I’m unable to highlight all the articles worth checking out in my weekly round up but you can check out the interesting columns I come across in my Twitter feed.

No post on Monday owing to Civic Holiday in Ontario. It promises to be another glorious summer weekend in Ottawa. Have a great weekend everyone.

Related Reading:

• This and That: Valentine’s Day edition
• This and That: Giveaway Edition
• Basics of Registered Education Savings Plans (RESP)
• This and That # 102
• This and That: Housing, Retirement and more…

This and That: Taxwiki, Credit card rewards and more… is brought to you by Canadian Capitalist — Helping you to invest & prosper.

Roger is the first to admit he’s no investing wizard. “I just figure if I throw enough stuff against the wall, some of it will stick.” What the Hunters have mastered is the art of saving. As soon as he started working full-time, Roger arranged automatic payroll deductions that, over the months, eventually bought him $10,000 worth of Canada Savings Bonds. Whenever his job required him to relocate, he took the moving allowance and put it in the bank. If he had a little extra cash, he called his bank and asked them to increase his mortgage payments.

Thanks to that attitude, the Hunters (whose names we’ve changed to protect their privacy) have saved more than $700,000 in their investment accounts. They paid off the mortgage on their $300,000 house in nine years, and own two rental properties, a tract of land and a motor home, with a combined value of more than $400,000. All this despite never earning a $100,000 income, until they hit that milestone last year.

When the Barenaked Ladies wrote their classic song about being rich, they didn’t call it “If I Had an Ample Nest Egg.” There’s no TV game show called “Who Wants Several Hundred Grand?” In the first Austin Powers movie, Dr. Evil didn’t obtain a nuclear warhead and hold the world ransom for 70% of his pre-retirement income. No, in our culture, the number that symbolizes real wealth is still a cool million. “I think I’ll need a million and a half to retire,” says Hunter. The couple is already there in terms of net worth, and they should have a seven-figure investment portfolio well before Roger hits 50.

At MoneySense, we’ve received many letters and emails from middle-class readers like the Hunters who have saved a million, so we thought we’d help you figure out if you could do it, too. We’re not going to pretend it’s easy—it requires a steady income, a commitment to saving, short-term sacrifices, and a smart investment strategy—but if Roger can do it, so can you. Joining the ranks of the millionaires may be a more realistic goal than you think.

Saving grace
The first secret to saving a million dollars isn’t a secret at all: spend less than you earn, then save and invest the difference. “That is so dirt simple,” says David Christianson, a financial planner and portfolio manager with Wellington West Total Wealth Management in Winnipeg. “But I work with people who have accumulated significant net worth, and most of them have accumulated it by using that formula.”

The percentage of your income you need to save depends on how much you earn, how many years you have before retirement, and what kind of return you expect on your investments. As a rule of thumb, Gail Vaz-Oxlade, financial author and host of ’Til Debt Do Us Part, says that people who start saving in their twenties can assure themselves a comfortable retirement by setting aside just 6% of their net (after-tax) income. For someone whose take-home pay is $50,000, that’s an RRSP contribution of about $250 a month.

If your heart is set on saving a million, however, you’ll likely have to sock away more: On the opposite page we’ve created a Model Millionaire and figured out how much he needs to save each year. We found that about 10% of his middle-class income should do it, if he wants to hit seven figures by age 65. That means in his thirties and forties, he’d have to save $300 to $500 a month. That’s a challenge for someone earning $50,000 or $60,000, paying off a house and raising children. But remember the part where we said this wasn’t going to be a breeze?

You can make it easier by setting up an automatic RRSP contribution on payday so you don’t have a chance to spend your savings. “Pay yourself first” has been a mantra for decades—because it works. Most people never get behind on their income taxes, mortgages or car loans because they never see the money earmarked for those purposes. Make your savings a fixed expense, too, and you’ll be well on your way to saving a million.

Living on less
When Thomas Stanley and William Danko wrote The Millionaire Next Door, they set out to examine the lifestyles of the wealthy. What they learned surprised them: the people who wore expensive suits, drove flashy cars and drank fine wine had high incomes, but they weren’t necessarily wealthy. Most of the millionaires they studied, by contrast, dressed casually, drove Chevrolets and drank Budweiser. The authors summed up their observation simply: “Wealth is what you accumulate, not what you spend.”

