Scotia iTrade’s recently announced that its clients can buy or sell 46 ETFs without a commission. Most of the ETFs in the list are Claymore ETFs and I gave some thought to how an investor would go about building a diversified portfolio out of the names in the list. The rules for building the portfolio are: (1) Broad diversification. The portfolio will not make narrow sector bets such as oil sands, agriculture, natural gas or water. This one rule alone would eliminate 19 ETFs from the list. (2) Limited set of asset classes. The portfolio will focus on the traditional asset classes, i.e., cash, government bonds and stocks. Real estate will be the only “alternative” asset class in the portfolio. This rules out another seven ETFs that track corporate bonds, junk bonds, preferred shares, commodities etc. (3) No income products. The portfolio is assumed to be suitable for an investor in her accumulation stage and does not depend on income from the portfolio. Therefore, dividend and other income products are out. This rule eliminates a further 4 ETFs. That leaves us with sixteen ETFs out of which seven were selected for the following portfolio:

Cash – 5% – Claymore Premium Money Market ETF (CMR) – MER 0.27%
Bonds – 20% – Claymore 1-5 Year Laddered Government Bond ETF (CLF) – MER 0.17%
Canadian Stocks – 20% – Claymore Canadian Fundamental Index ETF (CRQ) – MER 0.71%
US Stocks – 21.5% – Claymore US Fundamental Index ETF (CLU.C) – MER 0.73%
International Stocks – 21.5% – Claymore International Fundamental Index ETF (CIE) – MER 0.73%
Emerging Markets – 7% – Claymore Broad Emerging Markets ETF (CWO) – MER 0.71%
Real Estate – 5% – Claymore Global Real Estate (CGR) – MER 0.74%

This portfolio is comparable to the Sleepy Portfolio with one minor difference — the allocation to US/International/Emerging Markets is slightly different, reflecting current global weightings — and one major difference — the Claymore portfolio is tilted towards value stocks. The weighted MER of the Claymore Portfolio is much higher at 0.59%. If the portfolio were constructed with the same products as the Sleepy Portfolio, the weighted average MER would be just 0.18%. According to the useful Claymore Portfolio Index Allocator, the Claymore ETF portfolio would have returned an annualized 6.68% in the time period 2003-11 with a standard deviation of 10.02%. The Sleepy Portfolio would have returned approximately 5.90% with a standard deviation of 8.95% over the same time period. The higher returns of the Claymore portfolio can likely be attributed to the value tilt provided by fundamental indexing.

FD: I neither own nor plan to own any of the ETFs mentioned in this post.

This article has 16 comments

  1. The ticker symbol for the cash position is mislabeled – should be CMR.

  2. It’s striking when you put them side by side like that, because if you think about a portfolio of $100,000, that would mean MERs of $590 vs. $180.
    Makes me think “getting free trades” isn’t a good reason to do it — if you’ve got $10 trades, that’s 41 trades before you’d even break even. You’d really need to want to use Claymore for it to make sense to switch.

  3. CRQ rather than HXT?

  4. Sorry, just clued into the “Claymore” only aspect.

  5. Why are corlporate bonds not a “traditional” assett class?

  6. @Daryn: I agree. Trading commission is only one component of costs and investors should also look at total costs. “Free” here is good only if it doesn’t end up costing an investor more.

    @Jon D.: I’m not entirely comfortable with HXT even though it will save a bundle in taxes in investment accounts.

    @Dr. Dale: Investment-grade corporate bonds have indistinguishable risk/reward profile compared to Government bonds. So, why split your money into 2 ETFs when 1 will do?

    Junk bonds have high correlation with equities and in times of market stress drop in value along with the market. That’s not an ideal holding for investors who own bonds to mitigate portfolio risk. Just look up the performance of any junk bond fund in the past couple of months. They’ve dropped along with stocks while government bonds have even gone up a little bit.

  7. I am not arguing for junk bonds. Is it really true that higher grade corporates have an identical r/r profile to gov’t bonds?

  8. @CC: Thanks for the Swedroe article. I would have thought that the slight corporate premium would have been more pronounced. I have learned something about bond investing. One more slight quibble or observation is that your real estate allocation seems to fall under the “equities” rubric. It might deserve to constittue its own “traditional asset class”. Your thoughts?

  9. @Dr. Dale: I agree with your take. I did not mean to imply that real estate falls under equities. I meant to write real estate is the only other “alternative” asset class in the portfolio. Real Estate is commonly considered an alternative asset class because it doesn’t have the long history that cash, bonds and stocks do.

  10. For clarity sake.. it there a portfolio size where you believe it’s worthwhile building a Scotia iTrade “no commisions ETF” portfolio? 10k, 100k or beyond?

  11. Are you seriously telling people that “real estate doesn’t have the long history that stocks and bonds do”? For most of modern history until the 1980s real estate was the investment of choice for many (perhaps most) wealth builders.What am I missing?

    • @Dr. Dale: Real estate here refers to REITs, not individual rental properties. REITs do not have a long history. Canadian REITs have been in existence only since the last 1990s. We have a much longer history for stock and bond markets.

  12. So I am not really missing anything. Have a good weekend. Now that my people are out of the market for the ususal fall drop in equities, so will I.

  13. Russell O'Connor

    I wonder an all Claymore portfolio would make sense for someone investing in a TFSA where Vanguard ETF’s dividends would be subject to a 30% US witholding tax. Any thoughts on this?