Top ETFs and Model Portfolios for Canadian Investors

The investing landscape has certainly evolved for the better over the past two decades. Gone are the days when the only way to invest was to work with an expensive broker or mutual fund salesperson. Self-directed investing platforms, robo-advisors, and all-in-one ETFs have democratized investing – making it cheap and accessible for investors to build a portfolio at any age and stage.

Today, just as mutual funds dominated the investing scene in the 1990s, exchange-traded funds (ETFs) are exploding in popularity as investors flock to low cost passive investing products. The challenge for investors is to separate the wheat from the chaff. Indeed, according to the Canadian ETF Association (CETFA), there are now 780 ETFs offered by 36 ETF providers.

In this article, I’ll break out 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’ll take it one step further and show you one simple portfolio to get started with a self-directed index investing portfolio, and one more complicated version to help investors with larger portfolios save on fees.

Top ETFs for Canadian Investors

First, let’s sort out the top ETFs from that list of 780 funds. I’m going to stick with ETFs from the three largest ETF providers in Canada:

  1. BlackRock Canada: 130 ETFs and $68.1B in assets under management
  2. BMO Asset Management: 112 ETFs and $57.4B in assets under management
  3. Vanguard Canada: 40 ETFs and $22.8B in assets under management

I’m also going to screen out any ETFs that are actively managed or that focus on a specific sector (I’m looking at you, BetaPro Crude Oil 2x Daily Bull ETF).

Instead, we’re looking for ETFs that track as broad of an index as possible to give investors the ultimate diversification of global stocks and bonds. I’ve narrowed down the list to the top 20 ETFs on the market.

Canadian Equity ETFs

Each of these two ETFs offer exposure to approximately 200 of Canada’s top small, medium, and large companies for an ultra-low fee.

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

U.S. Equity ETFs

Each of these two ETFs offer exposure to the entire U.S. stock market by tracking the CRSP US Total Market Index.

  • iShares Core S&P US Total Market Index ETF (XUU)
  • Vanguard U.S. Total Market Index ETF (VUN)

International and Emerging Market ETFs

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

  • 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 U.S. equity, international equity, and emerging markets by choosing one of these two global equity ETFs (All World, ex Canada).

  • iShares Core MSCI All Country World ex Canada Index ETF (XAW)
  • Vanguard FTSE Global All Cap ex Canada Index ETF (VXC)

Bond ETFs

These popular Canadian bond ETFs give 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 all-in-one balanced ETFs that come in several different flavours depending on your 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 (Putting It All Together)

I’ve pulled out the top 20 ETFs, but that’s still a lot for investors to sort through 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 need to make trade-offs that include simple versus complex, low cost versus even lower cost, and automatic monitoring and rebalancing versus a more hands-on approach to portfolio construction.

The need for these trade-offs becomes more apparent as your portfolio grows over time.

One-Fund ETF Portfolio vs. 3-Fund ETF Portfolio

First, we’re going to look at an example of a young investor with an initial $10,000 to invest. We’ll assume the appropriate asset mix for this investor is a portfolio with 80 percent equities and 20 percent bonds.

Keep the process as simple as possible when you’re building an ETF portfolio. That means you should likely choose one of the asset allocation ETFs (one ETF solutions), such as iShares’ XGRO or Vanguard’s VGRO.

One-Fund ETF Portfolio ($10,000)

Ticker MER % Allocation $ Allocation $ Fee
XGRO 0.21% 100% $10,000  
Total 0.21% 100% $10,000 $21

 

The trade-off for a slightly higher fee is the simplicity of these products. They automatically adjust your allocation behind the scenes, so you don’t have to monitor or rebalance on your own.

Select a self-directed investing platform, fund your account, and then purchase the single ETF. It’s that easy.

I’d recommend choosing Questrade, which offers free ETF purchases, or Wealthsimple Trade, the mobile-only investing platform that offers zero-commission ETF trades.

Since you’ll likely be adding new money regularly, and likely in smaller amounts, a one-ETF solution is ideal to avoid having to tinker and rebalance your portfolio with every contribution.

As you can see by the model portfolio breakdowns for the more complex portfolios, you’d be tweaking each individual ETFs amount with every purchase to try and stay true to your original asset mix. 