The lesson here is that if you want to become a millionaire without a huge income, you’re not going to look like a millionaire. The Hunters are perfect examples: Roger is pretty sure his soccer teammates have little idea what he’s worth. People who save 10% of their net income aren’t typically paying $800 a month to lease an SUV, nor are they eating in restaurants three times a week. They buy what they need, and they recognize good value, but they don’t indulge every desire. This frugality comes naturally to the Hunters, but there’s hope for anyone who is truly committed to their financial goals, says Vaz-Oxlade. “There is no question that some people are born savers. However, I have gotten too many letters from too many people who were spend-crazy and who have subsequently seen the light. It’s all about prioritizing.”

One of the biggest barriers to saving a million-dollar portfolio is the priority we put on our homes. According to RBC Economics Research, owning a two-storey home costs the average Canadian household more than 46% of their pre-tax income. If you’re pouring that much into your house for 25 years or more, your chance of saving a million is vanishingly small. The goal becomes realistic, however, if you buy a home you can afford to pay off in 15 years. Once the mortgage is gone, you can redirect the payments to your RRSP and see your portfolio suddenly jump to life. (We cost out this scenario in “The Late-Blooming Millionaire,” below.)

Get time on your side
There’s no question that starting early is a huge advantage. Any online savings calculator will show that you can save a million by tucking away just $500 a month if you have 40 years to do it (assuming a 6% return). Unfortunately, life isn’t as simple as a savings calculator. “Those linear graphs that show how to achieve $1 million don’t match the human life cycle,” says Neil Murphy, a financial planner with Weigh House Investment Services in Toronto. “Your cash flow doesn’t match that. The people who are aggressively saving are usually a bit older, their kids are gone, they’re hitting their stride income-wise and their expenses are going down. But I doubt that many of them were doing massive savings in their twenties.”

If you live below your means when you’re young, concentrating on paying down debt rather than buying expensive toys, you’ll likely have little trouble applying that same discipline to retirement savings as you get older. Once you’re mortgage-free and your kids have moved out, you may well be able to save 30% or 40% of your net income during the last 15 years of your working career. But if you’re spending more than you make and continually refinancing your home to bail you out, you’re not going to suddenly morph into a super saver at age 50.

The slow-and-steady road to a million puts compounding on your side, but it does have one psychological pitfall: the finish line can seem so far away. Our Model Millionaire on page 68 starts saving 10% of his net income at 25, and two decades later his nest egg has grown to just $212,000. He’s halfway through his 40-year savings plan, and yet and he’s barely a fifth of the way to his goal. That can be awfully discouraging if you don’t understand the nature of compounding: most of the benefit comes near the end. For instance, our investor’s portfolio took 20 years to grow from zero to $212,000, but it will double in just eight more years. By the time it reaches half a million at age 55, a 6% return will be spinning off $30,000 of growth annually. That’s more than our hard-working saver contributed during his first six years.

The tipping point comes when the dollar value of your portfolio’s annual return exceeds the amount you’re contributing. At 35 years old, three-fifths of our Model Millionaire’s portfolio growth comes from contributions. Just five years later, however, the portfolio has grown to more than $115,000 and everything has changed. His portfolio’s return is now adding more to his savings every year than his contributions. Once your portfolio is working harder than you are, your goal will feel a lot closer.

Keeping more for yourself
The final piece in your million-dollar puzzle is the right investment plan. It’s possible for extreme savers and top-tier earners to amass a fortune in savings accounts and GICs. But if you’re planning to hit seven digits by saving 10% of a modest income, you’re going to need help from the markets.

Your first step is to check your expectations: if your map to a million includes 8% or 9% returns every year, you’re likely to be disappointed. True, the markets have returned more than that historically: during the 25 years ending in 2007, even T-Bills averaged almost 7%, while bonds returned close to 11% and stocks almost 12%. But that included periods of double-digit inflation and steadily declining interest rates, two things we’re not likely to see in the decade ahead. Neil Murphy says that high costs and bad decisions—things like chasing hot funds or panicking during market crashes—doom most investors to subpar returns. When he makes projections for his clients, he uses a 5% to 6% expected return for a portfolio of half equities and half bonds.

