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Simple Low Cost Diversified Index ETF Portfolios 2015

This post was originally posted in 2008 but was recently updated (June 2015) to include the latest low cost index ETFs available to investors.

Diversified indexing seems to be all the rage these days. To be honest, I’ve really grown to appreciate the simplicity of index investing and have used this approach for a number of my own accounts.  More specifically, I use this for our family RESP, my wife’s RRSP and a portion of my own RRSP.

After doing some research, if I were to put together a diversified couch potato’ish passive index ETF portfolio, I would choose ETF’s with broad index coverage along with the lowest MER’s possible.

Here is what I came up with which happens to be very similar to the Canadian Capitalist sleepy portfolio:

The Diversified Low Cost ETF Portfolio (mix of CAD and USD)

Canadian Index XIC (CAD) or VCN (CAD) 0.10% or 0.11%
Total U.S Market VTI (USD) 0.05%
70% Europe, 30% Pacific VEA (USD) 0.09%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North America VWO (USD) 0.15%
Canadian Short Term Bond Index VSB (CAD) 0.15%

Update Sept 2013: For your international exposure, consider VXUS which also has some small cap coverage.  I like VXUS because has broad international exposure and has a low MER (0.14%), however, the drawback is that it includes some Canadian coverage (duplication).  VXUS would replace VEA and VWO above, reducing the total number of ETFs to 4.

Canadian Index XIC (CAD) or VCN (CAD) 0.10% or 0.11%
Total U.S Market VTI (USD) 0.05%
70% Europe, 30% Pacific VEA (USD) 0.09%
94.3% Emerging Markets, 5.3% Pacific, 0.20% North America VWO (USD) 0.15%
Total International Index VXUS(USD) 0.14%
Canadian Short Term Bond Index VSB (CAD) 0.15%

CAD only (non-hedged)  Diversified Low Cost ETF Portfolio

Canadian Index XIC (CAD) or VCN (CAD) 0.10% or 0.11%
Total U.S Market VUN XUU(CAD) 0.16 0.10%
International Index (MSCI EAFE) XEF (CAD) 0.22%
Emerging Markets Index VEE (CAD) 0.29%
Canadian Short Term Bond Index VSB (CAD) 0.15%

Update November 2014, I added this table as a lot of readers want to avoid the FX conversion from CAD to USD in order to purchase USD based ETFs.  Vanguard has a number of ETFs that are low cost, in CAD, and non-hedged (hedging is known to under perform over the long term).

Update January 2015, If you would like to simplify even further, you could replace VUN, VDU, VEE with iShares All Country World ex-Canada index ETF (XAW).  With a MER of 0.20%, you could reduce your portfolio to three ETFs and still maintain a reasonably low MER.

Simplest CAD only Diversified ETF Portfolio (only 3 ETFs)

Canadian Index XIC (CAD) or VCN (CAD) 0.10% or 0.11%
Total U.S Market VUN (CAD) 0.16%
Developed ex North America Index VDU (CAD) 0.26%
Emerging Markets Index VEE (CAD) 0.29%
All-World ex-Canada Index VXC XAW(CAD) 0.27 0.20%
Canadian Short Term Bond Index VSB (CAD) 0.15%

There are lots of ways to tweak the portfolio. I chose XIC over XIU because of the lower MER which is the same reason why I chose a combination of VEA and VWO instead of using VEU or XIN.

VTI, the total U.S market, is a steal in my opinion as it covers the whole U.S market without having to purchase separate funds for the Russell 2000, S&P 500, DJIA, and Nasdaq. If you’re looking for a higher potential return and willing to take on a bit more risk, you may want to purchase a U.S small cap ETF separately.

VSB, a Canadian short term bond index, was chosen because short term bonds are known to have lower correlation with the equity markets than long term bonds. Having a bond portion in the portfolio will reduce volatility while only slightly reducing potential returns. The bond portion will start out small (maybe non existent) in the early years, but increase in percentage as the portfolio gets closer to funding retirement.

