Should I add dividend paying ETFs and REITs to my portfolio?

Should I add new ETFs and REITs to my portfolio?

Even a simple portfolio can be well-diversified but the temptation to tinker is overwhelming

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I have opened accounts with a discount brokerage and built a portfolio with the following ETFs:

Are these ETFs enough for my RRSP and TFSA, or should I add others, like dividend-producing funds and real estate investment trusts (REITs)?

– Natalie

A Carl Richards, a financial planner and author of The Behavior Gap, has observed an odd human tendency. “People say they want things to be simpler—investing, life insurance, retirement planning, etc.,” he writes. “But when a simpler (and effective) option is proposed, they reject it as too simple.”

The Couch Potato portfolio is a shining example. The appearance of ETFs has made building a diversified portfolio easy and shockingly cheap, yet many investors seem bent on making it more complicated and more expensive.

Part of the problem is the Couch Potato’s simplicity is an illusion. Natalie, your portfolio is just five ETFs, so you have the impression that you’re putting your life savings into just a handful of investments. You might look at a friend’s portfolio and see a dozen mutual funds, or even 30 or 40 individual stocks and feel like yours looks poorly diversified by comparison. But let’s pop the hood and see what’s inside your five ETFs.

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The first four in your list are what’s called “total market” ETFs, because they hold a blend of large, mid-sized and small companies. Funds such as VCN cover the broad Canadian equity market with about 250 companies, while VUN gives you access to about 99% of publicly traded stocks in the US. That’s about 3,600 companies.

The two iShares ETFs you’ve chosen cover the stock markets outside North America. XEF holds roughly 2,500 stocks in developed countries in western Europe, Australia and Asia. Meanwhile, XEC holds some 1,900 companies in emerging markets such as China, South Korea, Brazil and India.

Finally, ZAG, your bond ETF, includes about 800 federal, provincial and corporate bonds with terms ranging from one to 30 years.

Put all of that together and you’ve got about 8,250 stocks in some 40 countries and well over a dozen currencies, plus hundreds of bonds of all maturities. That is about as diversified as a portfolio can be, even though you have only five ETFs. And did I mention the management fee on this comprehensive portfolio is about $5 a month for every $50,000 you invest?

Adding dividend or REIT funds will not add any meaningful diversification. But it will add both cost and complexity, since specialized funds have higher fees, and rebalancing your portfolio gets more difficult every time you add another holding.

If you managed a pension fund or university endowment you would need to diversify beyond your five-ETF portfolio. But as long as your portfolio is less than eight figures, you have everything you need in the Couch Potato.

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