One of the best ways to conquer the one-two punch of high fees and self-destructive behaviour is to adopt the Couch Potato investment strategy. Low-cost index funds or exchange-traded funds (ETFs) are the best way to capture your fair share of the returns the markets deliver. A Couch Potato portfolio can easily cost less than 0.5% a year in fees if you manage it yourself in a discount brokerage account.

Have no illusions here: fees can destroy your returns and easily derail your million-dollar journey. Canadians pay some of the highest investing costs in the world: annual fees of 2% to 3% aren’t unusual. If our Model Millionaire has his annualized return reduced from 6% to 4% because of mutual fund expenses or other fees, he’ll fall well short of his million-dollar goal with just $672,000. Ask yourself whether it makes sense to put up all of the capital and assume all of the risk, while reaping only two-thirds of the return. If you don’t end up being a millionaire, you can be sure your investment adviser will.

The million-dollar question
We hope we’ve shown you that saving a million bucks is a realistic goal for disciplined investors with a good (though not enormous) income, and several decades to make it happen. The question you need to ask yourself now is more introspective: is it worth it? Like any sacrifice, your long-term savings plan should be done with a higher purpose. Your ultimate goal, after all, is supposed to be happiness.

A funny thing can happen on the way to the Millionaire’s Club. People who spend their whole lives scrimping and saving suddenly find themselves having to draw down their portfolio when they retire, and it doesn’t come naturally. “I would bet that for 25% of our clients each year, our job is helping convince them that they can spend more money,” says Christianson. “People who are good at saving often have trouble letting go.”

Living frugally, paying off your debt and saving for retirement should be everyone’s financial goal. But if you’re turned off by the idea of scrimping for decades just so you can call yourself a millionaire, that’s fine. “Don’t start with the end result, start with the process,” says Vaz-Oxlade. “It’s less about a magic number and more about you deciding where you want to be, where you are now, and how you are going to close the gap.”

Now there’s advice that’s worth a million bucks.

The model millionaire

Like a robot programmed to save, you contribute 10% of your net (after tax) income to your RRSP fromage 25 until age 65, and you turbocharge your savings by reinvesting your RRSP tax refund every year. You’re comfortable with a balanced portfolio of stocks and bonds designed to achieve an annualized return of 6%.

The super-safe saver

You can’t get a return of 6% without risk. If you’re the ultraconservative type of sticks to GICs and other safe investments, you may have to save a quarter of your net income to retire a millionaire. Here we assume you’re maxing out your RRSP every year, so your annual contribution is 18% of earned income to a maximum of $22,000. (Since you’re using up all your RRSP contribution room, you can’t reinvest the tax refund.) We assume a low-risk annualized return of 3.5%

This week I received an email from a reader of MoneySense magazine, where I write regularly about the Couch Potato strategy. Kate was concerned that index investing wasn’t delivering on its promises. With her her permission, I’d like to share her email and my response to her concerns, which I’m sure others share.

It’s important for new index investors to understand that the strategy guarantees simplicity and low fees, but it’s still at the mercy of Mr. Market. It’s also another reminder that ETFs may not be appropriate for small portfolios.

Dear Dan,

I have a financial advisor who oversees my investments. I was shocked to read in your articles about how much commissions and fees add up over the years. I am not financially savvy and have left it up to my advisor to deal with my investments, and I have been disappointed in how little they have grown.

Then I read an article about the Couch Potato strategy in the February/March 2007 issue of MoneySense and wanted to give it a try.  I took $10,000 and invested it in the High-Growth Couch Potato portfolio. I invested 25% in each of the following:

iShares &P/TSX Capped Composite (XIC)
iShares S&P 500 CAD-hedged (XSP)
iShares MSCI EAFE CAD-hedged (XIN)
iShares DEX Universe Bond (XBB)

As indicated in the article, I have rebalanced once a year, but I am finding that I have not made any gains. My $10,000 is now at $9,058.20. I had read that gains were steady with the Couch Potato strategy but do not see that with my portfolio.

So, my question to you is, am I in the right investments? Do I just need to wait it out longer and keep rebalancing each year? Do I need more than $10,000 in the portfolio to make it worthwhile?

It’s hard to blame Kate for her frustration. The article she refers to included stats that showed the Classic Couch Potato portfolio would have had an annualized returns of 11.8% from 1976 through 2006. Here’s how I answered:

Dear Kate,

I’m sorry to hear that you have had a negative experience with the Couch Potato strategy.

