Beginner’s Guide to ETF Model Portfolios in Canada

If you want to grow your money, stop saving it. The secret to building wealth isn’t a secret at all. You need to invest your money if you want to achieve financial independence and live life on your own terms. Luckily, you can build a diversified ETF portfolio without the need for in-depth research, complicated analysis techniques or hands-on management.

Exchange-Traded Funds (ETFs) have become a popular investment tool for beginner investors because they offer low fees and more versatility than traditional mutual funds. But if you’re a beginner, building your own ETF portfolio can be intimidating. There are so many things to take into consideration. So how can an investing greenhorn get started on their journey to financial independance? 

Sit back and relax. We’ll tell you everything you need to know about how to build your very own ETF portfolio, the easy way.

Understanding ETFs for beginners

An ETF is an Exchange-Traded Fund, which is a security that can track an index or group of assets. For example, the Toronto Stock Exchange (TSX) tracks the performance of 1,500 different Canadian corporations. You can buy ETFs modelled after the TSX. 

What does that really mean? It means that when you buy that ETF you are buying shares in each of the corporations tracked on the TSX. You can buy different types of ETFs which are typically classified by whether they track stocks, fixed income assets, commodities, or currencies. 

You may have heard of ETFs as a way to get exposure to various markets without having to buy individual stocks in each market. That’s what makes ETF such an incredible investing tool for seasoned and amateur investors alike. They give Canadians the ability to build an easy,  inexpensive, diversified investment portfolio without the crazy high fees that accompany traditional managed funds.

How to build the right ETF portfolio for your needs

There are many different types of ETFs that you can choose from, but the right one for your needs will depend on how you want to invest. Before you get started, you’ll need to determine two things:

1. Your risk tolerance 
2. Your time horizon 
   

Generally speaking, investors with lower risk tolerances structure a more balanced asset mix of equities and fixed-income assets. Those with a higher risk appetite and more aggressive investing strategy tend to weigh their portfolios heavily in favour of equities over fixed-income assets. 

Some investors with a high risk tolerance and a time horizon in excess of 10 years may even invest their entire portfolio in equities and none in fixed income assets. They have the time, and stomach, to recover from severe market downturns. The opposite is true for investors with low or no risk appetites, or very short time horizons since they do not have the time to recover.

Once you’ve figured out how much risk you’re willing to take on, how long you want to invest and how involved you want to be managing your portfolio, you’ve already won half the battle. You are in a position to choose the right combination of ETFs. For example, someone with a long time horizon and a higher risk tolerance may choose to buy stock market ETFs, while someone with a more conservative profile may choose ETFs that track bond market or gold indexes.

What is a model ETF portfolio?

If you’re anything like me, you’ve done your research and you’re all fired up to start your own investing journey. But when push comes to shove and it’s time to open a brokerage account and make your first trade, you suddenly get hit with decision paralysis. There is so much to choose from that you cannot make any decision at all.

When it comes to self-directed investing, there’s no shortage of information, tools, and conflicting advice. All that easily accessible knowledge is just as much a curse as it is a blessing. Due diligence is important but it can make your head feel like it went a couple of rounds with an MMA fighter.  

All I can say is thank God for model ETF portfolios. A model ETF portfolio is a pretend portfolio built to different risk tolerances. They give you an exact breakdown of what investments/assets are held, the ticker symbol and how they’re weighted in the portfolio. They’ll even be labelled “Conservative” or “Growth” so you know how risky they are.

3 ETF portfolios you can copy with your brokerage account

In order to start buying ETFs and building your portfolio, you’ll need to open a brokerage account. My two favourites are Questrade and Wealthsimple because of their user-friendly platform and low fees. 

A model portfolio is an incredible tool for any beginner who wants to get started with DIY, self-directed investing but isn’t sure how to structure their portfolio. My favourite site for model ETF portfolios is Canadian Couch Potato, no contest. 

There, you’ll find two model portfolios using two different all-in-one asset allocation ETFs from Vanguard and iShares. Asset allocation ETFs hit the market back in 2018 and have become a popular choice among passive DIY investors. They are a low-cost, convenient and low maintenance ETF that provides diversification across several asset classes such as equity, fixed income, and gold all in one ETF. These are great on their own or in addition to other single asset class ETFs. 

In case you couldn’t tell from the name, Canadian Couch Potato (CCP) is all about convenience and efficiency for passive investing. Here are three CCP model portfolios for three different risk profiles, the asset allocation ETFs, traditional ETFs, and their underlying holdings.

1. Conservative Low-Risk ETF Portfolio: 70% Fixed Income, 30% Equities

(VCIP) Vanguard Conservative Income Portfolio

Fixed Income:
70% (VAB) Vanguard Canadian Aggregate Bond Index ETF

Equities:
30% (VEGT) Vanguard All-Equity ETF

Note: Vanguard Conservative Income ETF (VCIP) is its own ETF. When you buy VCIP you are automatically buying the underlying assets, and their weighted distribution, listed above.

