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.