It’s important to understand how the strategy works and what it is designed to do. You write that “I had read that gains were steady with the Couch Potato strategy,” but this is not something we would have ever written in MoneySense, because it’s not true. The only investments that provide steady gains are savings accounts and GICs.

The Couch Potato strategy is designed to deliver the same returns as the overall stock and bond markets, minus very small costs. Index funds and ETFs offer no protection from a falling market. The only thing they promise is that your gains or losses will not be significantly different from the indexes, and that you won’t be losing 2% or more each year in fees. The funds your advisor uses will sometimes lose less or gain more than the indexes. But over the long term this is unlikely to continue, because the drag caused by fees is relentless.

You mentioned that you got started with the Couch Potato strategy in mid-2007. Through no fault of your own, this turned out to be terrible timing. Stocks markets around the world saw huge gains between 2003 and 2006, and mid-2007 was the peak of that long bull market. So you had the bad luck of buying when prices were highest. Things immediately got worse in the second half of 2007, and then 2008-09 saw the worst crash since the Great Depression.

Just about everyone who had money in the markets—and your portfolio was 75% stocks—lost money during this period. The Canadian, US and international markets are still lower than they were in 2007, so the ETFs that track them are down, too.

You also asked whether you need more than $10,000 in the portfolio to make it worthwhile. In some ways, the answer is yes. Using ETFs and rebalancing once a year is inefficient with small accounts. Many discount brokerages charge $29 per trade, so the cost of rebalancing is about $116, or 1.16% annually on a $10,000 portfolio. Of the $950 you have lost in your portfolio, more than a third would have been from brokerage commissions if you have done three rebalances (12 trades at $29 = $348).

If you decide to stick with ETFs, you might consider rebalancing only every two years (or even less) to reduce the costs. But you may even want to think about index mutual funds instead. These two articles offer detailed suggestions for using the Couch Potato strategy in a small portfolio:

Become a Couch Potato Investor With Less Than $5,000

Should You Use Index Funds or ETFs?

Even if we ignore the elephant in the room — the obvious risk that CRA would subject any tax avoidance scheme to extra scrutiny — a scheme with a long history already exists that allows taxpayers to save (up to) 100 percent of their income tax. It is called flow-through shares (FTS) and it allows certain corporations involved in mining, oil and gas, renewable energy and energy conservation sectors to transfer exploration and development expenses to investors in return for equity investments. The investors are allowed to deduct the renounced exploration expense from their income.

If saving on income taxes are the main goal, FTS provide a much less risky way to do so. However, FTS are not without investment risks as I pointed out in this earlier post (See Comment on Flow-Through Funds, 26 March 2007).

Related Reading:

• Beware of tax shelter donation arrangements
• Comment on Flow-Through Funds
• Good bye Flow-Through Funds, Hello Royalties
• This and That: Surviving the Crunch
• Avoid Flow-Through Limited Partnerships

A scheme to save 100 percent of income tax? No thanks is brought to you by Canadian Capitalist — Helping you to invest & prosper.

In a long-running rebate on the merits of Group RESP plans, a remark by a commenter touched a nerve:

To work with mutual funds or stocks, parents need to know what they are doing. This takes a lot of time and planning. I am too busy for that.

As you can imagine, I am not very sympathetic to the argument. If you are like me, you are exchanging eight hours of your precious time every weekday for a pay check and you owe it to yourself and your family to be an effective steward of your money. The reality of modern life is that, financially, we are on our own. Our retirement, our kids’ education and our general financial well being depends on how well we look after our money.

To become a successful investor, you should lay a strong foundation by taking the time to read a few good books. After that, you only need a few hours to devise an asset allocation, invest accordingly and spend about fifteen minutes every year to rebalance your portfolio.

If you have worked your way through my recommended books, you don’t have to sacrifice your leisure hours (unless you buy individual stocks or write a blog) to constantly keep up. Over the years, I’ve learnt both from reading and from experience that there are only a handful of rules for being a successful investor:

1. Don’t take stupid risks.
2. Diversify.
3. Minimize expenses and taxes.
4. Don’t trade too much.

That’s all there is to investing. Now, you can get on with gardening or photography or whatever with the confidence that you will do better than the vast majority of investors who are busy chasing the latest hot tip they heard on Market Call.

