On the ETF Model Portfolio page on Cut The Crap Investing we start with the core portfolio building blocks for a Canadian investor.
I do add an asterisk in that investors have the option to keep it very simple to the core, or they can add on various layers of bonds and other growth assets. The above model is the format for the index-based Tangerine Portfolios. Here’s my review The Canadian Robo Advisors – Tangerine Investments.
And while I offer a Greater Growth Portfolio for consideration, the self-directed investor has the ability to design their portfolio to their specific wants and needs. While you can dial up or down the portfolio risk level, you can also dial up that growth component.
I’d suggest you start with Canadian and US REITs for portfolio diversification (yes REITs can be classified as their own equity asset class) and for the growth potential. As a panelist, I had ‘argued’ for REITs when we offered the BEST ETFs for 2019 on MoneySense. But no luck. Of course you’ll find those REITs on the Vanguard Canada, iShares and the BMO ETF pages.
Bigger is not always better.
From there you might go looking for smaller companies. Size is one of the factors that is commonly used to seek out unique investment characteristics. Smaller companies tend to outperform larger companies over time; there’s simply greater growth potential. Within the basket you’ll get a lot of flame outs, but in the mix you’ll also find enough companies that deliver ‘astronomical’ gains. You might be an early investor in the next Apple, Google, Amazon or Shopify.
There’s incredible risks, but there the potential for incredible gains. And because this can be more than tricky business, index investing is tailor made to grab enough of those companies. You’ll own the losers, but you’ll also own enough of the eventual big-time winners. On the ETF model portfolio page I offer the US total market ETF XUU from iShares. Within that fund of funds you will find the US mid cap ETF IJH and the US small cap ETF IJR. Those indices and funds have a history of a very solid beat of the S&P 500 over time.
And at just over 10% weighting within XUU certainly there is the potential for the lesser caps to add a slight boost to your returns. In order to capitalize on the potential of outperformance you might increase that weighting substantially. You may build your own US basket by holding a core S&P 500 ETF and then adding 20-30% or more of the mid and small cap funds. You also have the potential to hold your US basket in a US dollar account to avoid withholding taxes on any US dividends.
iShares Canada also offers a Canadian dollar version of the US mid cap by way of XMC. There is also a currency-hedged version XMH. Their product page also shows a US small cap, currency hedged XSU.
The Nasdaq 100 ETFs
You may decide to hold some of the tech-heavy Nasdaq 100. That index holds 100 of the largest US companies described as non-financial. You will hold many biotechs and many of the familiar household tech names, telecommunications companies and retailers. It is very growth oriented and you will certainly duplicate many of the holdings already held within the US broad market ETFs. The Nasdaq 100 fund Invesco’s QQQ (US listed) is one of the most widely held funds.
The outperformance through the last market cycle is nothing short of remarkable. Portfolio 1 is QQQ. Portfolio 2 is an S&P 500 fund. The chart is courtesy of portfoliovisualizer.com.
That said, this index was crushed in the 2000-2003 market correction.
Just as the 2008-2009 had its roots in the US financial sector, the early 2000s correction was the tech crisis, or dot-com bubble. Investors rushed into tech-related companies and funds based on the hope of future profits. It was an investment based on hope. Many of the companies in the funds were losing money at an incredible rate and even the tech giants of the day were money losers. On that theme you can have a read of my take on the Canadian cannabis sector.
Today the Nasdaq 100 offers a combination of current profits and that incredible growth potential. This is not your Daddy’s Nasdaq 100. Certainly the risks always are present, and we should always understand the risks that exist with investing in any stock or stock fund.
In addition to QQQ you can also access the index by way of BMOs ZNQ – that is a Canadian dollar version, non hedged. iShares offers a Canadian dollar hedged XQQ.
Moving to the emerging markets.
The developing markets offer that common theme of greater risk but greater growth potential.
You’ll be investing in countries and companies with a collective greater underlying growth rate compared to international developed nations. And there’s simply greater growth potential moving forward due to favourable demographics and the movement of hundreds of millions of peoples from the lower economic classes to the middle class.
Have a look at the growth estimates for each nation. You have to look far down that list to find a developed nation.
And from a visual capitalist post, here’s the GDP projections for the world economies in 2030.
Emerging markets appear to be a ‘no-brainer’ for investors who have a longer time horizon. These developing countries should likely form a component of your long-term portfolio growth plans. Certainly we’ve seen little growth over the last decade and more from international developed nations. They might need a little help.
You might consider BMO’s ZEM. iShares and Vanguard Canada also offer emerging market funds.
You might also consider emerging market bonds. Our friends at ModernAdvisor suggest that bond class offers better portfolio diversification (compared to US bonds) and of course you’ll also get be able to grab a much more generous yield. BMO offers ZEF that is CAD currency hedged. The current yield is shown as 4.79%.
And if you like that line of thinking but want advice and a managed portfolio, here’s my review of ModernAdvisor. At the time of that post publication they offered over 10% exposure to each of developing market stocks and developing market bonds.
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