Exchange traded funds (ETFs) are likely the greatest advancement for investorkind. We can gain much-needed diversifcation and keep the fees super low. Compared to traditional actively managed mutual funds, ETFs are usually a 90% to 95% off sale. Over the decades this fee saving can amount to a life-changing event. But what if we go one step further and buy enough stocks to potentially replicate the index. Here’s how I bought stocks and left the ETF fees behind.
As always the following is not advice.
In most cases it might not make sense to sell an ETF to recreate the index. The fees can be next to nothing. An ETF such as XIC-T, which tracks the broad Canadian TSX Composite Index, offers investors an extremely low-cost way to gain diversified exposure to Canadian equities. With a Management Expense Ratio (MER) of just 0.06%, the fees are next to nothing. On a $100,000 portfolio, the annual cost is only $60.
ETF fees are peanuts
On a $500,000 portfolio the fees are just $300 per year. That’s peanuts. If you seek exposure to the broad Canadian stock market in cap-weighted form, XIC-T or similar is likely for you. Cap-weighted means that the largest companies, based on their market capitalization (total market value), receive the greatest weight in the index. For example, Royal Bank of Canada is one of the largest companies on the TSX by market capitalization, so it has one of the largest weights in the index. The larger a company becomes relative to the other companies in the index, the greater its influence on the index’s performance.
Related read: What is index investing?
Of course you can buy the markets for U.S. and International stocks in the same low-fee manner. For portfolio ideas check out the core global ETF portfolio models on Cut The Crap Investing. And as readers likely know, you can purchase an all-in-one global ETF portfolio at various risk levels. See the asset allocation ETF page.
In last week’s Sunday Reads we looked at the performance of the core ETF portfolios.
Buying stocks leaving ETF fees behind
Of course, it’s a personal decision whether to buy an index fund or gain exposure to the Canadian market by way of a stock portfolio. The good news? We can keep it simple. Canada’s bluest-of-blue-chip companies have a long history of delivering excellent returns—and often beating the broader market.
Most Canadian self-directed investors build their portfolios around Canadian stocks, then add U.S. and international exposure through ETFs. That’s exactly what I do. And that’s also why you might want to check out Wealth Club for Canadians. It’s a premium service focused on wealth creation, with specific Canadian stock portfolio models designed to help investors build and manage their own portfolios.
In my personal RRSP portfolio I created a version of a Canadian Wide Moat portfolio. It has a blue chip focus, but sticks to the wide moat sectors:
- Canadian financials
- Railways
- Grocers
- Broader utilities (including pipelines and telcos)
I shared this wide moat (out) performance example on Twitter / X …
Yes, please. Follow me on Twitter.
In my personal RRSP portfolio I held a concentrated portfolio of banks, pipelines and telcos. It’s somewhat close to the Essentials Portfolio that has a nice history of out performance.
Hanging up on the telco sector
In the utilities camp I held BCE-T and Telus T-T. As we know the telco sector fell on hard times. In early 2024 I mostly hung up on the telco sector. The rules changed and higher borrowing costs caused by rate increases piled on.
And while my Canadian banks has performed very well, I thought I should seek exposure to the greater Canadian Financials sector. So, I kept most of RBC-T and bought XFN-T, iShares S&P/TSX Capped Financials Index ETF. The fund mostly holds the big 6 Canadian banks, the insurers and Brookfield BN-T.
I have also been fortunate to hold Canadian oil and gas stocks from about 600% ago 😉 I also hold/held some gold and other inflation-fighting “stuff” such as PRA-T.
The “problem” is, XFN-T has an MER of 0.61%. We paying $610 on every $100,000. I’m not complaining. The ETF delivered a ‘quick’ 100% or more. RBC had even greater returns for the period. Yes, we’ve all be treated very well by our Canadian financials. They are even trouncing U.S. tech in recent years.
What stocks did I buy to remove ETF fees?
I bought the big 4 Canadian banks:
- TD Bank
- Scotiabank
- Bank of Montreal
- CIBC
Remember, I already held RBC.
I then bought the insurers.
- Sun Life
- Manulife
- Intact Financial
- Powercorp
Powercorp holds Great West Life and other assets including Wealthsimple.
