By definition, a model is something that emulates real life. No wonder even the best models need to be updated now and then. Take my model ETF portfolios, for example. With the first half of 2017 behind us, I’ve made a few tweaks to them for ongoing excellence.

The quick-take

As the word “tweak” implies, most of the changes are minor, such as swapping a few costlier funds for cheaper choices. There is one notable update I’m particularly fond of. You’ll now find several model portfolios, to reflect the varied tax- and cost-efficient realities within each of these account types:

  • TFSA and RESP
  • RRSP and RRIF
  • Taxable

For example, certain ETF products may be more tax-efficient when held in one account type versus another. Now, no matter which account you’re trading in, you’ll have a model portfolio of ETFs that are best structured for the task at hand.


What else can I tell you? If you feel your ETF portfolio is already sitting pretty within your various accounts and this quick-take is all you need to know for now – that’s fine. If I’ve piqued your interest, read on to see the specifics.

TFSA and RESP accounts

In this version of the model portfolios, I’ve replaced the Vanguard U.S. Total Market Index ETF (VUN) with the iShares Core S&P U.S. Total Market Index ETF (XUU). Relative fees are the driving force behind the change. Vanguard has maintained VUN’s MER at a now-pricey 0.16%, while BlackRock has steadily decreased XUU’s MER to 0.07%.

Vanguard also got the boot on their bond ETF for similar reasons. The BMO Aggregate Bond Index ETF (ZAG) has replaced the Vanguard Canadian Aggregate Bond Index ETF (VAB), due to its lower expected MER (0.10% vs. 0.13%).

As there are no foreign withholding tax reductions for holding US-listed ETFs in TFSA or RESP accounts, I’ve used entirely Canadian-listed ETFs in this version of the model portfolios.


RRSP and RRIF accounts

Although the model portfolios above are suitable for smaller RRSP or RRIF accounts, investors with larger accounts can save $100s to $1,000s annually in foreign withholding taxes and product fees by investing in US-listed foreign equity ETFs. The caveat is that you must master the dreaded Norbert’s gambit strategy to cheaply convert your Canadian dollars to US dollars before purchasing the US-listed ETFs.  Otherwise, most of the benefit of going foreign will be eroded by the brokerage’s steep currency conversion fees.

If you’re up to the challenge, I’ve created model portfolios using US-listed ETFs specifically for your RRSP and RRIF accounts. Please ensure that you fully understand the additional costs and complexities involved before placing these trades. Or, if you’ve decided life is just too short to jump through so many hoops, there’s absolutely no shame in using Canadian-listed ETFs. You’ll still be miles ahead of most investors who are playing the even more costly active investor’s game.


Taxable accounts

For taxable accounts, I’ve tinkered with the model portfolio by switching out a less tax-efficient bond ETF (ZAG) with the more tax-efficient BMO Discount Bond Index ETF (ZDB). In a previous blog post, I calculated the after-tax return for a taxable investor holding various plain-vanilla bond ETFs, and ZDB was the clear winner. ZDB also has an expected MER of 0.10%, so there’s no difference in fees.


Foreign withholding tax

It’s hard to manage your foreign withholding taxes if you’re not sure what to expect from them, so I’ve added an estimate for this overall tax drag on the various model portfolios. For example, the foreign withholding tax drag on a balanced portfolio held in a TFSA account would be about 0.12% (in addition to the MER of 0.11%). This should help eliminate some of the confusion that can otherwise arise.


A model on the move

So there you have it. Don’t feel as if you have to rush right out and make a flurry of immediate trades. If your portfolio is mostly optimized already, you may want to ride out these recent updates until you’re making changes anyway. But when you are ready for a change, these newest model portfolios should help you keep up with the latest in real-life pricing, products and performances.