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For aggressive investors only: The maximum growth portfolio

The challenge of investing aggressively is to do it responsibly.

Does a portfolio that is 100-per-cent invested in stocks qualify? "We don't recommend it as an asset allocation, although certainly we know investors do it," said Pat Chiefalo, exchange-traded fund strategist at National Bank Financial.

He and his fellow analysts have a better way. They call it the Maximum Growth Portfolio and it works on the idea of going very heavy on stocks, while adding modest weightings in bonds and alternative investments. "By having products that are not correlated to equity markets, you achieve better risk-adjusted returns," Mr. Chiefalo said.

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The Maximum Growth Portfolio is built with 12 TSX-listed ETFs and designed for investors who have decades to go before they need their money, who are comfortable with stock market risk and who are more interested in growing the value of their portfolio than generating investment income.

An obvious candidate for a portfolio like this is the young adult who is getting serious about investing. Using 12 ETFs is arguably overkill for an investing newcomer, so I asked Mr. Chiefalo if he could streamline the maximum growth portfolio into something smaller. The result is a seven-fund ETF portfolio that will be cheaper and more manageable, but still covers all the bases.

"It gives you a lot in a small package," he said.

In the charts that goes with this column, we've included the full version of the Maximum Growth Portfolio. But most investors, not just the newbies, would be better off with what we'll call Maximum Growth Portfolio Lite.

The fees, taken together, are lower and with fewer funds you'll pay less in brokerage commissions to set it up and rebalance.

Just as important, the Maximum Growth Portfolio Lite sticks to core indexes, while the full portfolio uses complementary products like value and low-volatility ETFs. NBF did this to demonstrate how investors can fine-tune their portfolios according to their market views or preferences.

Low-volatility ETFs focus on stocks that fluctuate less in price than the broader market and would make sense to a nervous investor who wants to take some of edge off of stock market risk, potentially at the risk of some returns. An ETF using a value focus would seek out undervalued stocks, which can at times deliver superior returns.

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Portfolio building with ETFs tracking core indexes alone is both sound and simple. Even so, Maximum Growth Portfolio Lite is best thought of as carrying a warning label that says it's strictly for investors who shrug off stock market fluctuations.

These are people who in the next stock market correction will rebalance (pare winning holdings, add to losers) and possibly add new money.

Young people tend not to invest as boldly as this, even though they can certainly afford to. Provided a young person accepts that stock market corrections aren't a major concern for those who don't need their money for decades, Maximum Growth Portfolio Lite is worth a look.

All the portfolio-building basics – bonds, plus Canadian, U.S. and international stocks – are covered in Maximum Growth Portfolio Lite. The one extra is a 10-per-cent weighting in the Horizons Morningstar Hedge Fund Index ETF (HHF).

The early results for this newer product are inconclusive, but I wouldn't hesitate to skip it and instead allocate the money to the portfolio's corporate bond ETF or a broad market bond ETF like the one in the full version of the Maximum Growth Portfolio.

Mr. Chiefalo included HHF because it's one of the few options available in ETF-land for adding alternative investments that are outside the orbit of the stock and bond markets. "It's in there with the intention of offering some kind of buffer in the event of a market correction," he said.

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The index on which HHF is based – the Morningstar Broad Hedge Fund Index – tracks the returns of 600 to 800 hedge funds using a wide variety of strategies. Rather than investing in these funds directly, HHF uses futures contracts, ETFs, money market instruments (ultra short-term government and corporate debt) and cash to replicate the index returns.

All in all, it's a complicated and expensive fund, with a management expense ratio of 0.95 per cent.

Even with HHF in the mix, the blended MER for Maximum Growth Portfolio Lite is strikingly low at 0.26 per cent. The full version of the portfolio comes in at 0.37 per cent, which is still attractively cheap.

ETFs are bought and sold like stocks, which means brokerage commissions must be considered as well when tallying up costs. Questrade and Virtual Brokers let you buy any ETF at no cost, although sell commissions apply. Qtrade and Scotia iTrade have a limited offering of zero-commission ETFs, while a growing number of brokers have capped their online trading commissions at $10 per transaction.