Related Reading:

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From the archives: Give Yourself a (Financial) Education is brought to you by Canadian Capitalist — Helping you to invest & prosper.

But while the home of Big Ben and Buckingham Palace has rarely been synonymous with value, the times they are a’ changing. Added to historically low exchange rates — around 0.65 at time of writing, a near 25% rise over last summer — there’s been a staycation surge among cash-strapped Brits that’s cultivated a new emphasis on great local deals.

For visitors, like me, who’ve been opening their wallets and heading to the U.K. for two decades, this is suddenly the year to hit London without breaking the bank.

But first you have to get there. Summer flights to Heathrow trigger Air Canada’s highest prices, ranging up to $1,400 return (including taxes) from Toronto. It’s a similar story on British Airways and other major airlines. And although most offer seat sales — sign-up online for their email announcements — don’t expect peak prices to drop much. Instead, after scanning potential deals on Expedia.ca and Travelocity.ca, consider Air Transat and Thomas Cook Airlines. Landing mainly at Gatwick, they are typically $200 to $400 cheaper than the big boys, saving you enough for a memorable London night out. And if you fancy a value-added side trip, try Icelandair. Their Heathrow-bound summer flights are usually around $1,200 return (with taxes), but they include an optional stopover in Reykjavik, where your dollar also stretches further than ever this year.

Unlike Iceland, however, London is a sleepover minefield where it’s easy to overpay for lame accommodation. To keep the cost in check, try the trendy Hoxton Hotel or Kensington’s base2stay, where the mod rooms have handy mini-kitchens. For even better rates, check the chains: cut-throat rivals Premier Inn and Travelodge offer clean but spartan rooms across the capital. Their websites stage frequent price wars, but you can expect summer nightly rates around $100. Premier Inn County Hall is recommended for its central location.

Shopping around on Hotels.com or Priceline.co.uk can also deliver discounts, but consider self-catering apartments as well: they offer built-in value, since the money saved on not always eating out can be considerable. Among my favourites is the elegant 51 Kensington Court, handily located near London’s giant Wholefoods grocery store. For a budget alternative, the University of Westminster has student-style kitchenette flats.

Dine-out costs will still be a major part of your London budget, but by copying the locals you can also add a side-dish of value. The thrifty $5 sandwich-drink-and-chips deal offered by Boots drugstore outlets is ideal for impromptu park picnics. But for a sit-down treat try Soho’s Arbutus restaurant, which specializes in modern British cuisine. Its fix-prix three-course lunch is around $25 ($28 for dinner). For similar fare, Inn the Park near Buckingham Palace is recommended.

London’s pubs can also provide good dine-out value. The ubiquitous JD Wetherspoon bar chain chefs up budget breakfasts and two-for-one meal deals, but I prefer the smaller Nicholson’s group. This summer, their traditional pubs — try the Cambridge on Charing Cross Road — are offering sausage or pie with mash plus a cask ale for £7.95 (around $12 Canadian) every Thursday. Most pub meals are under $15 and among my summertime favourites are Holborn’s Seven Stars and Southwark’s Anchor, with its Thames-view patio.

Since you’re not just here to eat and drink, you’ll also want to hit the city’s rich layer of attractions. Accessing the extensive bus-and-underground transit network — buy a seven-day one-to-six-zone Travelcard — consider pricey-but-popular sites like the London Eye (adult ticket $27) or Tower of London (adult ticket $26). Then emulate savvy Londoners by taking full advantage of the available freebies. Major museums and galleries here are admission-free, with many offering gratis value-added extras.

The giant, antiquity-lined British Museum hosts monthly late-opening events with free live music and performances, as does the Tate Modern, Natural History Museum and the Victoria & Albert Museum. The V&A and National Gallery also offer free daily tours of their artsy collections, with the latter staging additional weekly music recitals in its exhibition rooms. Check their website calendar — or www.lates.org — for upcoming events.

Don’t just rely on the big institutions to keep you entertained. London is stuffed with lesser-known small attractions that can add to your trip while ensuring you get full value from your transit pass. My road-tested recommendations include the Geffrye Museum, Museum in Docklands, Whitechapel Bell Foundry, Old Operating Theatre, Dr. Johnson’s House and the Fuller’s Brewery tour, where your $15 ticket includes generous samples.

