Building An ETF Portfolio

Regular readers of this blog are aware that we recently sold my wife’s expensive mutual fund holdings a couple of weeks ago. This has been long time coming and we finally got the funds transferred to a discount brokerage. Now comes the part of picking the ETFs. This article captures the exercise of building an ETF portfolio. Hope it helps you in your decision if you decide to go the route of passive investing.

The overall strategy remains as I mentioned earlier: my wife’s portfolio will use index funds via ETFs to invest in the broad markets using some rules of thumb in mind as discussed below. My portfolio will continue investing in more focused dividend growth stocks.


The goals of this portfolio are:

  1. Passivity: We will be taking a more passive approach of investing in this portfolio and using broad index funds to gain exposure to the markets. Instead of stock picking, we will be tying our portfolio directly to the markets. This way, we will not be making bets on one company vs another. We will be going with the flow and moving with the markets.
  2. Simplicity: We want this portfolio to be simple. I want my wife to maintain this portfolio and should be easy to understand.
  3. Diversification: We want the funds to be diversified across markets and asset classes. This is a very important factor for us as discussed earlier.
    • For asset class diversification, we will be splitting the portfolio into stocks and bonds, keeping some basic investing rules of thumb in mind such as: between stocks and bonds – each asset class will make up a minimum of 25% and maximum of 75%.
    • For the equities (stock) portion, we will have some decent exposure to the local market (Canada), but a bigger portion will be outside Canada, with a big part of it invested in the US market.
    • For the fixed income (bond) portion, we will be using only Canadian bonds.
  4. Expense Check: One of the main reasons to sell the mutual funds was to cut down on the high expense fees. While most index ETFs are cheaper than mutual funds, there are still some ETFs with high fees of over 1%. We will be avoiding such funds and keeping the expenses under check.
  5. Dollar Cost Averaging: We will not be making lump sum investing and will be dollar cost averaging in order to avoid timing the market. This works for us as our discount brokerage provides us with free ETF purchases (except the ECN fees, which adds up to a few cents per trade) and does not add any more added expenses.

The Portfolio

Passive investing is supposed to be simple and easy, but there are a plethora of index funds out there, with new funds added regularly. This makes life a bit harder in trying to compare, but some bloggers and reporters have put together simple portfolios which I really like.

Rob Carrick is a personal finance columnist at The Globe And Mail and has put together the following set of data for Canadian passive investors: ETF Buyers Guide – Canadian Equity, US Equity, Bond ETFs, Income-Paying ETFs. Canadian Couch Potato blogger Dan Bortolotti and PWL Capital’s Justin Bender write extensively about passive investing both on their blogs and the Money Sense magazine and have model portfolios here and here. The Vanguard ETFs put together by CCP caught my eye, which consisted only of three funds.

Index funds CCP

Source: Canadian Couch Potato

After reviewing the details and discussing with my wife (based on her risk tolerance), we have decided to go with a more “Balanced” approach, which consists approximately of 40% in bonds, 20% in Canadian stocks and 40% in International stocks.

The Funds

We have decided to go with the three fund approach (for now) thanks to the availability of the Vanguard ex-Canada fund – instead of buying a US-focused ETF and a different one for international stocks. Choosing the actual funds for the others came with some dilemma.

  • Canadian Equity: Here, we had a dilemma between a few different funds – shortlist included
    • Vanguard FTSE Canada All Cap Index ETF (VCN.TO)
    • BMO S&P/TSX Capped Composite Index ETF (ZCN.TO) and
    • iShares S&P/TSX Index ETF (XIU.TO)

The MERs range from 0.05% to 0.17%. After looking through the details, we discarded XIU.TO as it is expensive and a very thin ETF (with just 62 holdings) even though it has the heaviest volume on the market compared to others. Between VCN.TO and ZCN.TO, it was a close call – they both have similar number of holdings (252 in ZCN vs. 247 VCN) and have same MER fees. We eventually decided to go with the BMO S&P/TSX Capped Composite Index ETF (ZCN.TO) as it has a better diversification and higher yield.

