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%

This article has 5 comments

  1. 1. What exchange do the last 3 trade on? DJ, and FTSE/FTSE?

    2. Does TDB8150 really have 0.25% fee? I didn’t know that.

  2. Canadian Capitalist

    @Slacker: Thanks.

    @Ben:

    (1) The last 3 trade on the NYSE Arca.
    http://en.wikipedia.org/wiki/NYSE_Arca

    (2) Yes. All the Savings Accounts funds have a built in MER of 0.25 percent. All of them usually have a F-Series counterpart that do not have the MER and hence yield 0.25 percent more.

  3. Obviously this would be going in the opposite direction in terms of MER, but I wonder what you would think about switching to the new Vanguard Canada ETF’s?

    For example: VUN in place of VTI. VUN has an MER of 0.15%, but wouldn’t this be more than offset by the currency exchange savings over the years?

  4. Looking at this “new” portfolio I’ve got two questions:
    1) Would you consider replacing VEA+VWO with VXUS? That would reduce future transaction costs. I’m thinking of switching VEA for VXUS so that I can have emerging market exposure.
    2) Vanguard’s VCE trades at a $0.03 bid-ask spread. Aren’t I losing out already? Or is the bid-ask spread loss a 1-time loss that I should recoup over a long-term hold?