Tangerine, the well-known online bank, offers pre-fab portfolios of lower-fee index mutual funds or exchange traded funds (ETFs) that are as simple as you can get. You choose the investment fund with your preferred asset allocation (the proportion of stocks vs. bonds in your portfolio, more on this below) and that’s it, you’re done. The management expense ratio (MER) fees on these portfolios range from 0.72% to 1.06%, depending on which one you choose. That’s a significant savings over the 2% charged by a typical actively managed equity fund; on a $100,000 portfolio you’d save between $993 and $1,280 annually, which is added to your investment returns and will compound over time.
But do the holdings in these funds perform as well as actively managed funds? I was an investment advisor with Tangerine from 2013 to 2018. Part of my role was to compare Tangerine clients’ mutual funds held at other banks and mutual fund dealers to the Tangerine index-based mutual fund portfolios (they did not yet offer the ETF portfolios at that time). There was no comparison. It was extremely rare to find a higher-fee mutual fund mix that beat the Tangerine approach over the long-term. Chalk that up to the lower fees and the passive (indexing) investment approach.
No other provider offers a ready-made portfolio of index mutual funds that contains all the necessary Couch Potato components (Canadian, U.S, and global stocks, as well as Canadian bonds), so the next Couch Potato difficulty level is to build your own portfolio of individual index mutual funds. All the major banks offer such index funds, but only grudgingly, with fees of 1% or more. The exception is TD’s e-Series funds, which stand out for having the lowest fees in Canada: their MERs range from 0.25% to 0.40%. You can select an individual fund for each of the four main asset classes and combine them in any proportion, from cautious to aggressive. You can purchase the TD e-Series funds through discount brokerages including TD Direct Investing.
Next, we come to ETFs, the darlings of the industry. Their primary appeal is their rock-bottom cost: you can build your own portfolio of ETFs for less than 0.15%. ETFs are also available in enormous variety from several providers—including Vanguard, iShares Horizons, TD and BMO—and through any online brokerage.
Because there are so many ETFs to choose from, and you need to buy and trade the funds yourself as a self-directed investor, this Couch Potato method requires a certain comfort level with managing your own investments. But many MoneySense readers know that it’s well worth the time and energy to do the research and go the DIY route.
Rather than limiting yourself to the basics, advanced spuds can find ETFs that zero-in on specific categories of bonds or stocks: short-term or long-term bonds, government or corporate bonds, large companies, small companies, dividend payers and many others. You can also expand your portfolio to include asset classes like emerging markets, real estate, or preferred shares—none of which are available with the other options we’ve discussed. These assets might protect portfolio returns during extreme economic conditions, such as stagflation, so adding them could give you an improved all-weather Couch Potato portfolio.
Finally, nothing should strike fear into the hearts of the big banks, mutual fund providers and advisors more than one-ticket asset-allocation ETFs. These ETFs give investors an all-in-one portfolio solution that is globally diversified and automatically rebalanced, with a one-ticket ultra-low-cost purchase.
I track the performance of the leading asset allocation ETFs on my blog.
Dale Roberts
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