My benchmark Sleepy Portfolio was assembled in the beginning of 2005 using ETFs available at that time and assumed that the portfolio was held in a RRSP account (hence the 25% limit on foreign-listed ETFs). Needlessly to say, things have changed quite a bit since then and if I were constructing the portfolio today, here are the changes I would make:
- Capture exposure to US equity through a total-market ETF like the VTI. The mandate for XSP has changed within the past two years. Instead of using derivatives to track the S&P 500, it now owns IVV (iShares S&P 500 index fund) and hedges the currency exposure. The MER for VTI is a tiny 0.07% compared to 0.24% for XSP.
- XIN also used derivatives to track the MSCI EAFE Index to get around the 30% limit on foreign content. For long-term investors, EFA is a better option because the XIN costs an extra 0.15% to hedge the currency exposure. It is debatable whether the foreign currency exposure in EFA needs to be hedged at all. While the EFA is denominated in US dollars, it tracks a basket of stocks that are denominated in Euros, Pounds, Yen etc. and a direct holding in EFA really provides exposure to these currencies, not the US dollar.
- There is an even cheaper option for investors wanting to track the MSCI EAFE Index. Vanguard’s two ETFs - VGK and VPL - together (three-fourths in VGK and one-fourth in VPL) track exactly the same index and cost slightly more than half that of EFA.
- I’ve already mentioned that VWO is preferable to EEM because it is much cheaper to own.
- David Swensen argues in his book Unconventional Success that real-return bonds are a core asset class. So, a portion of fixed-income exposure could be allocated to real-return bonds (XRB tracks the real-return bond index).
If I implement the Sleepy Portfolio today, it would be invested in a money market fund, XBB, XRB, XIC, VTI, EFA, VWO and XRE.
NB: I’ve been thinking about this post since I rebalanced the Sleepy Portfolio, but Dave’s thoughtful post on constructing his portfolio, inspired me to write this post.
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16 responses so far ↓
1 Mike // Apr 16, 2007 at 10:33 pm
So why don’t you redo the SP? A lot of things did change over the last couple of years.
It would be nice to keep the same portfolio but if indexes can change..so can portfolios.
2 Canadian Capitalist // Apr 16, 2007 at 11:02 pm
Good point and it is something I am considering. Its not just that ETF mandates and rules have changed and new products are now available. I have learnt a lot too in the past few years, so it would make sense to reflect that.
3 Mike // Apr 17, 2007 at 7:22 am
Yah, between reading blogs & books I’ve learned a ton over the last 6 months which has greatly changed my investment planning.
4 Steve Heath // Apr 17, 2007 at 10:25 am
CC - for us n00bs that are still learning, I’d like to request a detailed overview of what your new SP is made of, since I still don’t understand a lot of acronyms or don’t know where to find out about currencies and the like.
For example, I’m guessing VTI is a vanguard fund since it starts with V, but do you mean VTI is hedged so is in CDN$ or is VTI in USD$? And what do you mean by it being a total market index when it seems to own the S&P 500?
I guess what I’d love to see is a breakdown of your new SP with who makes each ETF, what currency it is in, and what it covers in non-acronyms
(ie, is EAFA Europe and the Far East? Europe, Australia and Far East?)
I am trying to make my own sleepy portfolio, although I will just be doing all my investments with it, not using it as a benchmark, and I’m having trouble figuring out how to get European, Indian, and Asian exposure in their own currencies, and being able to understand how you guys do it would help a lot.
Steve
5 Canadian Capitalist // Apr 17, 2007 at 11:01 am
Steve: Fair enough, I’ll make a series of posts on how to use ETFs to construct a diversified portfolio. Sorry for the acronyms. I should also link back to other posts that discuss these topics.
6 Joe // Apr 17, 2007 at 11:25 am
VWO is not the same as EEM - VWO excludes Russia - which is a pretty big market to ignore.
As with all value judgements, make sure you are comparing apples to apples!
7 Damir // Apr 17, 2007 at 11:48 am
CC - your portfolio has international(global) exposure in stock ETFs but your bonds are Canadian only. Is there a reason for that? Do you, or your readers, know an ETF to track a kind of “global bond index”?
