Sleepy Portfolio

Making a low cost portfolio even cheaper

July 10, 2013

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The Sleepy Portfolio was designed to be an ultra low-cost portfolio and the exchange-traded funds (ETFs) used in the portfolio were the cheapest available at that time. As you can see in the following table, the Sleepy Portfolio currently costs just 20 basis points (0.20 percent) per year. In other words, if you invest in a portfolio like the Sleepy Portfolio, you’ll incur a cost of just $200 per $100K of portfolio balance. If the portfolio were assembled with mutual funds that carry an average cost of 2.5 percent instead, the same portfolio would cost $2,500 per $100K. Costs matter a great deal in investing.

Product Cost Weight
TD Investment Savings Account (TDB8150) 0.25% 5.00%
iShares DEX Short Term Bond ETF (TSX: XSB) 0.28% 15.00%
iShares DEX Real Return Bond ETF (TSX: XRB) 0.39% 5.00%
iShares S&P/TSX Capped Composite ETF (TSX: XIC) 0.27% 20.00%
iShares S&P/TSX Capped REIT ETF (TSX: XRE) 0.60% 5.00%
Vanguard Total Stock Market ETF (VTI) 0.05% 22.50%
Vanguard FTSE Developed Markets ETF (VEA) 0.10% 22.50%
Vanguard FTSE Emerging Markets ETF (VWO) 0.18% 5.00%
Weighted Average 0.20%

It is interesting to note the contrast in fees between US ETFs and Canadian ETFs in the Sleepy Portfolio. Half the portfolio is made up of US ETFs, which cost a weighted average of 8.4 basis points. The other half, which is made up of Canadian ETFs, cost a weighted average of 31.6 basis points. In other words, Canadian ETFs, even though they are cheap compared to traditional products, still cost as much as 4 times that of US ETFs!

Thankfully the advent of Vanguard and the launch of ETFs by BMO offer us the opportunity to cut the costs of the Sleepy Portfolio even further. By replacing some of iShares ETFs with lower cost products (see table below), the weighted average fees of the Sleepy Portfolio will drop to 14 basis points or 30 percent lower. It works out to a saving of $60 per $100K. An investor would incur trading commissions in making the switch, which can be reduced by making the switch when adding new money or rebalancing the portfolio. Caution must be exercised in taxable accounts because a switch to lower cost products might result in a taxable event.

Product Cost Weight
TD Investment Savings Account (TDB8150) 0.25% 5.00%
Vanguard Canadian Short Bond ETF (TSX: VSB) 0.19% 15.00%
BMO Real Return Bond ETF (TSX: ZRR) 0.25% 5.00%
Vanguard FTSE Canada ETF (TSX: VCE) 0.11% 20.00%
Vanguard FTSE Canada Capped REIT ETF (TSX: VRE) 0.40% 5.00%
Vanguard Total Stock Market ETF (VTI) 0.05% 22.50%
Vanguard FTSE Developed Markets ETF (VEA) 0.10% 22.50%
Vanguard FTSE Emerging Markets ETF (VWO) 0.18% 5.00%
Weighted Average 0.14%

Sleepy Portfolio 2Q-2013 Update

July 9, 2013

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Background

I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, which at that time was mostly invested in individual stocks. The portfolio started off with an initial outlay of $100,000 but no new money has been added since. This is not simply a model portfolio; it reflects investment returns that can be obtained in the real world by accounting for costs such as spreads, trading commissions, MERs, foreign exchange conversion charges etc. For example, dividend payments on US-listed ETFs are assumed to incur a foreign exchange fee of roughly 2 percent when they are deposited into the account. Note, however, that the portfolio is assumed to be held in a registered account, so it does not take taxes into account.

The portfolio has a target allocation of 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges. The cash portion is invested in a high-interest savings account that is available through many discount brokers and pays an interest of 1.25 percent.

2Q-2013 Update

The Sleepy Portfolio has gained 6.70 percent year-to-date since my previous update in the New Year.

