In Episode 5 of the CPM Podcast, Justin continues to fine-tune his portfolios. He shows investors how they can cut the cost of their Vanguard or iShares asset allocation ETF by switching to one of his “Ridiculous” model portfolios. During the discussion, investors will discover the many benefits of using U.S.-based foreign equity ETFs in their RRSP, and also learn how tax-efficient bond ETFs can help to reduce their tax bill in taxable accounts. And in this episode’s ETF Kombat, the BMO Discount Bond Index ETF (ZDB) will take on not one, but three of its rivals: VAB, XBB and ZAG. Justin will end the show by answering a popular listener question on whether they should switch their old CPM portfolio to one of the newer ETF portfolios introduced in 2020.
- How to read the Vanguard and iShares Ridiculous model ETF portfolio reports [0:01:25.5]
- Comparing the Light and Ridiculous model ETF portfolio reports [0:02:56.5]
- Foreign bond differences between the Light and Ridiculous ETF portfolios [0:03:34.5]
- Equity differences between the Light and Ridiculous ETF portfolios [0:04:52.5]
- Making your ridiculously complex investing experience slightly easier, using VEQT and XEQT [0:07:24.5]
- ETF Kombat: ZDB takes on not one, but three bond ETFs (VAB, XBB and ZAG) [0:08:16.5]
- The pros and cons of managing a Ridiculous ETF portfolio [0:14:24.5]
- Voicemail Question: A blog reader asks Justin whether he needs to switch his old CPM portfolio to one of the newer model ETF portfolios introduced in 2020 [0:18:11.5]
Blog posts/resources discussed in this episode:
- Canadian Portfolio Manager: Introducing the “Ridiculous” ETF Portfolios
- What Should You Do When We Update Our CPM Portfolios?
- Canadian Portfolio Manager Model ETF Portfolios
Hi Justin, thank you sincerely for all your work. I have read all your blog posts and listened to all your podcasts. I don’t believe I would struggle in terms of the difficulty of maintaining a plaid portfolio, but I am trying to optimize asset allocation AND the time required to manage the portfolio. My thought is to use my TFSA and Taxable account for XEQT (and other asset allocation etfs as I get older, I am currently 25), and then model your ridiculous portfolio for my RRSP for better product cost and FWT. What are your thoughts on this strategy? Can you think of a more optimal strategy that optimizes asset allocation AND time required to manage the portfolio? NOTE: Currently have 80k in my wealthsimple TFSA that I would move to Wealthsimple trade and buy all XEQT, 50k cash which I would put in a taxable account with Wealthsimple Trade and also buy XEQT, and lastly my RRSP with 20k I would move from Wealthsimple to Questrade to allow for easy execution of norbert’s gambit. I look forward greatly to your answer and once again thank you sincerely for your priceless information and countless hours of efforts to come up with all this material :)
@Jon: With a $20K RRSP value, you’re not going to save much in product costs and foreign withholding taxes by using U.S.-based ETFs. I tend to pay more attention to these details when the RRSP value is around $200,000 or higher. So if you’re looking for simplicity, you can likely just hold XEQT across all accounts for now until your RRSP value has grown to the point U.S.-based ETFs make more sense.
I see, good to know, thank you Justin! I also appreciate that you used a value of $200,000 rather than a generic statement of “more than 20K” as most people would do, this will be helpful for future planning :)
Hi Justin,
To avoid Foreign Withholding Taxes when buying US-listed ETFs on RRSP accounts, do I need to submit any form to IRS as a Canadian citizen? For example, the W-8BEN form. If yes, should I submit the documentation to my brokerage (Questrade) or to the assessment management firm (Vanguard/iShares)?
Thank you in advance. I am in the final details to implement your ridiculous portfolio :)
@Bruno – You shouldn’t require a W8BEN form for an RRSP (only for TFSA and taxable accounts), but you could follow-up with Questrade just to be certain (the form should be provided to Questrade if you do need to complete one).
Good luck with the portfolio implementation!
Hi @Justin,
FYI, I finally had the chance to follow-up with Questrade. According to them, I don’t need to provide the W-8BEN form in any of my accounts (Margin, RSSP, TFSA) because I have uploaded a valid ID. The form would only be needed by corporate account owners to confirm their address (because they don’t have a valid ID to provide).
@Bruno – thanks for the heads up! :)
Justin,
What are your thoughts on not including BMO asset allocations in the model portfolios. My only thoughts are: less selection, and little to no small cap exposure in international/US markets. Otherwise, some of their international products seem very tax efficient when held in a TFSA as they hold the assets directly.
ZAG and ZCN, seem similar to their Vanguard and iShares counterparts. With the new model portfolios, are many of these ETFs (XUU or VUN, VIU/VEE or XEF/XEC, ZCN or XIC or VCN, ZAG or XBB or VAB) viewed as interchangeable? Ie. the differences between them aren’t too important for the vast majority of Canadians Or is there a case to be made to compare ETFs by various attributes: # of holdings, MER, FWT, corp vs gov bonds, variations of distributions across countries, sectors, or cap sizes, ETF structure, etc.