Three-Fund ETF Portfolio ($10,000)

Ticker % MER % Allocation $ 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

 

That’s why I highly recommend a one-ETF solution for new investors who plan to invest a small amount to start, and want to add small, frequent contributions with every paycheque.

Adding Complexity to Save on Fees

When you’re first starting your investing journey it makes sense to value simplicity over fees. That’s because in the early stages of investing your savings rate and contributions will have much more of an impact than fees.

But when your portfolio grows to the six-figure range, perhaps even around $200,000, these extra costs can certainly add up. At this point it makes sense to add some complexity, such as unbundling a one-ETF solution in favour of adding some lower fee U.S. listed ETFs.

U.S.-listed ETFs come with lower MERs and less foreign withholding taxes. But they require you to invest using U.S. currency. Since it can be expensive to convert currency, investors perform a manoeuvre known as Norbert’s Gambit to convert CAD to USD and vice-versa.

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

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

One-Fund ETF Portfolio ($200,000)

Ticker MER % Allocation $ Allocation $ Fee
XGRO 0.21% 100% $200,000  
Total 0.21% 100% $200,000 $420

 

The one-ETF solution is still incredibly cheap compared to any mutual fund or actively managed portfolio.

But let’s show how low our costs can get when we dissect the portfolio into three ETFs.

Three-Fund ETF Portfolio ($200,000)

Ticker MER % Allocation $ 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’ll save $112 per year by using the three-ETF model portfolio.

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

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

Ticker MER % Allocation $ 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 low-fee solution our investor would save $240 per year by unbundling the one-ETF solution in favour of this five-ETF portfolio.

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

Two of the ETFs are U.S.-listed, meaning you’ll need a USD account and USD currency to purchase the funds. As mentioned, you’ll also need to perform the currency conversion move called Norbert’s Gambit to exchange CAD and USD and avoid currency conversion fees.

The extra tinkering, monitoring, and rebalancing may not be worth it for some investors (me included), but as your portfolio grows the cost savings may become too tempting to ignore.

Final thoughts

When you’re starting out with $5,000 or $10,000 to invest it doesn’t make a ton of sense to slice-and-dice your portfolio into a handful of different ETFs.

A one-ticket ETF is all you need at this stage while you build up your investment portfolio. Later on, as your portfolio grows and the fees start to creep up, then consider a more complex portfolio that can help you save on 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 start investing confidently in ETFs.

Decide on a model portfolio and an asset mix that’s suitable for your situation. Use a self-directed investing platform like Questrade or Wealthsimple Trade to save on transactional costs. Put your money to work regularly by setting up automatic contributions.

And, finally, stick to your investing plan through good times and bad. Passive investing through index ETFs is designed to deliver market returns, minus a small fee. That means your investment portfolio will go up and down with the direction of the market.

Over the long term, that risk has paid off handsomely.

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23 Comments

  1. LittleMountain on April 15, 2020 at 1:32 pm

    Thanks, Rob! This is an excellent and straight forward breakdown. For people who want to go “nuts”, there are always the model portfolios from Justin Bender.. 😉 But yours is an excellent introduction!

    One question I would have about buying US listed ETFs: everyone talks about fees to exchange $CAD to $USD (with or without Norbert’s Gambit), but no one really talks about the exchange rate between the two currencies. I remembers that about a decade ago, the exchange rate was 1:1 whereas nowadays, the Candian Dollar is down to roughly $0.70+ USD, so a significant drop.
    I usually stay with currency hedged ETFs, to avoid the “risk” of fluctuating exchange rates. Yes, there is the additional withholding tax, but this is on dividends only.

  2. Brien Stewart on April 15, 2020 at 4:36 pm

    What ETF’s do you recommend for someone who is looking for yield rather than growth?

    Thanks Rob, really enjoy your posts.

    • Robb Engen on April 15, 2020 at 10:43 pm

      Hi Brien, dividend ETFs (at least the more diversified ones) tend to come with a lower yield than most dividend investors are seeking.

      A more concentrated dividend ETF like Vanguard’s VDY (tracking 53 Canadian high dividend yield stocks) has a current yield 4.53%. And iShares CDZ (tracks 97 Canadian dividend aristocrats) has a yield of 5.29%. These yields sound attractive but keep in mind you’re investing in a small geographical region (Canada) and only its dividend paying stocks.

