Off the top, keep in mind that the portfolios are not a recommendation, but perhaps a starting point. There are a few ways to skin the ETF model portfolio in Canada. That said, we’ll start with a look at the core building blocks of Canadian, US and International stocks. From there we’ll have a look at assets that investors may or may not add. We’ll investigate how that would have affected returns in 2019. Let’s have a look at the core ETF portfolios on Cut The Crap Investing.
Most investors will build around these core portfolio building blocks.
A Canadian investor has the option to build a Canadian dollar account. They also have the option to hold the US and International assets in US dollar accounts for the potential of lower fees and greater tax efficiency. We’ll look at some of those options and nuances.
Let’s have a look at the core large cap index returns for 2019. I’ll largely use the iShares offerings to benchmark returns. You may look to other major ETF providers for certain funds.
The following assets offered by iShares Canada are in Canadian dollars. The annual returns are shown, for 2019.
- Canadian stocks XIU – 21.72%
- US stocks XUU – 23.34%
- International stocks XEF – 16.15%
- Canadian bonds XBB – 6.83%
It was party time all over the world in 2019 when it came to investing in stocks.
Let’s have a look at some asset allocation examples and how that would have affected the returns. There was very little volatility to consider in 2019.
All Stock Portfolio
- 40% US XUU
- 40% Canadian XIU
- 20% International XEF
- Total returns = 21.25%
Balanced Growth Model
- 40% US XUU
- 25% Canadian XIU
- 10% International XEF
- 25% Canadian Bonds XBB
- Total returns = 18%
Balanced Model
- 30% US XUU
- 20% Canadian XIU
- 10% International XEF
- 40% Canadian Bonds XBB
- Total returns = 15.7%
Balanced Income Model
- 20% US XUU
- 10% Canadian XIU
- 10% International XEF
- 60% Canadian Bonds XBB
- Total returns = 12.5%
Stock to bond ratio summary
- 100% stocks = 21.25%
- 75% stocks = 18%
- 60% stocks = 15.7%
- 40% stocks = 12.5%
It was a fantastic year for the core ETF balanced portfolios. And of course it was an even better year for all equity models. Even the conservative Balanced Income Model was able to ‘squeak out’ 12.5%. That level of performance for a bond-centric portfolio is not the norm. And that’s very surprising given that we’re still in a very low yield environment. Of course the generous bond return was courtesy of the price movement.
Here’s how you might have done a little better.
S&P 500 equity funds out-performed the total market offerings. Keep in mind that XUU is a fund of funds that includes a slight allocation to US mid cap and US small cap. Those assets under-performed, again. As a comparison iShares S&P 500 Canadian dollar XUS delivered 24.19% in 2019. Currency hedge versions of the S&P 500 delivered in the 29% range.
The main benefit of US listed ETFs exists for RRSP accounts in that there are no withholding taxes on US dividends. When held in a taxable account you can have your accountant file for a tax credit. Mark Seed explains the what goes where in this post.
I would simply caution investors of allowing the tax tail to wag the portfolio dog. Risk and asset allocation might be greater considerations at times.
US Dollar S&P 500 …
- iShares US IVV – 31.25%
- Vanguard US VOO – 31.47%
- BMO ZSP.U – 30.88%
BMO Canada offers that US dollar version of the S&P 500. We see that it slightly under-performed the US-based rivals.
Keep in mind that the Canadian dollar listed funds of funds that hold US equities will give up those withholding taxes, even within an RRSP or taxable account. There are certainly benefits to stripping out your US assets and holding them in US dollar accounts. Of course you will introduce currency risk. You may decide to hold US stocks that are currency hedged and also hold non currency hedged funds.
The currency differential for Canadian vs US dollar in 2019 was 5.1% in favour of the Canadian dollar. The Canadian dollar fell almost 19% for the decade.
US and International bonds.
- XIG US Corporate CAD Hedged – 15.97%
- VGB – Global Ex US CAD Hedged – 6.32%
- VBU – US Aggregate CAD Hedged – 7.85%
- ZTL – BMO US long term treasuries – 8.62%
- ZTM – BMO US mid term treasuries – 1.99%
- TLT US Dollar long term treasuries- 24.97%
- IEF US Dollar mid term treasuries – 8.12%
Investors may choose to add US and international bonds to core ETF portfolios. A Canadian investor would have received a very slight boost with that US, Global core bond funds and some longer term US treasuries. There is the greater long term risk management advantage.
We also see the advantage of holding those US treasuries in US dollar accounts by way of that TLT and IEF from iShares. I will look into that sizable differential between the BMO Canadian US treasury products and the offerings from iShares US.
I’ve added some TLT in 2019. We are now protecting some US dollar stocks with those US dollar treasuries. That was outlined in this post on our recent portfolio moves. Those treasuries punch above their weight as risk managers. Arguably there is nothing better in the land of bonds.
Real Estate – REITS.
- XRE – 22%
- VRE – 21.25%
While I think that REITs can be considered as a core asset, they delivered in line with Canadian stocks in 2019. US REITs slightly under-performed the S&P 500 funds in 2019, but would have outperformed those total market US funds. Of course, it’s about the longer term potential of greater returns or the addition of a lesser-correlated asset to large cap stock funds.
Developing markets.
iShares XEC delivered 11.1% in 2019. There are many reasonable arguments to expect greater growth over longer periods, but that has not materialized in recent years or in 2019. Many of the all-world funds will include developing markets. That addition has offered a bit of a drag in recent years.
The Vanguard 2-fund benchmark.
- VCN Canada – 22.17%
- VXC Global Ex Canada – 20.28%
In a mix of 1/3 Canadian and 2/3 International = 20.9% total return.
iShares Global ex Canada delivered ‘only’ 19.37% in 2019.
Investors might investigate the core portfolios on Canadian Portfolio Manager. It’s an approach used successfully by Robb Engen of Boomer and Echo.
Thanks for having a read of the core ETF portfolios on Cut The Crap Investing – for 2019. How did your portfolio hold up? Hopefully this overview might shine a light on any potential opportunities or shortcomings.
It was another year in which very simple worked very well.
We’ll see you in the comment section. Don’t forget to follow this site; any sharing of posts is greatly appreciated. 🙂
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