  • International Equity: We will use the Vanguard FTSE All-World ex-Canada Index ETF (VXC.TO) for this portion. It was an easy decision as it is a one of kind product. We flirted with the idea of using a mix of two funds for international exposure – one specific to US and other for the rest, but this one product covers the whole international market. The fund consists of stocks investing in over 3000 companies with just over 50% of its holdings in the US. The fund has an MER of 0.25%. Details here.
  • Canadian Fixed Income: Again, we had a bit of  dilemma to pick the right ETF. We discarded ETFs which invested only in corporate bond market since we wanted a mix of federal, provincial and corporate bonds in the holdings. We narrowed it to the following three.
    • Vanguard Canadian Aggregate Bond Index ETF (VAB.TO)
    • BMO Aggregate Bond Index ETF (ZAG.TO)
    • iShares DEX Universe Bond Index ETF (XBB.TO)

MER fees range from 0.12% to 0.33%. The average duration of the bonds are almost identical hovering around 7.4 to 7.6 years. The yield ranges are 2.7% (VAB), 3.1% (ZAG) and 2.9% (XBB). Number of holdings are 539 (VAB), 608 (ZAG), and 844 (XBB). Based on all consideration, we decided to go with the BMO Aggregate Bond Index ETF (ZAG.TO) – as it has fairly decent MER (0.20%), good diversified portfolio of holdings and a good yield.

We will be starting to add funds to work for us later this month and make regular contributions every month.


After evaluating options available in the market, we have decided to make a three-ETF portfolio for my wife’s account based on all the goals discussed above. The three funds chosen are summarized below.

Exposure Name Ticker MER # of holdings Yield
Canadian Equity BMO S&P/TSX Capped Composite Index ETF ZCN.TO 0.05% 252 2.6%
International Equity Vanguard FTSE All World Ex-Canada Index ETF VXC.TO 0.25% 3009 1.6%
Canadian Fixed Income BMO Aggregate Bond Index ETF ZAG.TO 0.20% 608 3.1%

The diversification of the three funds will follow: 20% in Canadian Index (ZCN.TO), 40% in All World Ex-Canada Index (VXC.TO), and 40% in Aggregate Bond Index (ZAG.TO) as shown in the figure to the left below. Based on the ETF holding composition, the equity and fixed income exposure is as shown in the figure to the right below.

ETF Pprtfolio

The above portfolio results in a weighted average MER of 0.19% and a weighted average yield of 2.36%.

One option that seems to be missing is the international bond market. It seems to be pretty common in the passive investing community to own only local bonds. I am re-evaluating this and may add international bond ETFs in the future to this portfolio.

What are your thoughts on the portfolio and the choices here? Do you agree or disagree? Do you own any of these ETFs in your portfolio? Share your thoughts below.


27 thoughts on “Building An ETF Portfolio

  1. R2R. Great choice. I am gearing towards more index efts as well. I believe those are great choices. Keep up the good work. Really enjoy reading other like minded investors thoughts. Really appreciate the work.

  2. Bernie says:

    Why would you not base your decisions on past long term performance rather than MER? If it’s simplicity you desire and are willing to go with an MER of 0.96%, the one fund solution I would suggest is Mawer Balanced fund. It’s excellent management and performance numbers all the way back to inception in 1988 trump anything offered in the index ETF world. I don’t care for ETFs mainly because most hold stocks that I would never consider buying personally. I much prefer stocks to funds but Mawer is my choice for that time when I don’t want to, or can’t, manage my portfolio any longer.

    • Bernie,
      Thank you for stopping by and the input. I really appreciate the feedback.

      I have looked at Mawer in the past when I started investing and started with mutual funds. I cant recall if the funds were available to purchase thru my past asset management (its been a while). Last time I checked, investing directly with them also took a large amount of money as initial investment – I just double checked and it had a minimum initial investment of $50K. Our account isnt that big. Moreover, going close to 1% is not ideal in our case – as we can do index-based etfs for under 0.2%.
      I am not intimately familiar with Mawer’s strategy, but for this account we also didnt want active management. Besides, once the funds are chosen – all the work is done. From now on, we simply keep adding funds to the account.