8 Canadian Capitalist // Apr 17, 2007 at 1:17 pm
Joe: VWO does have a 10.2% exposure to Russia. Actually, the top holding is Gazprom. Vanguard changed the mandate in fall of 2006 to track the MSCI Emerging Markets Index by including Russia and Malaysia. You can find the press release on the Vanguard website. VWO is now a cheaper apple than EEM!
9 Canadian Capitalist // Apr 17, 2007 at 1:41 pm
Damir: I read somewhere that currency rate fluctuations would balance out interest rate differentials in free market economies over the long-term. So, it is debatable if bonds denominated in foreign currency are a core asset you’d want to hold in your portfolio.
10 Neil // Apr 17, 2007 at 2:26 pm
I like the improvements you have proposed to the sleepy portfolio. I don’t like XIC though. The concept of this ETF is good (ala the Nortel problem in 1999), but this stock is not very liquid, and you will save a lot of money in spread costs by using XIU which is, from a passive prespective, pretty much the same thing. If a person is going to get involved with ETF’s they must also read about how to trade since these trade like stocks, and there is a bit of skill to making sure you get the appropriate price for your ETF. A liquid stock protects you from a lot of the sharks out there, and you won’t get hosed as bad if you buy or sell an odd lot. Non-liquid ETF’s can be used, but require a lot patience, and careful use of limit orders. Generally people using an ETF passive approach aren’t interested in spending a lot of time on their investments.
11 Suz // Apr 17, 2007 at 8:45 pm
XRB — I would really appreciate some comments on this one. I totally understand your interest in Real Return Bonds. I’m totally flumoxed as to why you would suggest XRB could substitute for holding the actual RRBs. My personal experience with anything that is a grab bag of bonds (mutual fund, index or whatever with no specific maturity date) is that, over time, the aggregated instrument behaves quite differently from holding an actual RR bond for eventual sale or to maturity. Maybe I’m missing something here.
12 Mike // Apr 17, 2007 at 9:41 pm
I’m just re-reading this since I’m actually getting inspired to do the sleepy ETF thing myself.
Question - You mentioned that you would use EFA to track the MSCI EAFE index but that VGK + VPL = same thing for half the cost so why did you choose EFA?
13 Canadian Capitalist // Apr 17, 2007 at 10:11 pm
Mike: Simple. VGK and VPL are new ETFs and when I assembled the Sleepy Portfolio, they were not in the market yet. I already own EFA in my RRSPs and it would be a hassle for me to sell them and buy VGK and VPL. Perhaps when my portfolios are large enough, I would do that.
Suz: You have a point about the XRB - most of its holdings are in four real return bonds. But XRB should have a similar risk and return characteristics as buying the underlying bonds if you don’t care about maturity. My understanding is you should bother with individual bonds only if you want to match the maturity date with a future obligation. Otherwise, a mutual fund or ETF is a suitable option.
14 Dave // Apr 17, 2007 at 11:58 pm
“If a person is going to get involved with ETF’s they must also read about how to trade”
Bull. See below.
“since these trade like stocks, and there is a bit of skill to making sure you get the appropriate price for your ETF.”
I have no stock trading skill. I bought 38 shares of XIC on March 26, 2007 at $83.84. It looks like the range that day for XIC was $83.56 and $84. Closed at $83.90. That’s just one data point.
Show me some references or data to back up your point.
“A liquid stock protects you from a lot of the sharks out there, and you won’t get hosed as bad if you buy or sell an odd lot.”
Sharks? Who are the sharks? Are you trying to say that XIC is so much less liquid than XIU that it really makes a difference. Explain why.
Define hosed. Do you mean paying too much for an ETF? How much are we talking here? And if I hold that ETF for 10 years how much of an impact will it have on my final value? I’m pretty sure the Sleepy Portfolio is designed as a long-term investment portfolio.
“Non-liquid ETF’s can be used, but require a lot patience, and careful use of limit orders.”
Sorry I have a hard time believe this is the case for XIC.
15 Doug // May 21, 2007 at 9:35 pm
re: Dave and XIC. Go Dave!
re: RRBs. I am debating this very situation and trying to understand the info provided at http://www.bylo.org/rrbs.html before procceding. Avoiding fund expenses certainly sounds appealing.(ie. holding the issues directly) Avoiding semi-annual interest payments sounds appealing as well (ie. stripped RRBs). I suspect its probably going to be XRB (mer 0.35%) until I feel more educated.
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