Consider not only the cost of buying your ETFs to set up the portfolio, but also periodic rebalancing.

Mr. Chiefalo suggests rebalancing your portfolio every six months, but he figures that once per year will also work.

NBF chose funds for its sample portfolios based on their liquidity, or typical daily trading volumes; performance; cost; and level of diversification. The core of Maximum Growth Portfolio Lite comprises funds from BMO, BlackRock's iShares lineup and Vanguard.

NBF has also created growth, balanced, conservative and income portfolios. Maximum growth is by far the riskiest of the bunch – don't touch it unless you're sure you can handle it.

Globe app users click for tables showing the streamlined Maximum Growth Portfolio Lite and the full Maximum Growth Portfolio.

Click here for a printable excel table.

Maximum Growth Portfolio Lite

National Bank Financial analysts created this portfolio of exchange-traded funds for investors who are willing to live with high levels of risk in order to increase long-term returns, and who are more interested in growth than generating income. It's a streamlined version of the full Maximum Growth Portfolio, which is presented here as well.

FundTickerWeight (%) *MER (%)
Canadian stocks
BMO S&P/TSX Capped Composite Index ETFZCN-T25.50.06
Comment: Holds the shares of 230 or so large, medium and smaller-size companies and has a super-cheap fee. Interchangeable with the iShares S&P/TSX Composite Index ETF (XIC).
U.S. stocks
Vanguard U.S. Total Market Index ETFVUN-T28.00.16
NBF's highest recommended product for U.S.-market exposure covers about 3,600 stocks and in terms of cost is a bargain.
International stocks
BMO MSCI EAFE Hedged to CAD Index ETFZDM-T16.00.23
Coverage of markets outside North America, with currency hedging. NBF likes that because of risk of the euro declining and thereby eroding returns from European stocks for Canadian investors.
iShares MSCI Emerging Markets IMI Index ETFXEC-T5.00.25
NBF considers this to be a superior way to invest in emerging markets because there's exposure to large, medium and small companies.
Canadian bonds
Vanguard Cdn. Short-Term Corp. Bond Index ETFVSC-T10.00.17
Adds yield by focusing on corporate over government bonds and takes a defensive approach by sticking to short-term bonds.
High yield bonds
Horizons Active High Yield Bond ETFHYI-T5.00.69
NBF says the team running this actively managed fund has consistently been able to produce better returns than index-tracking ETFs in the high yield category.
Alternative investments
Horizons Morningstar Hedge Fund Index ETFHHF-T10.00.95
Complicated and expensive, but included here with the goal of generating returns that are not correlated to the stock market. If you're doubtful about this ETF, leave it out and put more in bonds.

Maximum Growth Portfolio

Here's the Maximum Growth Portfolio as initially designed by National Bank Financial.

FundTickerWeight (%) *MER (%)
Canadian stocks
BMO S&P/TSX Capped Composite Index ETFZCN-T16.30.06
First Asset Morningstar Canada Value Index ETFFXM-T8.20.68
U.S. stocks
Vanguard U.S. Total Market Index ETFVUN-T18.70.16
PowerShares S&P 500 Low Volatility CAD HedgedULV-T9.30.35
International stocks
BMO MSCI EAFE Hedged to CAD Index ETFZDM-T6.80.23
Horizons Active Global Dividend ETFHAZ-T6.80.93
iShares MSCI Emerging Markets IMI Index ETFXEC-T6.80.25
Canadian bonds
iShares High Quality Canadian Bond Index ETFCAB-T3.60.14
Vanguard Cdn Short-Term Corp Bond Index ETFVSC-T3.60.17
High yield bonds
Horizons Active High Yield Bond ETFHYI-T4.80.69
Alternative investments
iShares S&P/TSX Capped REIT Index ETFXRE-T10.50.60
Horizons Morningstar Hedge Fund Index ETFHHF-T4.50.95
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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More


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