      Once again, thanks for raising the points. It validates why we chose this strategy and re-evaluate our decision.


  3. For my 401K, I choose the Vanguard Target 2025 fund. This is a balanced fund with 30% bonds (international and US), 50% US stocks and 20% international stocks. The expense ratio is extremely low at 0.07%. While the 3 yr. average return of 11.07% is not mind blowing, the volatility seems to be low which is what one would expect from a target date fund. This is pretty much a set it and forget it investment.

    I look forward to seeing the returns on your hand crafted ETF portfolio.

    Best regards,


    • Hmmm interesting. Target date funds also sound interesting. I wonder if there are any target date ETFs. That sounds like a really good diversification and that expense ratio is amazing! I think the rate of rate is decent considering how low bond yields are – and the low volatility can also be attributed to the bond factor, I bet.

      I will post updates later on as to how the portfolio is performing.


  4. Nice choice R2R…looks like you have a nice mix paying a decent 2.36% yield. I will have to check our Rob Carrick’s page for some ETFs for US investors. 🙂

    Although we have a dividend stocks portfolio, most of our money is tied up in mutual funds and ETFs. In fact, this coming year, we are planning to slowly add a few ETFs to our dividend stocks portfolio as well.


    • AFFJ,
      Rob Carrick works for a Canadian newspaper, so his column might be a bit too focused for Canadian investors…but Im sure it’ll help you out in your overall strategy.

      I think broad index based ETFs are nicely complemented to the dividend growth strategy…you get a hedge on your bets and with index ETFs you are going to do just as good as the markets.

      Best wishes

  5. Hi R2R, nice choices of ETFs. The portfolio seems a little conservative to me but the yield is still decent. I thought about investing in Ishares too but I think BMO is the better choice as well.

    • Hey Jeff,
      It is a bit of a conservative portfolio – based on my wife’s risk tolerance. If it were just up to me, I would pick the Assertive model from the CCP models, but she wanted her portfolio to be a bit more conservative.

      Thats what I found too – BMO ETFs are really good and well put together – giving iShares a run for their money

  6. Nice list of ETFs. I hold 4 ETFs in my portfolio that spans International (VWO), Utilities (VPU), US Dividend (SCHD) and Tech (XLK) sector. Expense ratio is one of the main things that I look at when trying to choose a fund especially if it isn’t a specific niche fund.
    All the very best in your chosen funds.

    • Thanks for stopping by and the comment, DGJ. Those are interesting ETFs you hold – coincidentally, I own a utilities ETF myself, which I’d like to sell and buy a stock instead, but the valuations for utility companies is ridiculously high, so I have decided to leave it as is for now.


  7. R2R,
    Looks like you put a decent amount of work into making your choices. I’m pretty much devoted to individual DG stocks for now, but I can see the practicality of using ETFs. I’m trying to contemplate legacy issues these days.

    Basically, if something happens to me, my wife won’t understand how to manage the portfolio. She’s just not all that interested in reviewing stocks. So, I’m trying to establish a Plan B to be put to use “some day”. I suspect it will be a collection of ETF holdings and nothing more. Lots to choose from, that’s for sure, which makes for an interesting decision process. Nice work on your part.


    • Thats the idea I went with Steve. If something were to happen to me – my wife would be able to manage the portfolio and I have tried to keep it simple as simply and diversified as possible. There are of course some aspects missing – for e.g., the fixed income portfolio is only exposed to Canadian market and there is no US exposure – but I am ok with that for now. We might look at adding that later once we have some more stabilization in the bond market.

      I think ETFs are a great way to go if you are looking for simplification – but then again, you could always go with some solid companies and keep reaping the dividends and not worry about how the company is run – companies like JNJ pop into the mind. No matter what happens – the company will remain a cornerstone of healthcare and is as solid as they come. The trick will be to find something in other sectors.


Leave a Reply

Your email address will not be published. Required fields are marked *