Portfolio construction can vary wildly in complexity. On one end, you have all-in-one asset allocation ETFs which provide a range of stock/bond allocations for investors of all risk tolerances. In the middle, you have elegant three-ETF portfolios like Dan Bortolotti's Canadian Couch Potato strategy.
On the other end of the spectrum, you have DIY investors who slice and dice their portfolio with five or more ETFs in order to pursue lower costs, overweigh certain geographies, or target specific sectors. A great way to find the right ETF for this purpose is via the NEO ETF Screener.
Today, I have a suggestion for a highly cost-effective, globally diversified portfolio of stocks and bonds that can be created by mixing and matching five index ETFs from Scotiabank (TSX:BNS). All five of these ETFs are listed on the NEO Exchange and are passively managed with rock-bottom expense ratios.
Goals for the portfolio
When constructing this portfolio, we need to keep three considerations in mind before we select and allocate our ETFs of choice:
- We want to ensure globally diversification across the U.S., internationally developed, and emerging markets based on market-cap weights.
- With that in mind, we also want to ensure a 20-30% overweight to Canadian equities, called a home-country bias. Historically, this has reduced volatility and currency risk, and improved tax-efficiency due to lower foreign withholding tax.
- On the bond side, we're opting to use Canadian aggregate bonds, which consist of federal/provincial government and investment-grade corporate bonds of an intermediate (5-8 year) average duration.
- Above all, we want to ensure that the ETFs we use are passively managed by following an index (no active management or "smart beta" ETFs) and charge low expense ratios.
The goal of this portfolio isn't to outperform the market. Rather, it's to capture most of the global market's average returns at a low cost. With consistent contributions and good investing habits, this portfolio is easily capable of funding a lucrative retirement.
Choosing our ETFs
As noted earlier, we will be using Scotiabank ETFs, but any provider with low-cost index ETFs would be suitable. Here's what I would personally use for an 80/20 stock/bond allocation. Clicking on each ETF will take you to a page where you can view their details.
- 40% in the Scotia US Equity Index Tracker ETF (NLB:SITU)(SITU).
- 15% in the Scotia Canadian Large Cap Equity Index Tracker ETF (NLB:SITC).
- 15% in the Scotia International Equity Index Tracker ETF (NLB:SITI)(SITI).
- 10% in the Scotia Emerging Markets Equity Index Tracker ETF (SITE).
- 20% in the Scotia Canadian Bond Index Tracker ETF (NLB:SITB) (SITB).
To make this portfolio more conservative, investors simply dial up the bond ETF allocation, or increase the allocation to spare cash. If you really want to get fancy, adding alternative ETFs could work as well, but make sure you're familiar with their risks and construction.
Now, these proportions are what I would prefer, which is to stick closely to world market-cap weights. Some investors may prefer to a certain geography, but keep in mind that this is a form of active management and can either pay off or backfire.
In the allocations I suggested, investors are looking at a weighted average expense ratio of around 0.13%, which is significantly cheaper compared to a comparable 80/20 asset allocation ETF like the Vanguard Growth ETF Portfolio (VGRO).
However, keep in mind that trading commissions and bid-ask spreads can quickly add to the implicit costs of managing this portfolio. To keep these to a minimum, consider using a zero-commission brokerage or portfolio rebalancing service like Passiv, and always setting limit orders.
This content was originally published by our partners at the Canadian ETF Marketplace.