But what about asset allocation (the percentage of each ETF)?  It really depends on how much you can tolerate volatility in your portfolio (some would define volatility as risk).  While the higher the bond % may slightly reduce the long term return of your portfolio, it will also dampen those big market corrections that are guaranteed to occur (remember 2008?).  As a rule of thumb, beginner investors who are a little more aggressive may want to start at a bond allocation at 25% of their portfolio and those a little more conservative 40%.  There are a number of “balanced” mutual funds that hold 40% bonds.  As another example, Canada Pension Plan, holds 30% bonds with a “retirement” timeline of 75 years.  Bond allocation typically increases with age to reduce the impact of a large market correction when you are withdrawing from your portfolio.

How does the portfolio look to you? What would be your picks for a diversified low cost ETF portfolio?

For those of you just starting out on your investing journey, you can see my list of discount brokers that offer commission free ETF transactions to further reduce your investing fees.

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 33 comments… add one }

  • Ruth April 11, 2011, 4:43 pm

    Amit: Thanks for the great information. I have one last question (for now!).

    Since pharmaceutical patents are expiring left and right, do you have any info on ETF’s that include those who are about to benefit the most, so: pharmacies, generics, medical/pharmaceutical wholesalers…

  • Amit April 11, 2011, 4:48 pm

    @Ruth: IHE, PJP, and XPH might be the best way to hedge against the patent expiration. Check out this article:- http://money.msn.com/business-news/article.aspx?feed=IVPL&date=20110224&id=13048616

  • Clay October 16, 2011, 12:23 am

    If you don’t like the MER of XRE just buy the index. It’s only 13 stocks!

  • Sean September 8, 2012, 3:19 am

    I’m relatively new to the million dollar journey site but I have thoroughly enjoyed reading through the discussion and recommendations of other investors. One thing I noticed is that the purpose of this article is for a low cost, diversified ETF portfolio and not to fault other investors out there but I see many of you who have portfolios that extend above 10 and even 15 ETF’s and comments have been made that this can be very costly to maintain on an annual basis due to all the brokerage fees and I completely agree.

    To give a little bit of background, I will start off by saying that I am by no means a professional when it comes to personal investment however I do try to take a simple, methodical approach. At the end of the day you have to factor in ALL costs and fees associated with trading to determine net portfolio gains and it’s easy to lose sight of that. KISS… remember that from grade 8 science? Keep it simple s*****. I’m 31 years old and just purchased my first home with my wife in the GTA. We managed to put 20% down to avoid high risk mortgage fees and as we currently stand today, we have over $150K equity in our home and just over $100K in our RSP.

    The breakdown and strategy is about as simple as it gets. Hold 4 ETF stocks and 3 TD eFunds at an annually expense of only $40. Is there a better way? Perhaps, but I also don’t have time to follow the daily movement, nor the need to deal with the added stress that market volatility can bring. Therefore my portfolio breakdown is as follows:

    40% – VCE – Vanguard Canadian Index (Canada)
    30% – VTI – Vanguard Total US Market Index (US)
    15% – VEU – Stable World Markets (in theory) (World)
    15% – VWO – Emerging Markets (World)

    Throughout the duration of the year I contribute my money to TD eFunds that carry no fees on a weekly basis. The purchase can be automated for each week to reap the benefit of dollar cost averaging.

    40% – TDB900 – Canada
    30% – TDB902 – US
    30% – TDB911 – World

    Every quarter or 6 months I make sure my ratios are still matched (40% Can, 30% US and 30% World) and then at the end of the year I make one set of trades to convert all the eFunds into their equivalent Vanguard funds. Tracking the ratios is as simple as downloading your portfolio from TD into CSV format and creating a quick pie chart for easy visibility. The simple reason that I chose Vanguard over iShares is that their funds all have lower MER’s than iShare equivalents.

    I’ve also noticed that many of you like to have bonds for fixed income. Since i’m not planning on using this money for another 20 years, we don’t mind all our money being in stocks. It’s slightly higher risk than bonds but when you’re dealing with ETF index funds, that’s about as low risk as it gets when trading stocks.