There is certainly “enough stocks” to replicate the index, or perhaps best the index if the periphery non bank/insurers are a drag on returns. The banks and insurers are the bluest-of-the-blue-chip in the sector.
Here’s Dale’s index skims vs XFN-T, longer term.
The out performance is about 1.2% annual. The out performance increases modestly over the last several years, averaging above 1.5% annual. Here’s an annual snapshot.
Past performance does not guarantee future returns, but the big blue chip thing appears to work in the space. I’m not surprised.
Summmary: it’s easy to build a stock portfolio if you choose to go that route 😉
The banks are expensive
It’s true. After teaching the U.S. AI stocks a lesson in stock market performance, the Canadian banks are expensive. There’s greater value (potentially) with the insurers and oil and gas stocks. I use Canadian blue chip stock tables that include PE ratios at Wealth Club.
I will go over my approach/thoughts on stickhanding through expensive markets in Canada and the U.S. We will also cover these strategies on Wealth Club Group Zoom Calls.
Are you getting some cash back?
I shared this on Twitter / X. Check out the comments for how some readers/followers are getting the most out of their cash back and other points cards.
More Sunday Reads
At Findependence Hub Jonathan Chevreau offers a few good reads this week, including time for core plus bonds? And Canadian Kids picking up on their Parents’ Money Stress, new Vanguard Survey finds.
I did an extensive overhaul recently on why retirees hold bonds, cash and GICs.
Dividend Hawk takes a look at his portfolio for the week.
Stocktrades is on the Canadian Wide Moat and Essentials theme, taking a look and ranking the Canadian pipelines. I like what I see …
GenYMoney offers a very nice summary on travelling to Yellowstone National Park.
At Retirement Manifesto, the old man is knocking at the door. As I offered to Fritz, we do what we can to keep the ol’ man waiting as long as possible. Fritz is certainly aligned on that.
We have been building out the travel ideas and experiences in the online community at Retirement Club.
Thanks for reading. We’ll see you in the comment section. How are you buidling your Canadian stock portfolio?
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ETF Portfolios / Stock Portfolios / Retirement Strategies / Wealth Creation / Retirement Club
And check out Wealth Club, the premium stock portfolio and wealth building offering at Cut The Crap Investing.
Retirement Club
You can also join us at Retirement Club for Canadians. It’s most everything you need to DIY your retirement. The Retirement Club offering …
Earn a break on fees by way of of this Justwealth partnership link.
Here’s Canada’s top-performing Robo Advisor, Justwealth. You can get advice, planning and low-fee ETF portfolios all at one shop. Canadians can have it all. That’s a wonderful shop for retirees who want planning and low-fee portfolios. Of course, it’s a great option for those in the accumulation stage as well.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
Thanks for reading and watching. Have a great Sunday and week.
Dale
Hi,
I recently build a custom canadian growth index portfolio using wealthsimple custom index offering with a mer of 0.25% mer all companies are top quality around 70 names. Will share if i can only time can tell will see in 5 yr where I stand.
There’s an arithmetic point buried in your own numbers that’s worth sitting with. You left behind 0.61% and outperformed by 1.2% to 1.5%. So more than half
of what you gained had nothing to do with the fee — it came from which names you skimmed and how you weighted them.
Worth saying plainly for anyone reading this thinking of trying it. The MER is the visible cost and it’s certain. The price you pay for each holding is the invisible one, and it isn’t. On $100,000, 0.61% is $610 a year. Overpay by 20% on one name at 15% of the portfolio and that’s $3,000 gone in an afternoon — five years of the fee you were avoiding, spent in one purchase.
XFN is cap-weighted, so it holds the most of whatever has already run. Skimming
lets you weight by something else, and that’s the real opportunity in it — but
“something else” has to be a view about what each bank is worth, not just an equal split.
You’ve evidently done that part. I came to markets from property appraisal, so
my instinct is that the fee saving is the easy half, and the half that’s easy to measure.
How did you settle on the weights — equal across the skim, or sized by what you
thought each one was worth at the time?
The contrast between XIC’s tiny 0.06% fee and XFN’s 0.61% fee makes the case for owning individual stocks much more interesting. I’d be curious how the savings compare with the extra effort of monitoring and rebalancing the portfolio over time.