      Outside of Canada there’s VIDY which tracks the FTSE Developed ex North America High Dividend Yield Index and has a yield of 3.76%.

      In the U.S., there’s VGG which tracks the U.S. Dividend Appreciation Index. This one has a yield of just 1.31%.

  3. Rod on April 15, 2020 at 9:45 pm

    Hi Robb,

    I’m curious what your thoughts are on the size of portfolio that would warrant the greater complexity. In your 200k example, it’s $240 per year. I Know that it would vary by individual but was thinking that it might be worth it more once the fee savings approach $1k/year (so $800k+). If it’s just several hours more per year, that could be a good trade off.

    Thanks.

    • Robb Engen on April 15, 2020 at 10:55 pm

      Hi Rod, great question and one I’ve pondered myself. Take a look at this post where I asked PWL Capital’s Justin Bender this very question: https://www.canadianportfoliomanagerblog.com/when-should-i-dump-veqt-or-should-i/

      Keep in mind there’s an extra layer of costs at play here called foreign withholding taxes which can make the trade-off even more appealing at around the $200,000 mark.

      However, as Mr. Bender explains in that article, there’s also an extra layer of complexity from the currency conversion, PLUS, the potential opportunity cost of being underexposed to equities while your brokerage settles the currency conversion (TD, for instance, takes a few days to process the Gambit transaction).

      Note that some brokers, like RBC Direct Investing, allow you to implement the entire Norbert’s Gambit process in the same trading day, so choose your broker wisely if you go down this route.

  4. Charlie on April 16, 2020 at 5:02 am

    Hi Rob,
    Another great post. I’ve been a firm believer in balanced etf portfolios like the VBAL you’ve highlighted. In today’s environment, etf investing is so broad that we buy into the mediocre with the good investments that they track. I mean we know travel and hospitality will be hard hit for quite sometime. Why buy into a broad based fund when we know these types of companies will do poorly in the short term with many going bankrupt and closing for good?

    Also what are your thoughts on an older investor’s ideal portfolio when they’re 2-3 years out from retirement?
    Thanks

    • Robb Engen on April 16, 2020 at 8:00 am

      Hi Charlie, thanks! I don’t believe your investment strategy or allocation should change based on market conditions.

      Let’s unpack your comment about travel and hospitality. You say we know this industry will be hard hit for quite some time. In reality, we know this industry has been hit hard already.

      Stock prices at major hotel chains like Marriott and IHG dropped 55-60% but have since rebounded along with the latest market bounce and are “only” down 38-45% as of today. Airlines have been hit harder (majors like United and Delta are still down 60%).

      So, on the one hand, you want to make a portfolio decision to remove these companies now, but the damage has already been done. It also requires some incredible foresight to imagine a world 5-10-20 years from now where tourism is no longer a major driver of certain economies.

      On the other hand, the broad index also includes companies that are unexpectedly thriving in this environment.

      We’re all home and watching more Netflix than usual. Those of us working from home are using video conferencing software like Zoom. All of us, even those who are self-isolating, need groceries. U.S. grocery giant Kroger and Canadian conglomerate Loblaws have benefitted greatly. We’re ordering more online from Amazon (up 23% YTD). And, since we’re all washing our hands and disinfecting every surface regularly, companies like Clorox are cleaning up.

      The point of buying all the companies in the world with a broad-based index ETF is that we cannot predict which companies, industries, sectors, countries, or regions will perform well or poorly in the future. So we buy all of them to diversify and capture the collective gains.

      We have to avoid hindsight bias and understand that we could not have seen this coming – but the time we understood what was happening in the market all the known information had already been priced in.

      As far as an ideal portfolio for someone nearing retirement goes, I typically recommend building a safety buffer between your investments – such as one year’s worth of spending in cash, three-to-five years worth of spending in some sort of GIC ladder, and the remainder of your portfolio in a risk-appropriate mix of stocks and bonds (something like VBAL could certainly be a sensible option).

