Exchange Traded Funds – Portfolio Management

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Putting a portfolio together has become much easier because of exchanged traded funds. They are a low cost alternative to mutual funds. Since they trade like stocks, the best way to buy them is through a discount broker.

Things to consider:

  • Risk and return are linked
  • Spread risk by using asset allocation & diversify within the asset classes
  • Always keep some cash to pick up some bargains
  • Ignore the noise and take a long-term view
  • Make the most of tax shelters
  • Use the internet to do your own research

Selecting the right mix of assets should be based on your tolerance to risk and your time horizon. It is also important to have realistic expectations regarding investment returns. Markets do go through periods of  extreme exuberance and extreme pessimism.

Here are some examples of portfolios:

Conservative – 30% Stocks & 70% Bonds

  • 20% Domestic Large Cap Equity ETF
  • 5% Domestic Small Cap Equity ETF
  • 5% Domestic Equity Dividend ETF
  • 30% Long Treasury Bond ETF
  • 15% 3-7 year Treasury Bond ETF
  • 15% Investment Grade Corporate Bond ETF
  • 10% High Yield Global Corporate Bond ETF

Balanced – 60% Stock & 40% Bonds

  •  20% Domestic Large Cap Equity ETF
  • 10% Domestic Small Cap Equity ETF
  • 10% Domestic Dividend ETF
  • 20% International Equity ETF
  • 10% Long Treasury Bond ETF
  • 10% 3-7 year Treasury Bond ETF
  • 10% Investment Grade Corporate Bond ETF
  • 10% High Yield Global Corporate Bond ETF

Growth – 80% Stocks % 20% Bonds

  • 20% Domestic Large Cap Equity ETF
  • 20% Domestic Small Cap Equity ETF
  • 10% Technology ETF
  • 10% International Equity ETF
  • 10% Emerging Markets ETF
  • 10% Investment Grade Corporate Bond ETF
  • 10% High Yield Global Corporate Bond ETF

These examples are not recommendations but illustrate how to diversify within asset classes. Do your own research by visiting ETF providers’ web sites.  Compare similar ETFs and check to make sure that the fees are the same. Shop around, try not to purchase all your ETFs from one provider.

Here is a list of some large providers of ETFs:

  1. Blackrock – Ishares
  2. Bmo -ETFs
  3. Horizons
  4. Powershares
  5. Vanguard

Be cautious with regards to bonds, their risk levels have been elevated because of investor fear! The 10 year U.S. bond yield fell temporary below 2% this past week. Some experts believe that bonds are in a bubble and overvalued.




Retirement Saving: RRSP/401K or TFSA / Roth Account?


The most common answer given by tax specialists is it depends if you are going to be in a higher or lower tax bracket in retirement. There is little benefit of getting a tax refund if you are currently in a low tax bracket and your RRSP / 401K  withdrawals will put you in a higher tax bracket in retirement.

It may make sense for low income Canadian families to put money into a TFSA because withdrawals are not taxable. The income will not affect their eligibility to receive Old Age Security (OAS) and Guarantee Income Supplement (GIS) from the government. It is also a good strategy for individuals who have a traditional defined benefit pension plan. Withdrawals from a RRSP could reduce their OAS benefits.

However, for the majority of  my U.S. & Canadian followers, I would strongly recommend investing in both. There is no way to predict what your tax bracket will be in retirement. I would first invest the maximum allowable amount into a RRSP or 401k and reinvest the tax refund in a TFSA or Roth account. The compounding effect on even a small yearly refund amount could grow to be quite substantial over the long term.

For example: A 35 year old in a low tax bracket of 20% and has $5,500 to invest per year. Contributing the money into a RRSP or 401K every year would generate a refund of $1,100,  if invested every year in a TFSA or Roth account at 5%  would compounded over 30 years to equal $73,082. To avoid an individual’s tax rate from jumping up into the next tax bracket, they could withdrawal the extra funds from the TFSA or Roth and lessen the withdrawal amounts from the RRSP or 401K. Another option would be to withdrawal the income generated by the TFSA or Roth to pay any extra taxes.

The only problem with this strategy is that most individuals end up spending the tax refund instead of saving it for retirement. People forget that the tax refund is their money, not the governments!

“In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.”Peter Lynch (famous retired mutual fund manager and author)

Mutual Funds & Exchange Traded Funds (ETFs)

Most novice investors start by owning mutual funds but Exchange Traded Funds have become very popular in recent years.

Wikipedia’s definition of an ETF: an exchange-traded fund is an investment fund traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index.


  • They’re both easy to buy and sell.
  • They both offer  lots of choices based on the types of securities that they hold. You can find funds specializing in a myriad of industries, countries and investment styles.
  • They both offer investors the opportunity to reduce risk through asset allocation and diversification.
  • Returns are not guaranteed. You can lose money in a mutual fund and in EFTs, because a fund’s value is nothing more than the value of its portfolio holdings. They are also not covered by government deposit insurance.
  • Under performing funds are sometimes merged with other funds or discontinued. (In Canada last year, 48 new ETFs hit the market, 11 funds were terminated and there were three mergers.)


  • Mutual funds are professionally managed and have research departments to help managers select securities for you.
  • Mutual fund fees and expenses can be very high. Professional managers and their supporting staff aren’t working for free. Plus financial advisors are getting paid as long as you hold the fund.
  • In addition to the management expense ratio (MER) of a mutual fund, there may also be sales fees called loads. These can be paid when you buy the fund or they may be deferred to whenever you decide to redeem your units. No-load funds are also available.
  • Mutual funds can have tax consequences depending on your individual situation. So you may end up with taxable gains in a year when you don’t have taxable losses to offset them even if you don’t do any buying and selling.
  • Managers are human. Managing involves judgment calls and some managers’ records are more successful than others. Managers also retire, switch companies or get fired.
  • Choosing the right ETFs to create a portfolio to meet your goals requires more time and effort.
  • Exchange traded funds have very low fees because there is very little trading within the fund unless a company or bond is removed or added to the index.
  • ETFs may contain some investments that you don’t like. For example; the S&P/TSX Capped Information Technology Index Fund, contains  shares of BlackBerry.

I don’t think that mutual funds are fabulous investments. The high fees make it very difficult for the fund managers to beat their benchmark index. Why not simply buy an index fund with very low fees? For example you can buy the S & P 500 by purchasing SPDR S&P 500 ETF  (SPY: AMEX). Plus, over the long run, lower ETF fees can increase your investment returns.