How to Set Up (or review) A Diversified Low-Fee Investment Portfolio

How Canadians Can Construct a Low-Cost Diversified Investment Portfolio Using Exchange Traded Funds

This short article provides a specific portfolio of low-cost Exchange-Traded-Funds that can be used to almost instantly create a diversified portfolio. This can solve the problem of how to get started investing or how to achieve a diversified portfolio.

The information will also be useful in reviewing and making adjustments to an existing investment portfolio.

Before putting together an investment portfolio, you should first know something about where and how to get started investing including having a basic understanding of the main types of investments (“asset classes”) and the different types of advisers and do-it-yourself services. And if you are going to include individual stocks and bonds and Exchange-Traded-Funds (instead of or in addition to deposit accounts, Guaranteed Investment Certificates and mutual funds) then you need to have some knowledge of those investments.

We have two articles that cover the basics:

1. Where and How to Invest – Defines the major asset classes, discusses considerations in dividing investments across the major asset classes and across the world, discusses the types of advice available, and discusses active versus passive index investing.

2. How to Get Started Investing in Individual Stocks and ETFs – Discusses how to open a self-directed investment account, explains how investing in stocks differs from investing in mutual funds, explains how much money is needed to get started, and discusses the advice that is available.

For those who feel that they are ready to construct a basic investment portfolio using low-cost Exchange-Traded-Funds (or make changes to their existing portfolio), I have put together the following table.

This table is intended for Canadians who have already set up (or will set up) a self-directed investment account. For those who will stick with mutual funds the table may be useful to start a discussion with your advisor who should be able to do something similar with mutual funds.

A new investment portfolio could be very quickly set up using the following table as guidance. The appropriate allocations to each major asset category, the sub-categories and the regions of the world will differ greatly based on individual circumstances. I have provided some rough allocation percentage ranges that might be applicable to a “typical” investor but which may or may not be applicable to your particular circumstances.

Major Asset Class Sub-class Country Toronto Symbol Fee Current Yield Risk Typical Allocation Comment
CASH Actual cash in the investment account Canadian none none 0% no risk normally 5 to 15% There is no real substitute for cash in terms of lack of volatility and instant access when needed
Deposit accounts within the investment account Canadian Example TDB8150  none about 1% no risk
FIXED INCOME Guaranteed Investment Certificates Canadian  none  none  1.25% 1 year to 1.6% 5 year  very low     Normally 15 to 50% divided equally between short, medium and long term Short-term bonds could be used in place of GICs
Short term Bonds 1-5 years Canadian  XSB  0.11%  2.1% to maturity  very low
 Medium Term Bonds Canadian  XBB  0.11%  2.6%  low
 Long Term Bonds Canadian  XLB  0.20%  3.2%  medium Higher risk of loss in value if interest rates rise
      EQUITIES Canadian Common Canadian  XIC  0.06%  2.9%  high 10 to 40% Broad Toronto stock index
 U.S.A. Common United States  IVV (New York) or XSP hedged to Canadian dollars  0.04% or 0.11%  1.8% high  5 to 20% S&P 500, the largest American publicly traded companies
Rest of Developed  World Common Rest of World  VIU or VI hedged to Canadian dollars  0.23%  2.0%  high 0 to 15%
Preferred shares Canadian  CPD  0.51%  4.5%  medium 0 to 10% Consider using in taxable accounts in place of some fixed income
High dividend Canadian  VDY  0.22%  3.4%  medium 0 to 10%
 REIT Canadian  VRE  0.39%  4.0%  medium 0 to 10%  Consider using in non taxable accounts

There are hundreds of Exchange-Traded-Funds to choose from. The above table provides a possible basic diversified low cost Exchanged Traded Fund portfolio for Canadians. This approach implicitly trusts that markets are efficient and does not reflect any judgement regarding the relative attractiveness of any particular country or asset class or any judgement regarding the timing of when to invest.

In a separate article we have a broader list of Canadian ETFs and Global ETFs where we comment on attractiveness of each ETF at the time those articles were updated.

Dated September 27, 2017