Introducing the Freedom 0.10 Portfolio, a simple, sound way to put low-cost ETF investing to work.
You might know this investing strategy by its previous name, Freedom 0.11. Before that, it was Freedom 0.15. Every year, I take on the challenge of building a solid portfolio of exchange-traded funds that costs less than the previous year’s. As you may have guessed, 0.10, 0.11 and 0.15 represent the weighted average management expense ratio (MER) for these portfolios over the years.
MERs in ETF-land are in a downward trend, which means it costs less every year to build an ETF portfolio. Note that brokerage commissions apply when you buy ETFs – expect to pay $5 to $10 a trade, with some brokers offering no-charge ETF investing in at least a limited way.
Here’s how the Freedom 0.10 Portfolio comes together:
- 40 per cent in the Vanguard Canadian Aggregate Bond Index ETF (VAB): The MER for this broad market bond ETF containing both government and corporate bonds is 0.09 per cent. VAB replaces the iShares Core Canadian Short Term Bond Index ETF (XSB), which last year had an MER of 0.11 per cent and this year comes in at 0.10 per cent.
- 20 per cent in the BMO S&P/TSX Capped Composite Index ETF (ZCN): Put the benchmark Canadian stock index in your portfolio for a fee of 0.06 per cent. A true investing bargain.
- 20 per cent in the Vanguard S&P 500 Index ETF (VFV): The MER for this U.S. equity fund is just 0.08 per cent.
- 20 per cent in the TD International Equity Index ETF (TPE): An MER of 0.2 per cent for this international equity fund, which means it tracks developed markets outside North America.
The weighted average MER for this portfolio in late 2019 came in at 0.104 per cent, which we’ll round down to 0.10 per cent. Stay tuned to see whether ETF fee competition produces a cheaper Freedom portfolio next year.
Willing to pay a bit extra for more convenience as an ETF investor? Balanced ETFs, also known as asset allocation funds, package a diversified mix of underlying ETFs into a single fund. Example: The MER for the iShares Core Growth ETF Portfolio (XGRO) is double the cost of the Freedom 0.10 Portfolio with a fee of 0.2 per cent, but still a flat out bargain.
-- Rob Carrick
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Ask Globe Investor
Question: What do you do when one stock becomes seriously oversized within your portfolio? I usually sell it down to a more balanced amount, but people have told me I should let the winners run.
Answer: It depends on what you mean by “seriously oversized." My own rule of thumb is to aim for an initial weighting of no more than 5 per cent of the total equity portfolio, but I’ll let that number creep higher as long as the outlook for the company remains positive.
How much higher? Well, if a stock rises to the point that it accounts for, say, 10 per cent or more of your equity portfolio, trimming would probably be prudent. Cutting back will limit the damage should the company’s fortunes take a negative turn. It will also limit the gains if the stock continues to rise, of course, but it’s all about controlling risk. I picked 10 per cent because it’s a nice, round number; you might wish to trim before the weighting gets that high.
Taxes are another consideration. If you hold a stock in your non-registered account and selling would trigger a hefty capital gains tax hit, you might want to give it a little more slack than you otherwise would – again, as long as the company remains healthy.
The bottom line is that the decision to trim your position depends on how large the weighting is, your conviction about the company’s prospects and the tax consequences of selling.
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What’s up in the days ahead
With the election now over, lifting some of the uncertainties over Brexit, is it time to nibble at British stocks? Ian McGugan will share some insight on where to look first when traveling across the pond.
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Compiled by Globe Investor Staff