ETF Growth Portfolios for Canadians

Edited Photo. Source: Flickr - Brooke Raymond

Self-directed investment portfolios, for the typical Canadian, can follow two major strategies which are dependent on your current stage in life. The first strategy, and what we will discuss in detail in this post, is the Growth Strategy. The second strategy is the Retirement Strategy – which we will discuss in detail in another post.

Typically you want to follow a Growth Strategy portfolio while you are working and saving money. In this stage, you are more tolerant of volatility and you can easily weather market downturns while picking up stocks cheaply.

A Retirement Strategy is normally better when you are looking for tax efficient income and less volatility.

The Strategy & Design

A growth strategy portfolio will typically have few components. In this strategy, you should hold no more than 5 different ETFs. 

In the last post, we categorized the ETF market into two major groups: a growth group and a protection group.

When following a growth strategy, growth ETFs should form 60 - 100% of your total portfolio value. This leaves 0 - 40% for protection ETFs. The true amount you choose will depend on your risk tolerance.

Diversified stocks can drop around 40% while bonds are unlikely to drop substantially. Therefore, a portfolio with 100% growth ETFs has an expected max drop in value of 40% during a market crash. While a portfolio with 60% growth ETFs has an expected max portfolio loss of just 24% during a market crash.

The protection does come at a cost though. Stocks generally provide much better returns than bonds over longer time periods.

Use the questionnaire to assess your maturity and competence in investing to determine how aggressive your portfolio should be. In my view, if you can't handle a 24% loss in portfolio value, you should probably let a good adviser manage your investment portfolio for you.

Most self-directed investors looking for growth should be comfortable with at least 70% of their portfolio in growth ETFs.

Choosing Your Growth ETF Allocations

Once you've chosen your desired growth/protection ratio, the next step is to choose your ETFs. The main goal here is diversification: exposure to a broad range of markets and currencies.

The easiest solution would be dumping the whole growth side into a single ETF: XAW.TO – the iShares MSCI All Country ex-Canada Index. You get cheap exposure to the entire world except Canadian stocks. Being Canucks, it's often easy for us to forget that Canada only forms about 3.5% of the global stock market – we're not a big deal in the world economy.

For tax efficiency, re-balancing, and somewhat lower fees, I think most investors with at least $100,000 are better off splitting their portfolio into components by adding a Canadian allocation. It's wise to do this in the approximate allocation to global markets with a heavier allocation to Canada – especially if you can put your Canadian allocation in a Cash/Margin account.

For a bit more diversification, you may move to 3 ETFs in your growth allocation. This translates to putting 50% into U.S. stocks, 30% into developed international, and the last 20% into Canada.

Choosing Your Protection ETF Allocations

Your protection component ETFs can be placed all in Canadian currency. Bonds are a "must have" in this side of your portfolio. Gold miners are optional and normally preferred share ETFs are only useful for Income Strategy portfolios.

The easiest solution here is to put all your protection side in broad bonds. Broad bond ETFs will perform better than short term bonds over the long haul, but they are also more susceptible to interest rate risk than short term bonds.

If your main goal with the protection side is to provide maximum stability and "juice" for stock investing in a stock market crash, short term bonds are a great tool. They have the maximum negative correlation to stocks.

Gold miners are great for dampening swings in the stock market, protecting from inflation, and capitalizing on market fear. But they are also volatile and unpredictable. For this reason, gold miners should never form more than 10% of your overall portfolio.

There is no "wrong" solution here if your expectations match the general principles I shared here. Simplicity and cost should be the driving factors for your choice.

I would suggest the best choice is either going all broad bonds or all short term bonds for portfolios under $100,000. There's no substantial advantage in splitting up your bonds between broad bonds and short term bonds. With larger portfolios, consider splitting between bonds and gold miners up to a maximum of 10% for gold.

Acceptable Growth Portfolio Examples

The images depict a portfolio with 80% growth allocation and a 20% protection allocation.

2 ETF Portfolio for Canadians


A really easy portfolio for an investor with higher risk tolerance would be putting 100% of their growth portion into XAW and 100% of their protection portion into ZAG or VSB.

3 ETF Portfolio for Canadians


The next logical step is to add Canadian stocks to the 2 ETF portfolio. For diversification reasons, Canadian stocks should be a maximum of 20% of your total portfolio. The 3 ETF Portfolio has your growth portion in XAW and a smaller allocation to XIC or HXT with all of the protection portion in ZAG or VSB.

4 ETF Portfolio for Canadians


The next step adds gold miners to the protection side of the 3 ETF portfolio. Growth is still in XAW and XIC or HXT. Protection is now split between ZAG or VSB and XGD or ZGD. For example, if you chose to have 80 or 90% growth, your protection side would be split evenly between bonds and gold miners. If your portfolio is 70% growth and 30% protection, your protection side would be 2/3rd bonds and 1/3rd  gold so that gold makes up no more than 10% of your total portfolio.

5 ETF Portfolio for Canadians


With this step we split up the growth side of your portfolio. Instead of choosing XAW, we split that into a U.S. stock component and Developed International stock component. A reasonable allocation for the growth side is 50% XUU/HXS, 30% VIU/XEF, and 20% XIC/HXT while your protection side remains unchanged from the 4 ETF portfolio.


While it's not always better to use more ETFs as your portfolio grows, you should definitely not over-complicate a small portfolio. There is no benefit to expanding beyond the 5 ETF Portfolio for any growth oriented portfolio. Also, as fees continuously come down across ETFs, the benefit to holding more components in your portfolio tends to shrink.