Finally, you might also want to add a show or two to your London visit. Check the latest offers at www.lastminute.com or drop by Leicester Square’s official Half Price Theatre Booth to see what’s available on the day. Alternatively, download free tickets for BBC radio and TV recordings before you leave home via www.bbc.co.uk/tickets. Sliding into your auditorium seat in London, you’ll feel just like an in-the-know local.

British-born Vancouver writer John Lee hits the U.K. twice a year. Follow his travels at www.johnleewriter.com.

London on sale: Two sample budgets for two

7 days on $4,000 Return airfare (Toronto-Gatwick): $1,900 (Air Transat)
Double-occupancy hotel room for six nights: $1,250 (base2stay)
Food and drink: $800
Transport: $72.75 (7-day anytime 1-6 zone Travelcard)

7 days on $6,000

Return airfare (Toronto-Heathrow): $2,300 (Icelandair)
Double-occupancy large studio apartment for six nights: $1,825 (51 Kensington Court)
Food and drink: $1,200
Transport: $72.75 (7-day anytime 1-6 zone Travelcard)
Entertainment: $600

(All sample rates accurate as of May 21, 2010)

Top value dining spots

Arbutus

Inn the Park

JD Wetherspoon

Nicholson’s

Seven Stars (53 Carey Street, Holborn)

Anchor (34 Park Street, Southwark)

Top value sleepovers

base2stay

Hoxton Hotel

Travelodge

Premier Inn

51 Kensington Court

University of Westminster

If you are already have an eligible Scotiabank chequing account, the Let the Savings Begin campaign allows you to earn a bonus of 10% on savings that you accumulate over a 16 month period between July 5, 2010 and October 31, 2011. The maximum bonus amount is $150. The savings should me made through a combination of at least two of the following:

• Bank the Rest program that automatically rounds up every purchase made using a Scotia debit card to the next multiple of $1 or $5 and the sweeps the difference between the purchase total and the round up amount to a Scotia Money Master Savings Account.
• Scotia Momentum Visa card that earns a 2% cash back on eligible gas, grocery and drug store purchases and a 1% cash back on all other eligible purchases.
• A new or additional automatic transfer of at least $50 into a savings or investment account.

If I were a Scotia customer, the easiest way to earn the $150 bonus would be to sign up for a pre-authorized contribution (PAC) deposited into the Money Master account, which normally pays a pitiful 0.15% interest on balances below $5,000 and one of the other programs. The actual PAC amount would depend on the estimated savings from the other program. You can find the terms and conditions of the savings bonus here.

Related Reading:

• ‘Simply Save’ with TD Bank
• High-Interest Savings Accounts Revisited
• CBC Show on Credit Cards
• High Interest Savings Accounts at Discount Brokers
• This and That

Scotiabank’s Let the Savings Begin Bonus is brought to you by Canadian Capitalist — Helping you to invest & prosper.

This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.

The funds: The Claymore Balanced Growth CorePortfolio ETF (CBN) and Claymore Balanced Income CorePortfolio ETF (CBD), a pair of ETF wraps made up of equity, fixed-income and commodity ETFs and designed to serve as complete portfolios.

The indexes: Both ETFs track versions of the Sabrient Global Balanced Index, a custom benchmark created for Claymore. The index “comprises a mixture of approximately 10-20 (or more) existing ETFs selected, based on investment and other criteria, from a defined set of exchange-traded funds trading on the Toronto Stock Exchange.”

There are Growth and Income versions of the index, each specifying a range for each asset class. For example, in the Growth index, Canadian, US and international equity must all make up 15% to 20% of the portfolio. The Income index must include 20% to 25% government bonds and 17.5% to 22.5% Canadian dividend stocks.

According to the funds’ literature, “weightings are adjusted and rebalanced quarterly to the optimal asset class mix depending on economic conditions and relative value of income and equity securities.” Translation: the fund uses tactical asset allocation, albeit based on quantitative rules and not a manager’s own forecasts.

The cost: The management fee for each ETF is 0.25%, but this does not include the cost of the underlying ETFs. Once you add these fees, plus HST, the full MER of the CorePortfolios becomes about 0.70 to 0.75%. This large discrepancy between management fee and MER is not at all obvious: you have to look in the Management Reports of Fund Performance, available at Sedar.