@Lucas: I’ve excluded the BMO asset allocation ETFs from the model ETF portfolios, as they do not have U.S.-based versions of their funds (so we can’t improve on the tax-efficiency, like in the Ridiculous or Plaid portfolios). If you’re considering holding a BMO asset allocation ETF (i.e. Light portfolio), this would be a decent substitute for either iShares or Vanguard. As you mentioned, the biggest difference is that BMO does not include foreign small cap stocks in its AA ETFs.
As you mentioned ZAG is interchangeable with VAB or XBB. The same applies to the other ETF pairs in your question.
Hello Justin,
Hope you are doing fine during this time.
I’ve been checking low volatility ETFs ZLU and XMI and in the end they seem to have been done better than VUN and VIU, respectively. Is that right or I might be missing something?
Thank you,
Tony
@Tony: Things are going well here – hopefully you and your loved ones are safe and healthy. It would appear that ZLU has outperformed VUN over the past 5 years (as of March 31, 2020) and XMI has outperformed VIU over the past 3 years (as of March 31, 2020). There will always be some active strategies that will beat a passive strategy over certain periods.
Hi Justin,
Great work!! I am (was) new to Canada – entered in 2018, and learned about ETFs through Ben Felix’s YouTube channel and soon founds and followed yours. I love your ridiculous portfolio, but I think I am making it more complicated. I live in Ontario but I earn in USD. Here is what I plan to buy. I need to maximize my yearly RRSP contribution of C$27,000 and some change. I already have my account with Scotia and under their Ultimate package I get 5 free trades/year
ITOT in USD using Scotia iTrade in RRSP (Or I could open a new RRSP in Questrade)
IEFA in USD using Questrade RRSP
IEMG in USD using Questrade RRSP
XIC in CAD using Wealthsimple Trade RRSP
Canadian Equities in CAD in Wealthsimple Trade RRSP
Bonds in CAD using Wealthsimple Trade RRSP
My wife and friends think I am crazy, and I should make my life simpler my moving all my accounts under one brokerage. Also, I don’t understand why are you giving all this awesome advice for free, instead of trying to lure people into signing up for PWL? I mean as a frugal person I greatly appreciate it, but not sure about the business case behind it.
@Ayon: You may want to listen to your wife and friends! ;) Complicating your portfolio can be more trouble than it’s worth (and maybe your wife and friends are hinting that they’d like to spend more time with you!).
Hey Justin, thanks so much for all this great information, I’ve only moved here a few days ago after reading everything in CCP. Listening to all of your podcasts and reading your blogs I do have a few questions:
When it comes to RRSP and the Home Buyers Plan, what are your thoughts? (Even your thoughts on using HBP in general).
I’m currently in limbo right now between my original plan of sticking my RRSP in a regular account with 1.75% interest or putting it in an 80% bond/ 20% stocks account for a possible 3-4%.
My follow up question, since I need to sell all my stocks for cash in the RRSP to withdraw it, would it be preferred to stick to the Light portfolio to sell one stock? Or to go for Ridiculous (save some on MERs/ FWTR) and sell the 5 stocks? I plan on transitioning the RRSP to a 70% stocks/ 30% bonds just like my TFSA after.
Thanks in advance! My ultimate goal will be to get to ludicrous, and I can’t wait to see what Plaid is about. I watched the 5 min clip of Spaceballs and completely forgot how hilarious it was and love the portfolio complexity reference! It’s also great that you started your podcasts as Dan sadly ended his, can’t wait for your next release! Cheers.
@Fitz: Welcome to the party! If you’re planning on using the HBP, the money should be (or should have been) in safe, liquid and guaranteed cash equivalents. My wife and I plan to use the HBP for our upcoming condo purchase, but will try to pay it back as soon as possible. It’s been in savings accounts for years now.
I think this answers your next question (you shouldn’t be in any of these model ETF portfolios if you require the cash for an upcoming HBP withdrawal):
https://canadianportfoliomanagerblog.com/choosing-your-ideal-vanguard-asset-allocation-etf/
Hi Justin,
What are your thoughts on using a global ex-Canada ETF (XAW or VXC) to replace the US, EAFA, and emerging portions of Ridiculous? My thinking it is allows me to fine-tune my Canadian allocation while minimizing the number of ETFs held. It’s sort of an “in between” of Light and Ridiculous.
Thanks for the great content.
@Dustin: That would be completely fine (it’s how the old CPM models were arranged):
https://canadianportfoliomanagerblog.com/what-should-you-do-when-we-update-our-cpm-portfolios/
HI Justin, Great discussion on the different bond funds in the ETF Kombat section. I am interested in your thoughts of Horizons HBB as a tax efficient alternate for taxable accounts. It has no taxable distributions so on the surface it seems good, maybe too good to true??
@Randall: I’m staying away from the Horizons ETFs for now (at least until there is more after-tax return data to back up their new tax structure). I also feel that the corporate class structure will be targeted by the Canadian government shortly, so I’d rather focus on tax strategies that I aren’t expected to be on the government’s radar.