I personally believe a 4 ETF portfolio is sufficient for most investors. This is why I choose the 4 ETF model at a 80/20 allocation for the RM Balanced Portfolio.

The current fees for these portfolios will average 0.18% annually. This is extremely cheap considering you will be holding a portion of thousands of different corporations and hundreds of bonds.

You should rebalance your allocations once a year. Pick a memorable date like your birthday or anniversary.

Investment Portfolio Components for Canadians


Edited Photo. Source: Flickr - Marty Bernard

Last week I shared a questionnaire designed to test your course of action when it comes to portfolio management. I think the majority of Canadians who are willing to put in a bit of effort and discipline themselves can do very well managing their own investments. No one cares more about your money than you.

If you are suited to managing your own investments, how should you proceed with designing your own portfolio?

The easiest way to start is categorizing investment options. You should always invest using low-cost ETFs, but the options within ETFs are still plentiful and confusing. However, they can still be lumped into two main categories: growth ETFs and protection ETFs.

Growth ETFs

Growth ETFs are the engine of your investment portfolio. These ETFs will provide the long-term growth for your portfolio. They are also more volatile and can realize substantial shorter-term losses.

The growth portion of your portfolio should still be focused on broad indices. Although they may seem appealing and can provide higher returns in periods, stay away from ETFs that focus on fad sectors: tech stocks, marijuana stocks, momentum stocks, small-caps, etc.

You should also focus on balance in your portfolio. Measured diversification is the only "free lunch" when it comes to investing. Choose a portfolio that balances Canadian stocks, U.S. stocks, European stocks, Emerging markets, etc.

Limit each component to no more than 50% of your portfolio. Typically U.S. stocks should form the largest part of your growth ETFs as the U.S. economy is the biggest, most diversified economy in the world.

Don't let yourself get distracted by taxes, but choose your placement with an eye for tax efficiency. See my comprehensive guide on Tax Efficient Investing.

The options I share are chosen for their low fees, trading volume, and tax efficiency. Other than tax reasons, it doesn't really matter which ETF you choose within each category. Tax guidance is provided in italics.

Good Options for Growth ETFs

Canadian Stocks:

XIC.TO - iShares Core TSX Capped Composite Index

VCN.TO - Vanguard FTSE Canada All-Cap Index

HXT.TO - Horizons TSX 60 Index (Total Return): Best in Cash/Margin accounts for high income individuals

U.S. Stocks

XUU.TO - iShares Core S&P U.S. Total Market Index: Best in TFSA/RRSP accounts

VTI - Vanguard U.S. Total Stock Market Index: Best for US Dollar based RRSP accounts

HXS.TO - Horizons S&P 500 Index (Total Return): Best in Cash/Margin accounts

Developed International Stocks

VIU.TO - Vanguard Developed All-Cap ex-NA Index: Best in TFSA/RRSP accounts

XEF.TO - iShares Core MSCI EAFE IMI Index: Best in TFSA/RRSP accounts

HXX.TO - Horizons Eurostoxx 50 Index (Total Return): European only, best in Cash/Margin accounts

Emerging Market Stocks

VEE.TO - Vanguard FTSE Emerging Markets All-Cap Index: Best in TFSA/RRSP accounts

Real Estate Stocks

VRE.TO - Vangaurd FTSE Canadian Capped REIT Index

CGR.TO - iShares Global Real Estate Index: Best in TFSA/RRSP accounts

Combined Global Stocks

XAW.TO - iShares Core MSCI All Country ex-Canada Index: Combines U.S., Developed International, and Emerging Markets, good for easy portfolio management

Protection ETFs

The protection ETFs are the brakes built into your portfolio. They are used to limit portfolio volatility and potentially provide fuel for your growth ETFs following a market downturn.

Protection ETFs are intentionally chosen for their low correlation to growth ETFs. Bonds and gold are not correlated to stocks. Preferred shares have low correlation to stocks.

In general, protection ETFs do not need to be as diversified as your growth component. Short-term bonds in Canada will perform comparably to short-term bonds in the U.S. What matters more in your choices is cost and tax efficiency.

If you choose gold miners in your protection component, limit your exposure to a maximum of 10% of your total portfolio value. Gold stocks don't correlate to other stocks, but they are notoriously volatile. They are a great "fear asset".

Good Options for Protection ETFs

Broad Bonds

ZAG.TO - BMO Aggregate Bond Index: Best in RRSP accounts

ZDB.TO - BMO Discount Bond Index: Good in Cash/Margin accounts

HBB.TO - Horizons Select Universe Bond Index (Total Return): Best in Cash/Margin accounts

Short-term Bonds

VSB.TO - Canadian Short-term Bond Index: Good for minimal interest rate risk/volatility

Preferred Shares

ZPR.TO - BMO Laddered Preferred Share Index: Good for stable, tax efficient income in Cash/Margin accounts

Corporate Bonds

ZIC.TO - BMO Mid-Term US Corporate Bond Index

HAB.TO - Horizons Active Corporate Bond

Gold Shares

ZGD.TO - BMO S&P Equal Weight Global Gold Index

XGD.TO - iShares S&P Global Gold Index

Next Steps

In the next post, we will look at how to use these components in designing and managing a portfolio whether you are younger and looking for growth, or retired and looking for stability.