    As I mentioned, there are definitely other approaches but I find this is simple and works for me.


  • Elbyron November 24, 2014, 2:28 pm

    I’m surprised there’s been no mention of the fact that several discount brokerages offer free ETF purchases. Some only offer a specific subset of ETFs but Questrade and Virtual Brokers have all of them available to buy for free. Going back to sid’s comment earlier, this means you can invest monthly and not have to pay $9.99 per purchase. While you do still have to pay brokerage fees to sell the ETF shares, you probably won’t be doing that regularly, as you can usually manage the re-balancing by simply adding more to the underperformers. Since MERs on ETFS are lower than TD e-series, it’s definitely going to save you more than $10 per fund/ETF even if you’ve only got a few thousand to invest. Really the only reason I still recommend e-Series to my friends is because it’s a lot simpler to setup than getting a brokerage account and figuring out which ETFs to buy (though articles like this are a great help).

    FT, I believe you actually wrote about the free ETF trading a while back… maybe you could edit this article to include a link to it? http://www.milliondollarjourney.com/top-canadian-discount-brokerages-with-commission-free-etfs.htm

    • FrugalTrader FrugalTrader November 24, 2014, 2:43 pm

      Thanks for the feedback Elbyron, I will update the article.

  • Gail Bebee November 26, 2014, 12:03 am

    To my mind, this article misses a major ingredient in portfolio building.
    Asset allocation is one of the main factors in determining returns. it deserves more attention than MERs. What is your asset allocation?

  • SST November 27, 2014, 9:56 am

    @Gail — Ibbotson’s research found that asset allocation ultimately accounts for 100% of the absolute level of portfolio returns. Make of that what you will.

  • FrugalTrader FrugalTrader November 27, 2014, 10:39 am

    @Gail, thanks for stopping by and good point about asset allocation. I’ve written about bond allocation in the past which ultimately depends on the risk tolerance of the individual (for new investors, higher bond allocation theoretically equals lower volatility of your portfolio). We have about 10% bond allocation in our total investable assets. What about yourself?

  • SST November 27, 2014, 10:02 pm

    re: “…the risk tolerance of the individual (for new investors, higher bond allocation theoretically equals lower volatility of your portfolio).”

    Except that risk and volatility are not the same thing.

  • RealTonyYoung December 2, 2014, 11:45 pm

    Hey all, I’m relatively new to all this, but, I’m 33 and just starting out. I’m investing heavily into the equity market and not afraid of the risk – I’m in for the long haul. I use 25% equal weighting into each of VDY, VUS, TDB905, TDB638. What are people’s thoughts? Is there a better way? Everything I’ve been reading and researching is telling me to index, and low-MER ETF’s seem to be the way to go

  • Sampson December 3, 2014, 11:11 pm

    @ SST,

    Actually risk IS defined as portfolio variance (volatility) by the CFA institute.

    It is the true definition of risk in this context.

  • FrugalTrader FrugalTrader December 4, 2014, 9:48 am

    @RealTonyYoung, So you are using VDY as your Canadian exposoure, VUS for your US coverage, TDB905 (mer: 0.53%) for international, and TD638 (mer 2.88%) for your emerging markets. My opinion is that if you are already using ETFs, why not replace your mutual funds with equivalent ETFs?

  • Al December 4, 2014, 10:44 am


    I agree with SST despite the edicts coming out of the CFA Institute. Who cares about volatility if the business you are invested in is sound – wouldn’t you rather have a choppy and volatile 25% than a completely stready 5%?

    Why not go ask someone who actually runs a business, you’ll get a very different definition of risk. An, of course, stocks are fractions of businessess.

  • SST December 5, 2014, 10:41 am

    Volatility is the consistency of expected returns.

    It is not risk but a measurement of the effects of fundamentals, the source of most risk. Volatility always comes after the fact, thus it is not risk; at the very most it is tail-end risk.

    In this context — bond allocation — bonds have low volatility because there are few fundamental events which can put the expected return at risk.

    Then again, as one CFA article states, “it is impossible to operationally define risk. At best, we can operationally define our perception of risk. There is no true risk.”

