure to approximately 200 of Canada’s best small, medium and large companies at an extremely low price.

  • Vanguard FTSE Canada All Cap Index ETF (VCN)
  • iShares Core S & P / TSX Capped Composite Index ETF (XIC)

US equity ETFs

Each of these two ETFs offers exposure to the entire US equity market by tracking the CRSP US Total Market Index.

  • iShares Core S & P US total market index ETF (XUU)
  • Vanguard US Total Market Index ETF (VUN)

International ETFs and ETFs from emerging countries

Vanguard’s VIU and iShares’ XEF offer exposure to thousands of stocks in developed countries outside of North America (Europe and Pacific), while VEE and XEC offer exposure to thousands of stocks from emerging markets around the world.

  • Vanguard FTSE developed All Cap ex North America Index ETF (VIU)
  • Vanguard FTSE Emerging Markets All Cap Index ETF (VEE)
  • iShares Core MSCI EAFE IMI Index ETF (XEF)
  • iShares Core MSCI Emerging Markets IMI Index ETF (XEC)

Global equity ETFs

Investors can avoid holding individual ETFs for US equities, international equities and emerging markets by choosing one of these two global equity ETFs (All World, ex Canada).

  • iShares Core MSCI All Country World without Canada Index ETF (XAW)
  • Vanguard FTSE Global All Cap from Canada Index ETF (VXC)

Bond ETFs

These popular Canadian bond ETFs offer investors exposure to the broad universe of Canadian government and corporate bonds.

  • BMO Aggregate Bond Index ETF (ZAG)
  • Vanguard Canadian Aggregate Bond Index ETF (VAB)

All-in-one ETFs

Vanguard, iShares and BMO all offer balanced all-in-one ETFs, which are available in different flavors depending on the risk tolerance. These one-decision ETFs circumvent the need to hold multiple ETFs.

vanguard

  • Vanguard All Equity ETF Portfolio (VEQT)
  • Vanguard Growth ETF Portfolio (VGRO)
  • Vanguard Balanced ETF Portfolio (VBAL)

iShares

  • iShares Core Equity ETF Portfolio (XEQT)
  • iShares Core Growth ETF Portfolio (XGRO)
  • iShares Core Balanced ETF Portfolio (XBAL)

BMO

  • BMO Balanced ETF (ZBAL)
  • BMO Growth ETF (ZGRO)

Model ETF portfolios (all together)

I’ve pulled out the top 20 ETFs, but that’s still a lot to clear up for investors when deciding which ones to use for their own portfolio. Now I’m going to break things down even further by showing you an ideal model ETF portfolio depending on the size of your account (s).

Along the way, you may have to make compromises that include simple or complex, low and even lower costs, and automatic monitoring and realignment compared to a more practical approach to portfolio construction.

The need for these compromises becomes clearer as your portfolio grows over time.

One fund ETF portfolio vs. 3-fund ETF portfolio

First, let’s look at an example of a young investor who first has to invest $ 10,000. We assume that the suitable asset mix for this investor is a portfolio with 80 percent stocks and 20 percent bonds.

Keep the process as simple as possible when building an ETF portfolio. This means that you should probably choose one of the asset allocation ETFs (an ETF solution), e.g. B. XGRO from iShares or VGRO from Vanguard.

One-Fund ETF Portfolio ($ 10,000)

ticker MER % Assignment $ Allocation $ Fee
XGRO 0.21% 100% $ 10,000
total 0.21% 100% $ 10,000 $ 21

The compromise for a slightly higher fee is the simplicity of these products. You automatically adjust your assignment behind the scenes so that you do not have to monitor or adjust it yourself.

Select a self-managed investment platform, fund your account, and then buy the individual ETF. As simple as that.

I would recommend the selection Questrade, which offers free ETF purchases, or Wealthsimple Trade, the purely mobile investment platform that offers ETF trades without commission.

Since you are likely to add new money on a regular basis and likely in smaller amounts, a one ETF solution is ideal to avoid having to tinker and rebalance your portfolio with each contribution.

As you can see from the breakdown of the model portfolio for the more complex portfolios, each time you buy, you have to adjust every single ETF amount to try to stay true to your original asset mix.