2. Balanced Moderate Risk ETF Portfolio: 40% Fixed Income 60% Equities

(XBAL) iShares Core Balanced ETF Portfolio 

Fixed Income:
13% XBB iShares Core Canadian Universe Bond In
3% (XSH) iShares Core Canadian Short Term Corporate + Maple Bond Index ETF
2% (GOVT)  iShares U.S. Treasury Bond ETF
2% (USIG) iShares Broad USD Investment Grade Corporate Bond ETF

Equities:
20% (XIC) iShares Core S&P/TSX Composite Index ETF XIC 
36% (ITOT) iShares Core S&P Total U.S. Stock ETF ITOT
20% (XEF)  iShares Core MSCI EAFE IMI Index ETF XEF
4% (IEMG)  iShares Core MSCI Emerging Markets Index ETF

Note: iShares Core Balanced ETF Portfolio (XBAL) is its own ETF. When you buy XBAL, you are automatically buying the underlying assets, and their weighted distribution, listed above.

3. Aggressive Higher Risk Growth ETF Portfolio: 20% Fixed Income, 80% Equities

(VGRO) Vanguard Growth Portfolio 

Fixed Income:
12% (VAB) Vanguard Canadian Aggregate Bond Index ETF
4% (VBU) Vanguard U.S. Aggregate Bond Index ETF 
4% (VBG) Vanguard Global ex-U.S. Aggregate Bond Index ETF

Equities:
24% (VCN)  Vanguard FTSE Canada All Cap Index ETF 
32% (VUN) Vanguard U.S. Total Market Index ETF
18% (VIU) Vanguard FTSE Developed All Cap ex North America Index ETF  
6% (VEE) Vanguard FTSE Emerging Markets All Cap Index ETF

Note: Vanguard Growth Portfolio (VGRO) is its own ETF. When you buy VGRO, you are automatically buying the underlying assets, and their weighted distribution, listed above.

The best ETF portfolio hack no one is talking about

Of course, if you’re still feeling anxious about getting started on your own, we have a hack for that. As one of my favourite Canadian FIRE bloggers, Miss Money Sensei, once said “The best time to invest was yesterday. The second best time is today.” She hit the nail on the head. You need to start investing right now, you can figure out the nuts and bolts later. 

Open up a robo-advisor account through Wealthsimple or Questrade, for example. Answer a few questions about your risk tolerance and timeframe. They’ll work their magic putting together the best possible portfolio based on your current needs. Deposit a lump sum or make regular contributions, it’s up to you. Boom, you’re invested. It is super easy and completely painless.

Keep an eye on your portfolio, but give it some time as you evaluate its success. It’s the tortoise and hare again, and we know how that turned out. How are those gains? Are you happy with your returns? Have you had time to learn more about investing and finally feel ready to take the reins? 

Great! You can open your brokerage account, copy your own robo-advisor portfolio and start investing for a fraction of the cost. Robo-advisors disclose your portfolio holdings on a regular basis. Just take a look at your holdings. What do you have, how are they weighted, and what’s the ticker symbol? Get to work buying those assets yourself in your brokerage account. 

Personally, I have a Registered Education Savings Plan (RESP) for my children through Wealthsimple. I didn’t have a hot clue about investing at the time. I just knew 17 years was a long time horizon. So I chose the most aggressive asset allocation their robo-advisor offers; 90% equities and 10% fixed income assets. I have a long time to recover my losses from any major market downturns, so I am comfortable with a high-risk portfolio. 

To date, that portfolio has generated an average of 13.5% annual returns. Not bad for a rookie. Here are my holdings:

Aggressive Growth ETF Portfolio: 10% Fixed Income, 90% Equities

Fixed Income:
7.5% (ZFL) BMO Long Federal Bond Index ETF
2.5% (GLDM) SPDR Gold MiniShares Trust

Equities:
22.4% (VTI) Vanguard Total Stock Market ETF
22.4% (XEF) BlackRock Canada iShares Core MSCI EAFE IMI Index ETF
16.8% (EEMV) BTC iShares Edge MSCI Min Vol Emerging Markets ETF
11.3% (ACWV) BTC iShares Edge MSCI Min Vol Global ETF  
11.2% (XIC) BlackRock iShares Core S&P/TSX Capped Composite Index ETF
5.5% (VUS) Vanguard U.S. Total Market Index ETF CAD-hedged

ETF model portfolios : final thoughts

When I was new to investing, all the information out there made my brain feel like the bottom of my purse. I fell down the investing rabbit hole. The perfectionist in me wanted to learn everything there is to know right now, so I could build the most killer portfolio ever. But that just wasn’t realistic. When it comes to learning any new skill, slow and steady wins the race. I started with a robo-advisor because time is money. I knew I needed to get my cash in the stock market sooner rather than later, but I wasn’t ready to manage things myself.

As time went on, I learned more about investing. Then I discovered how to hack my way through designing my own ETF portfolio while saving on management fees. You don’t have to know everything today. But you do need to know how much risk you are comfortable with, and how long you want to be invested. Once you get those two things figured out, ETF’s become your best friend. And the rest is easy peasy lemon squeezy.