  5. Tom on April 16, 2020 at 5:06 am

    Hi Robb,
    Is there a “where used” site that can be used to look up what stock is used in ETF’s. Example: enter ticker RY and get a list of ETF’s (with %’s of holding) that include RY.
    I know it would only be accurate of time of look up and would fluctuate with time/re-balancing.
    Thanks.

    • Robb Engen on April 16, 2020 at 8:02 am

      Hi Tom, I’m afraid I don’t know of a site like this where you can find that information. If I come across something I’ll leave another reply here.

  6. Kevin on April 16, 2020 at 9:29 am

    Hi Robb,

    Really good post with great tips for beginner to start investing.

    Would you recommend for someone that is starting to invest (let’s say with $10,000 from your example) to sell his all-in-one ETF (VEQT for example) when he reaches that six-figure portfolio ($200,000 from your example) in a decade or two and buy different ETFs (as you recommended) to minimize MER?

    If yes, at what point would you recommend someone doing so? $100,000? $200,000?

    Thank you

    • Robb Engen on April 16, 2020 at 9:52 am

      Hi Kevin, thanks! So, I’m living this example myself and if you follow the link I shared in my reply to Rod you’ll see Justin Bender answer my question about sticking with VEQT or moving to a lower cost option.

      In his post he explains the trade-off between cost and simplicity. What I took from that is if you’re not the type of investor who will take the time to fully optimize his or her portfolio by performing Norbert’s Gambit, and moving to a discount broker who can process that manoeuvre in the same day (rather than taking 2-3 days), then you’re better off sticking with the one-ETF solution.

      Let me just say that the cost savings look great in an article or on a spreadsheet, but don’t underestimate the time and effort it takes to monitor and rebalance your portfolio.

      Remember, the day after you implement your portfolio markets will open and stocks and bonds will start moving around – throwing your portfolio off its original target mix.

      If you go this route I’d highly recommend developing a rebalancing strategy now that you pledge to stick to. This could mean either:

      – Rebalancing by % threshold – meaning whenever your asset mix drifts away from its original allocation by 5% then you’ll rebalance.
      – Rebalancing by date – meaning you commit to rebalancing quarterly, semi-annually, or at the very least annually.

      I would personally choose the % threshold, but either way it’s important to set up a rule now and stick to it so you take your emotions out of the process.

      PS – read some of the recent comments on that article I linked to above from some regretful Norbert’s Gambiteers.

  7. RichLife on April 16, 2020 at 7:15 pm

    Hi Rob,
    Im a newbie in investing. I just want to ask how do you compute the average/total MER if you have 3-fund or 5-fund etf portfolio? thank you!!

    • Robb Engen on April 16, 2020 at 11:05 pm

      Hi RichLife, no problem – here’s how to do it:

      Let’s say you have a portfolio worth $100,000 and it’s made up of 60% equities and 40% bonds. You’re using VAB for bonds, VCN for Canadian equities, and XAW for global equities.

      VAB’s cost is 0.09%. So you take the $40,000 that’s invested in VAB and multiply by 0.09% to get the total dollar cost = $36

      VCN’s cost is 0.06% and let’s say we have 20% of the portfolio invested in that ETF. $20,000 x 0.06% = $12

      XAW’s cost is 0.22% and it makes up the remaining 40% of your portfolio. $40,000 x 0.22% = $88.

      Now you add up the total dollar amounts of all three funds ($36 + $12 + $88 = $136) and then divide that by your total portfolio amount ($100,000).

      That gives you the weighted-average MER of your portfolio, which in this case is 0.136%.

      One mistake I see new investors make is adding up the MER of each fund to try and get a total cost (0.06 + 0.09 + 0.22 = 0.37%). But, as you can see from my example, it doesn’t work like that.

  8. Sam on April 16, 2020 at 10:02 pm

    Hi Robb,
    Great article (as usual). A few quick questions.

    -What does the “FTSE” part mean with the Vanguard ETFs?
    -Pardon my ignorance (I’m still confused about the Norbert Gambit stuff) but are there ETFs you can buy with Canadian currency that track US indexes (for example the S&P 500)? Investing on your own as a newbie can be challenging, so I want to keep it as simple as possible and deal with one currency (i.e. the one I get paid in, Canadian dollars).

    Thanks!!

    • Robb Engen on April 16, 2020 at 11:13 pm

      Hi Sam, thanks!

