George Costanza: I’ll sniff out a deal. I have a sixth sense.

Jerry Seinfeld: Cheapness is not a sense.

I have a brother I love a lot … and who reminds me a lot of George Costanza. I’ll bet every family has one. If you don’t think so, look in the mirror; it’s probably you. When it comes to sniffing out deals, my real-life bro is every bit as talented as the fictional George, so I wasn’t surprised when he asked me to create a set of commission-free ETF portfolios he could implement in his Scotia iTRADE account.

Challenge accepted.

Scotia iTRADE gets a massive fail for charging $25 trading commissions on portfolios below $50,000 (unless you’re a loyal customer). Maybe to make up for the price gouging, Scotia offers 50 commission-free ETFs you can trade without fear of depleting your hard-earned nest egg. (And no, that’s not a picture of my brother there … although it could be.)

Before you get too jazzed up about that, the majority of these misfit commission-free ETFs have no place in a prudent portfolio. Luckily for you, I’ve sorted through the mess, back-tested the strategies, and selected five of them that made the cut, and should hopefully track my official model ETF portfolios reasonably well over the long-term. Deal-sniffers of the world, rejoice!


Download the Scotia iTRADE Commission-Free Model ETF Portfolios


In the commentary that follows, I’ll discuss some of the main differences between the original ETFs and Scotia’s commission-free replacement ETFs for each asset class.


Canadian Equities

The Horizons S&P/TSX 60 Index ETF (HXT) replaces the Vanguard FTSE Canada All Cap Index ETF (VCN) in the commission-free version of my model portfolios. HXT excludes mid-size and smaller companies, making it less diversified than VCN. It also uses a more complicated swap structure to obtain its Canadian equity exposure, which some investors may not like. On the plus side, HXT is the cheapest Canadian equity ETF available, with fees of only 0.03% per year.

U.S. Equities

The Horizons S&P 500 Index ETF (HXS) replaces the iShares Core S&P U.S. Total Market Index ETF (XUU). HXS also excludes mid-size and smaller companies, and uses a swap structure to obtain its U.S. large cap equity exposure. Fortunately, this swap structure allows HXS to avoid the additional tax drag from foreign withholding taxes in registered and tax-free accounts, saving investors roughly 0.30% per year. Unfortunately, this swap structure also adds 0.30% annually to the fund’s trading costs, completely offsetting the initial tax savings. HXS is also slightly more expensive than XUU (0.11% vs. 0.07%).

International Equities

The Vanguard FTSE Developed All Cap ex U.S. Index ETF (CAD-hedged) (VEF) has a number of notable differences from the iShares Core MSCI EAFE IMI Index ETF (XEF). First off, VEF hedges away its foreign currency exposure, while XEF rides it out, for better or for worse. In years when the Canadian dollar has significantly appreciated (depreciated) against a basket of foreign currencies, I would expect that VEF would outperform (underperform) XEF.

Secondly, VEF includes an 8.3% allocation to Canadian equities whereas XEF excludes Canadian equities. In a typical balanced portfolio, this would result in an additional ~1.25% portfolio allocation to Canadian equities. This is not really something to lose sleep over, but I point it out for the record.

Third, VEF (unlike XEF) doesn’t hold its underlying stocks directly – it simply holds its US-listed ETF counterpart, the Vanguard FTSE Developed Markets ETF (VEA). Although this may seem like a reasonably efficient way for a Canadian fund company to avoid reinventing the wheel, it results in an additional layer of foreign withholding taxes. If you hold VEF in a registered or tax-free account, I would estimate the additional tax drag at around 0.37% per year, relative to holding XEF.

Finally, as VEF follows a FTSE index, it includes Korea as a developed market. (XEF follows an MSCI index, which still considers Korea to be an emerging market.). This only becomes an issue if you combine a FTSE-following developed markets ETF with an MSCI-mimicking emerging markets ETF; you’ll end up holding Korea in both ETFs. Which brings us to our next asset class …

Emerging Markets Equities

The iShares Core MSCI Emerging Markets IMI Index ETF (XEC) is the only fund you’ll find in both my regular model portfolios and on the Scotia iTRADE commission-free ETF list – so no substitution required. As I mentioned above, MSCI treats Korea as an emerging market, resulting in a double allocation to the country’s stocks. The end result for a balanced portfolio would be an additional ~0.75% allocation to Korean stocks. I think even an index investing purist can live with this.

Fixed Income

Plain-vanilla, broad-market bond ETFs tend to be highly interchangeable, so it was an easy decision to ditch the BMO Aggregate Bond Index ETF (ZAG) and replace it with the iShares High Quality Canadian Bond Index ETF (XQB). XQB does have a few slight differences, such as a 40% allocation to corporate bonds, versus ZAG’s allocation of just under 30%. If you’re holding your fixed income in a taxable account, you may want to ditch these ETFs entirely and consider a more tax-efficient product, like the BMO Discount Bond Index ETF (ZDB). Even if you have to eat a trading commission, the trade-off seems worth it.


Dimes worth of difference

So brother against brother, which of “our” portfolios is expected to come out ahead after costs? Although the above differences may result in over- or under-performance from year to year, I would expect both of us to share similar performance over the long term. That should make my parents happy, as they always hoped we’d eventually learn to share.

Here are a back-tested return comparison table and chart for the balanced portfolios from each model. As you can see, the results were almost identical over the past 20 years.

Model ETF Portfolio Return Comparison as of June 30, 2017

Measurement PeriodBalanced Portfolio
(Scotia iTRADE
Commission-Free ETFs)
Balanced PortfolioDifference
3-Years (Annualized)7.04%7.10%(0.06%)
5-Years (Annualized)9.43%9.74%(0.31%)
10-Years (Annualized)5.41%5.75%(0.34%)
20-Years (Annualized)6.32%6.34%(0.02%)