  • Sampson December 5, 2014, 10:07 pm

    When constructing a portfolio, you do not believe in assessment of volatility as an important metric?

    For an individual investor building a ‘simple low cost diversified ETF portfolio’ and considering when monies from the portfolio will be harvested, volatility and sequence of returns risk are of predominant importance.

  • SST December 6, 2014, 10:10 pm

    As yet another CFA states, volatility is “not a measure of investment risk but a measure of behavioural risk.”

    We all have our biases. :)

  • Jozo December 30, 2014, 5:51 pm

    I am absolute beginner who is planning to invest some money into ETFs. I have small amount of money 5k. First I was thinking to go with TD e Series and than after doing some research I changed my mind due to low fees at Questrade and due to recognition that one day with more money available will be more beneficial for me to trade independently through some brokerage firm. I would honestly appreciate if somebody could specify some ETF portfolio which would be adequate for me to start.
    Thank you in advance.

  • Peter Saumur February 2, 2015, 12:16 am


    I’m assuming you are Canadian. You have choices but the biggest question is: are you saving for retirement (RRSP) or tax-free dividends (TFSA) ?

    With 5k, I would keep things simple and start your portfolio with a Tax-Free Savings Account and with Canadian ETFs.

    XIC a broad exposure ETF to Canadian market
    XBB as stable Canadian bond ETF

    And the twist:

    The new VXC ETF for exposure to all markets excluding Canada in one investment. Since it’s relatively young (a year?) it’s uncertain where it will go. Pays quarterly dividends are around $0.11 / share.


    I opted out since I had international investments in my RRSP and, instead, bought into EWU

    EWU is an ETF for the total UK market, which suffers none of the withholding tax issues you get with other nation ETFs in a TSFA. Currently rated 4 stars by Morningstar and has a Dividend Yield 7.59% and MER of 0.4%. It complements XIC nicely in that it diversifies into markets not covered in Canada (strong in Financials and Consumer Products).

    Your *aggressive* weighting (again I am assuming long-term and you are young) :D

    40% – XIC ($2000)
    40% – EWU ($2000)
    20% – XBB ($1000)

    This would be a very reasonable, simple to manage start to your investments.

  • Curt February 27, 2015, 1:35 pm

    I may be the only Canadian using ETFs as a part of my investment portfolio who did not appreciate the technical difference between “Global” and “International” exposure in ETFs and Mutual Funds. So far it has been a relatively inexpensive lesson and a bit of a frustration when attempting to use an online analysis and rebalancing tool. The tool classifies “Global” as Other and “International” as “International”. An excellent example is Vanguard’s VXC. The consequence is that the Canadian rebalancing tools only address the conventional distribution Fixed, Canadian, US, and International. I think the distinction between Int’l and Global and the implications can be significant if not understood by those of us learning as we go.

  • SST March 4, 2015, 12:55 am

    re: “Except that risk and volatility are not the same thing.” ~ SST

    “Actually risk IS defined as portfolio variance (volatility) by the CFA institute.” ~ Sampson

    “That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.” ~ Warren Buffett (2014 Letter to Shareholders)

    When the CFA Institute hits multi-billionaire status (or starts generating 1.8 million percent 50-yr returns), I’ll start listening. ;)

  • Evelyn March 26, 2015, 12:18 am

    I am considering to switch VXC and VSB into XAW and XQB to save MER for 0.03%. Please advise whether the new ETFs are good or not.

    • FrugalTrader FrugalTrader March 27, 2015, 3:15 pm

      @Evelyn, if you’ve already started a portfolio with vanguard products, then I probably wouldn’t switch unless your portfolio is very large. However, for someone just starting out, I like XAW and XQB. However, i’m thinking that it’s only a matter of time before Vanguard drops their prices to match.

  • John April 4, 2015, 7:29 pm

    I have been putting off rebalancing my non registered account because of possible tax implications.

    Today I called to and the agent thought that there was no issue with rebalancing from 1 index found to another, and that there should not be any taxes due…

    Can anyone confirm?