What’s more, the cost of CBD is misrepresented in the filings. As an eagle-eyed reader point out, the stated MER is 0.47%, but if you add up the fees of the underlying ETFs, that doesn’t compute. An email to Claymore confirmed that our reader was correct, and the true cost is approximately 0.70% plus HST. That’s still low, but it’s worrisome to see fees stated incorrectly in regulatory documents.

The CorePortfolios are also available through advisors—indeed, more than 40% of their assets are in “advisor class” shares, which add an extra 1% trailer fee. The advisor class versions therefore have MERs over 1.7%, which wipes out any cost advantage over balanced mutual funds.

The details: Like a balanced mutual fund, these Claymore ETFs are suitable for investors who want a globally diversified portfolio without having to select a number of individual funds.

Claymore’s Balanced Growth CorePortfolio is currently made up of 14 other Claymore ETFs, plus two iShares ETFs that cover REITs and real-return bonds. It’s most significant holdings are international, US and Canadian equity ETFs, each of which makes up about 17% of the portfolio. CBN also includes an allocation to emerging markets (9%), real estate (8%), government and corporate bonds (13%), and a trivial smattering of infrastructure, water and agriculture. The one significant commodity allocation is 8% to gold, via the Claymore Gold Bullion ETF (CGL). Overall, it is an aggressive fund with about 75% in equities.

The 11 ETFs that make up the Balanced Income CorePortfolio have a more Canadian and more conservative focus. The fund holds 20% in short government bonds, another 10% in real-return bonds and more than 12% in corporate bonds. Almost 50% of the fund is in dividend-paying stocks, more than half which are Canadian.

You can criticize the narrow sectors in the Growth fund (why does anyone need 2.5% in a global water ETF?) and question why there’s gold in the Income fund (last time I checked, bullion pays no income), but these are quibbles. Overall the asset allocations are sensible: well diversified, but not overly complex. The indexes prescribe narrow ranges for each asset class, so the asset allocation should not change much from quarter to quarter.

Claymore launched the CorePortfolio ETFs in June 2007, which was terrible timing. That turned out to be the 10-year peak for the US and international stocks, and while the TSX eventually climbed a bit higher before the crash, global stock  markets are still way below where they were in mid-2007. So you can’t be too hard on CBN for posting a return of –9% since its inception. The more conservative CBD managed to eke out a tiny gain (less than 0.2%) over the same period.

The recent performance of both funds has been outstanding. In 2009, the Growth ETF returned 29.2%, while the Income ETF returned 25.6%. (By way of comparison, the Mawer Canadian Balanced Retirement Savings Fund, perhaps the best balanced mutual fund in Canada, returned 16.4% last year.) And that doesn’t include their distributions: currently CBN yields about 2.5%, while CBD throws off an income of more than 4%. Distributions are paid monthly and can be reinvested using Claymore’s DRIP plan.

The alternatives: The most direct competitors of the Claymore CorePortfolios are the similarly named iShares Conservative Core Portfolio Builder Fund (XCR) and iShares Growth Core Portfolio Builder Fund (XGR). I have reviewed these ETF wraps in a previous post — suffice it to say I don’t like anything about them, despite their low MERs (0.63%).

The bottom line: There is a lot to like in Claymore’s CorePortfolio ETFs, and I think either one would be an good choice for do-it-yourself investors who want an all-in-one solution at low cost compared with a balanced mutual fund. However, if you’re working with an advisor who is using the advisor-class shares, he or she is skimming 1% of your assets in return for buying one ETF. That’s not a good deal.

The CorePortfolios are especially appealing for small accounts: building a portfolio with ETFs is not usually cost-effective with less than $30,000 to $50,000. But these wraps allow you to get an instant portfolio with one initial purchase (maximum price $29), and you can set up preauthorized contributions and a dividend reinvestment plan and avoid all further brokerage fees. The ETFs rebalance themselves quarterly, which also saves brokerage commissions and makes life easier. All considered, you’ve got an extremely simple and inexpensive way to become a Couch Potato.

If you’re considering investing in either of these ETFs, first read the prospectus.

Disclosure: I do not own CBN or CBD in my own portfolio.