Three-Fund ETF Portfolio ($ 10,000)

ticker % MER % Assignment $ Allocation $ Fee
VCN 0.06% 25% $ 2,500
XAW 0.22% 55% $ 5,500
VAB 0.09% 20% $ 2,000
total 0.15% 100% $ 10,000 $ 15

For this reason, I recommend a one-ETF solution for new investors who want to invest a small amount first and want to add small, frequent contributions with every paycheck.

Add complexity to save fees

When you start your investment journey for the first time, it makes sense to evaluate the simplicity versus the fees. This is because in the initial stages of investing, your savings rate and contributions have a much greater impact than fees.

However, if your portfolio grows to the six-figure range, perhaps even around $ 200,000, these additional costs can add up. At this point, it makes sense to add some complexity, e.g. For example, unbundling a one ETF solution in favor of adding some US listed ETFs with lower fees.

ETFs listed in the US have lower MERs and fewer foreign withholding taxes. However, you need to invest in US currency. Since converting currencies can be expensive, investors perform a maneuver called Norbert’s Gambit to convert CAD to USD and vice versa.

The good news is that a discount brokerage platform like Questrade can support the USD and Norbert’s Gambit move when you’re ready.

Now let’s look at model ETF portfolios for an investor with a $ 200,000 portfolio.

One-Fund ETF Portfolio ($ 200,000)

ticker MER % Assignment $ Allocation $ Fee
XGRO 0.21% 100% $ 200,000
total 0.21% 100% $ 200,000 $ 420

The One ETF solution is still incredibly affordable compared to mutual funds or actively managed portfolios.

But let’s show how low our costs can be if we split the portfolio into three ETFs.

Three-Fund ETF Portfolio ($ 200,000)

ticker MER % Assignment $ Allocation $ Fee
VCN 0.06% 25% $ 50,000
XAW 0.22% 55% $ 110,000
VAB 0.09% 20% $ 40,000
total 0.15% 100% $ 200,000 $ 308

With a $ 200,000 portfolio, you save $ 112 a year using the three ETF model portfolio.

Let’s go one step further with a five ETF solution courtesy of Justin Bender of PWL Capital and his “Ridiculous” model ETF portfolio.

Lowest Fee ETF Solution (RRSPs – $ 200,000)

ticker MER % Assignment $ Allocation $ Fee
VAB 0.09% 20% $ 40,000
VCN 0.06% 24% $ 48,000
VTI 0.03% 31.83% $ 63,660
VIU 0.22% 18.00% $ 36,000
VWO 0.10% 6.17% $ 12,340
total 0.09% 100% $ 200,000 $ 180

With this cost-effective solution, our investor would save $ 240 a year by unbundling the one-ETF solution in favor of this five-ETF portfolio.

  • Vanguard Canadian Aggregate Bond Index ETF
  • Vanguard FTSE Canada All Cap Index ETF
  • Vanguard Total Stock Market ETF (listed in the U.S.)
  • Vanguard FTSE developed All Cap ex North America Index ETF
  • Vanguard FTSE Emerging Markets ETF (listed in the U.S.)

Two of the ETFs are listed in the United States, which means that you need a USD account and USD currency to buy the funds. As mentioned earlier, you also need to do the currency conversion step called Norbert’s Gambit to exchange CAD and USD and avoid currency conversion fees.

The extra tinkering, monitoring, and realignment may not be worthwhile for some investors (including myself), but as your portfolio grows, the cost savings may become too tempting to ignore.

Final thoughts

If you start with $ 5,000 or $ 10,000 to invest, it doesn’t make much sense to split your portfolio into a handful of different ETFs.

A one-ticket ETF is all you need at this point in time as you build your investment portfolio. Later, as your portfolio grows and fees rise, you should consider a more complex portfolio that can save you MER and foreign withholding taxes.

I know that 780 ETFs can be overwhelming and you may not know where to start. Hopefully this guide can help you avoid analysis paralysis so you can safely invest in ETFs.

Decide on a model portfolio and an asset mix that is suitable for your situation. Use a self-managed investment platform like Questrade or Wealthsimple Trade to save transaction costs. Use your money regularly by setting up automatic contributions.

Finally, stick to your investment plan in good times and bad. Passive investing through index ETFs is designed to deliver market returns minus a small fee. This means that your investment portfolio goes up and down with the direction of the market.

In the long term, this risk has paid off well.

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