  • across April 27, 2015, 3:04 pm

    Why are you not concerned with liquidity and ease of trade? For example, XUU is so thinly traded. The spread is so wide compared to more popular XSP. So you lose a lot of value when buy in and sell. In the event of crash, you can’t even get out fast enough.

  • Ryan May 14, 2015, 11:55 pm

    This is my first post but have been reading million dollar journey very intensely for about 4 or 5 months now and have found this way of investing to be extremely exciting. It has really encouraged me to ramp up my savings. Putting a spare $1000 into a mutual fund was never all that exciting but transferring it into my brokerage account and putting in an order for some etf’s is just plain fun.

    My question is this: (but first a little background) I am using Questrade and using sleepy 5 etf portfolio very similar to those discussed above. I make regular contributions every month as well as some lump sum deposits throughout the year. Monthly contributions are currently $200/month (and could be significantly more if I gain the confidence to pull my contributions from my advisor and the mutual funds I purchase through him – as I said I’m less than 6 months into index investing). Being self employed in a seasonal industry, my income is also variable throughout the year so I make additional lump sum deposits of a few thousands dollars here and there as things allow. Okay, finally the question: how should I make my etf purchases (as part of the sleepy portfolio) throughout the year? I was thinking I would determine my desired asset allocation and then as cash is transferred into my account I would make the appropriate etf purchases to balance the desired asset allocation. In many cases the monthly contributions may not actually balance it (especially as it grows to a larger balance), but it would at least steer it in the right direction. This should remove the need to really re-balance it very often since it should be continually balanced, correct? Correct me if I’m wrong, but shouldn’t this also result in some dollar cost averaging too, since my regular purchases should be the “cheapest” of the etfs in the portfolio, relatively speaking?

    As I said, I’m very new to this and 6 months ago had never even heard of an etf or index investing whatsoever, so I would love any input or suggestions. Thanks in advance.

    • Le Barbu May 15, 2015, 9:19 am

      @Ryan, since you are self employed, I suggest to keep all your RRSP contributions in cash/equivalent until the limit date for yearly contribution. This mean you’re short only few weeks/year (depending of your tax filling/return). Forget the dollar averaging and buy/sell to rebalance, it’s trivial on the long run. Just buy the lagging asset to meet your goal.

      • Grant September 20, 2015, 9:49 am

        Le Barbu, I disagree. You should put the money on the market into the worst performing etf(s), (buy low), when you have it, not hold in cash. As the market goes up the majority of the time you incur opportunity cost if you hold in cash.

    • FrugalTrader FrugalTrader May 15, 2015, 2:50 pm

      Ryan, congrats on taking control of your finances. You could do as you say and simply use the new cash contributions to rebalance. Or you could build your cash balance and deploy semi-annually or annually. Another option is to actually sell a portion of your position to formally rebalance, but I would avoid that as it incurs commissions.

  • P June 26, 2015, 2:48 am

    I am just looking up these ETFs at morningstar.ca
    And many of them’s MER much higher than your data:
    XIC 0.1% Vs 0.05%

    VCN 0.11% Vs 0.05%

    VSB 0.15% Vs 0.1%

    Did they increase MER recently?

    • FrugalTrader FrugalTrader June 26, 2015, 8:53 am

      Hi P, upon further inspection, you are right. The vanguard products “management fee” is what I quoted, but the overall MER is what you quoted. I did not notice this before, perhaps it could be new?

  • Sam B July 8, 2015, 10:46 am

    Since Vanguard recently decided to include Canada in their VEA investment strategy, it became less of a good choice for diversification if you already own VCN. I moved to iShares’ IEFA instead, which excludes US and Canada, at a reasonable 0.12% MER.

  • Grant September 20, 2015, 9:43 am

    Nice article. I’m interested in your comment that short term bonds have a lower correlation to the stock market than long term bonds. I think that would depend on whether the crash was in an inflationary environment (more common), or a deflationary environment (like 2008). Could you refer me to a resource that discusses this issue? Thanks.

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