Adapting the Lazy Portfolios for Canada - MoneySense

Adapting the Lazy Portfolios for Canada

In Monday’s post, I had some fun at the expense of Paul Farrell, the MarketWatch columnist who champions index investing while at the same time forecasting the coming apocalypse. What got lost in the discussion was that Farrell’s Lazy Portfolios are actually worth a look. They’re all built with an eye toward rock-bottom cost and […]

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In Monday’s post, I had some fun at the expense of Paul Farrell, the MarketWatch columnist who champions index investing while at the same time forecasting the coming apocalypse. What got lost in the discussion was that Farrell’s Lazy Portfolios are actually worth a look. They’re all built with an eye toward rock-bottom cost and broad diversification.

There are loads of other model portfolios out there, too. The Oblivious Investor, a US blog that advocates indexing, lists 8 Lazy ETF Portfolios of its own. (Some are the same as Farrell’s.) The site’s creator, author Mike Piper, also includes links to the original sources of these portfolios, many of which include historical returns. Or you can shuffle over to Asset Builder, an advisory firm run by Scott Burns, creator of the original Couch Potato. His site is also packed with model portfolios.

The problem for Canadians is that all of these portfolios are designed for Americans. They typically include about two-thirds of the equity allocation—and all of the fixed income—in US funds. The good news is that adapting them for Canadian investors is quite easy. To show you how, let’s use an example. This is the Coffeehouse Portfolio, created by Bill Schultheis:

10% iShares S&P 500 (IVV)
10% Vanguard Value (VTV)
10% Vanguard Small-Cap (VB)
10% Vanguard Small-Cap Value (VBR)
10% Vanguard FTSE All-World Ex-U.S. (VEU)
10% Vanguard REIT (VNQ)
40% Vanguard Total Bond Market (BND)

Step 1: The bonds

Holding your fixed-income investments in a foreign currency is almost always a bad idea. (A small allocation to US or global bonds is fine, but the currency should be hedged.) So the first step is to replace the Vanguard bond fund with a similar broad-based Canadian bond ETF. iShares DEX Universe Bond (XBB) will do the trick nicely.

Step 2: The real estate

The 10% allocated to REITs is also easy enough to Canadianize. You can simply swap the Vanguard fund with iShares S&P/TSX Capped REIT (XRE), or BMO Equal Weight REIT (ZRE).

If you have a large portfolio and don’t mind a little added complexity, you could add a foreign REIT component. You might put half in the iShares or BMO fund, and the other half in the Vanguard REIT fund or in Claymore Global Real Estate (CGR).

Step 3: The equities

The Coffeehouse Portfolio is half equities: 40% in US stocks and 10% in a global equity fund that includes all developed and emerging markets outside the US. This doesn’t make much sense for Canadians, especially in a taxable account, where you’d be subject to withholding tax and would not be eligible for the dividend tax credit.

There’s no hard and fast rule about how much of your equity allocation should be in Canada, but approximately one-third is reasonable. So we could go with something like 15% Canadian, 15% US, and 20% to the rest of the world.

The Coffeehouse Portfolio gives added weight to small-cap and value stocks, which isn’t as easy to do in Canada. Slicing and dicing Canada’s small market into three or four ETFs is also unnecessarily complicated. To keep things simple, we could put 10% in Claymore Canadian Fundamental (CRQ), since this large-cap ETF has a value bias. Or if you just want large caps at the lowest cost, you can’t go wrong with iShares S&P/TSX 60 (XIU). We can round things off with 5% to iShares S&P/TSX Small Cap (XCS).

US-listed ETFs are impossible to beat for low cost and minimal tracking error, and they’ll do just fine for the US and international components. IVV is great for the S&P 500, but the Vanguard Total Stock Market (VTI) is probably even better, as it covers the entire US market.

Finally, the Vanguard All-World Ex-U.S. ETF that Schultheis recommends includes Canada, which would be redundant in our version. It’s cheaper and neater to split the international component of our portfolio, putting 15% in Vanguard’s Europe Pacific (VEA) and 5% in Vanguard’s Emerging Markets (VWO).

Step 4: Putting it all together

Now it’s time to assemble our Canuck version of the Coffeehouse Portfolio:

10% Claymore Canadian Fundamental (CRQ) or iShares S&P/TSX 60 (XIU)
5% iShares S&P/TSX Small Cap (XCS)
15% iShares S&P 500 (IVV) or Vanguard Total Stock Market (VTI)
15% Vanguard Europe Pacific (VEA)
5% Vanguard Emerging Markets (VWO)
10% iShares S&P/TSX Capped REIT (XRE) or BMO Equal Weight REITs (ZRE)
40% iShares DEX Universe Bond (XBB)

In honour of everyone’s favourite Canadian coffeehouse, let’s call this the Tim Horton’s Portfolio. Make mine a double-double.

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