Here’s how the portfolio looked as of July 9, 2012:

Asset Type Security #s Price Current Value % Portfolio Target % Delta
Cash TDB8150 11501 $1 $11,501 7.47% 5.00% -2.47%
Bonds TSX: XSB 705 $29 $20,128 13.07% 15.00% 1.93%
  TSX: XRB 275 $23 $6,237 4.05% 5.00% 0.95%
Canada Equity TSX: XIC 1445 $19 $27,874 18.10% 20.00% 1.90%
US Equity VTI 440 $85 $39,364 25.56% 22.50% -3.06%
International Equity VEA 945 $36 $36,030 23.40% 22.50% -0.90%
Emerging Markets VWO 170 $38 $6,781 4.40% 5.00% 0.60%
Other TSX: XRE 392 $16 $6,084 3.95% 5.00% 1.05%
Total       $153,998    

This update is a perfect illustration for widely diversifying your stock portfolio across many geographies. Since the inception of the portfolio (excepting the 2008-09 financial crisis), you could count on US stocks to drag down the portfolio. But this year, there has been a change in fortunes. US stocks have YTD returns of 22.8 percent *and* on top of it, the US dollar has strengthened by 6 percent.

The only other asset class in the positive column is Developed Markets excluding North America, which are up 8.8 percent YTD. Emerging markets were down 9.3 percent.

The big story this year has been the recent sharp rise in bond yields (recall that bond yields and prices move in opposite directions) resulting in a sharp drop in the price level of real return bonds and REITs. Fortunately, the bulk of the portfolio’s bond position is held in short-term bonds, which are less sensitive to interest rate movements.

Transactions

With half an year’s worth of dividends, interest and distributions adding up, the cash portion is now significantly above target. Therefore, we will deploy some cash into the two asset classes that are the most out of whack — bonds and Canadian stocks.

Buy 100 shares of iShares (TSX: XIC) at $19.25 plus trading commission of $9.99

Buy 68 shares of (TSX: XSB) at $28.55 plus trading commission of $9.99

Total cash deployed: $3,886

Sleepy Mini Portfolio Q1-2013 Update (and TurboTax Online Giveaway)

April 18, 2013

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The Sleepy Mini Portfolio has gained 6.7 percent my previous update. The Sleepy Mini Portfolio was launched in August 2007 with an initial investment of $1,000 with a target allocation of 20% bonds, 20% Canadian stocks, 30% US stocks and 30% International stocks to illustrate how a regular investment program can slowly build wealth over the long term. Another $1,000 was added to the portfolio every quarter since then for a total investment of $22,000 so far. Here’s how the portfolio looks as of April 18, 2013:

TDB909 – Canadian Bonds – $5,037 (19.0%)
TDB900 – Canadian Equities – $4,882 (18.4%)
TDB902 – US Equities – $8,336 (31.4%)
TDB911 – International Equities – $8,263 (31.2%)
Total – $26,518
Total Invested – $22,000

I’ve been a little bit tardy in adding new money to this portfolio. It’s better late than never, so let’s add another $1,000 to the portfolio and rebalance it to the original target allocation using this rebalancing spreadsheet. Here are the results:

Transactions

TDB909 – TD Canadian Bond Index (e-Series) – Buy units for $420.
TDB900 – TD Canadian Index (e-Series) – Buy units for $580.

It is interesting to note how market leadership has shifted from Canadian stocks and bonds to foreign stocks.

TurboTax Online Giveaway

Thanks to TurboTax Online, I am giving away four (4) online coupons for filing one (1) tax return with TurboTax Standard, Premier or Home & Business. To enter just leave a comment in this post and don’t forget to include a valid e-mail address. If you are reading this through your favourite RSS Reader or via-email, you have to click on the headline, get through to the website and scroll down to the bottom of the page and type in your comment.

Some quick rules:
(1) No purchase necessary. A skill-testing question may be required.
(2) Deadline for entries is 11:59 p.m. EDT on Friday, April 19, 2013.
(3) One entry per person please.
(4) I treat your privacy very seriously. Your email will be used for the sole purpose of contacting you if you happen to win.
(5) I’ll pick four (4) entries at random and announce the winner after the deadline. All decisions are final.