      FTSE is the Financial Times Stock Exchange (or the London Stock Exchange). It’s the index the Vanguard ETF is tracking.

      Yes, there are Canadian listed ETFs that track US and other world indexes. The ones I listed under U.S. equities and global equities are all Canadian listed ETFs that track foreign equities.

      I agree with your idea of wanting to keep things simple and invested in Canadian dollars.

      Where Norbert’s Gambit comes into play is when your portfolio reaches a certain size. U.S. listed ETFs are actually cheaper (lower MER) and avoid withholding taxes on foreign dividends (basically a 15% tax on foreign dividends), so sophisticated investors who want to lower their fees and avoid or reduce foreign withholding taxes use U.S. listed ETFs – but the catch is they have to set up a USD account at their brokerage and swap currency from CAD to USD and vice versa to purchase funds and rebalance. It’s not for everyone.

      Most investors should just stick with Canadian listed ETFs, and more specifically a one-ETF solution that takes care of rebalancing automatically.

  9. MacAl on April 17, 2020 at 9:03 am

    What great information!!

    Question from the perspective of a new investor, let’s use the same $10k initial investment example.

    During a crisis like we have now, where the markets are very volatile, and there is a tremendous amount of uncertainty about the future… would you still suggest they go to a single-ETF? Are the single-ETF holding-mixes changed when temporary opportunities or risks arise? (e.g. do they try to minimize the blow when the markets get hit, by changing their holdings?)

    Still new to this, but I’ve heard “buy low sell high”, and I think the buy low part is here/coming. 😉

    • Robb Engen on April 17, 2020 at 9:35 am

      Hi MacAl, thanks! There’s always uncertainty about the future (unless you have a crystal ball).

      Remember, these one-ticket ETFs are really a wrapper of 6-7 different ETFs that track different indexes around the world.

      They are not actively managed – they’re not changing their holdings based on market conditions.

      What they do, is maintain their target asset mix regularly by selling whichever of those ETFs have gone up and buying more of the ETFs that have gone down (rebalancing).

      This is all happening automatically behind the scenes so you don’t have to make any active decisions on when to rebalance your portfolio on your own (like you would if you were holding multiple ETFs in your own portfolio).

      Making active decisions with your investments sounds good in theory but doesn’t work so well in practice. The vast majority of actively managed mutual funds fail to beat their benchmark index each year. That’s why investors are better off just buying the index (globally) and accepting market returns minus a small fee.

  10. Sam on April 17, 2020 at 10:23 pm

    Hi Robb,
    Thank you for your response, I appreciate it. Please excuse my ignorance, but I don’t understand. For example, I want to buy the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) and keep things simple and dummy proof.

    1) This ETF tracks Canadian companies on the Toronto Stock Exchange with high yields.
    2) This ETF is traded on the Toronto Stock Exchange.

    How does the London Stock Exchange (The “FTSE” part) enter into the picture here if this ETF is tracking companies on the Toronto Stock Exchange and bought/sold on the Toronto Stock Exchange?

    Thanks in advance…

    • Robb Engen on April 18, 2020 at 9:56 am

      Hi Sam, sorry I should have been more clear about the role FTSE plays in regards to creating indexes for ETF providers like Vanguard to follow. This link explains it more clearly: https://www.vanguardcanada.ca/advisors/en/our-benchmarks/ftse-tab

      It shows that FTSE creates benchmark indexes, and Vanguard (along with other ETF providers) creates ETFs that track these various indexes to provide investors with options to choose from.

      Aside from FTSE, other groups like MSCI also create benchmark indexes for ETF providers to track.

      This has nothing to do with the exchange in which these ETFs are traded. You’d still buy VDY on the Canadian stock exchange (TSX). I hope that was more clear.

  11. Darby on April 18, 2020 at 12:24 pm

    When holding investments in different accounts – TFSA, RRSP and non-registered – would the same model portfolios be ideal for all types of accounts?
    I am wondering particularly about 6 figure non-registered accounts regarding withholding taxes on foreign investments, taxes on interest income from the bond component and also calculating the adjusted cost base.
    Could you comment on a model portfolio specifically for Cash Accounts with the assumption that the individual has only a Cash Account and a TFSF but no RRSP?

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