As I was updating my model Growth Portfolio for my Internet Wealth Builder newsletter last month, I was reminded about how many ways there are to put together a personal wealth-building plan.
Some people use a basic asset allocation approach – 60 per cent equities, 35 per cent fixed income, and 5 per cent cash is a popular choice. Others use a tactical style, varying the percentages depending on market conditions.
There are people who pay no attention to percentages at all, preferring to invest most or all of their capital in equities or, more rarely, fixed-income securities like bonds. Some investors like the diversification offered by mutual funds and ETFs, others prefer to place big bets on a single stock or group of stocks, like the Magnificent Seven.
In short, there’s no magic formula for a perfect portfolio. There are too many variables in play. Consider this e-mail I received last week from a long-time reader.
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“I would like to construct a RESP portfolio consisting of ETFs and/or index funds. For equities, I’m looking for separate exposure to U.S., Canadian, and international markets (rather than global funds). I will determine the allocation percentages myself. Broad market indexes would be perfectly suitable; I’m not necessarily seeking sector-specific funds unless you believe there is a compelling case for including them.
“For fixed income, my preference is for corporate bond funds only (rather than government bonds), as well as unconstrained bond funds if you feel they would be appropriate.”
This is a very specific request from a person who appears to be quite knowledgeable. The portfolio he wants to create is somewhat unusual. How can it be done?
Let’s look first at the equity side of the equation. He wants ETFs and/or index funds that give him international exposure, without using global funds. Part of this can achieved with these three ETFs:
iShares Core S&P 500 Index ETF (CAD Hedged) (XSP-T)
This ETF tracks the S&P 500 index and is hedged back to Canadian dollars. It gained 14.13 per cent in the year to Jan. 31. The 10-year average annual compound rate of return is not much different, at 13.85 per cent. About one-third of the fund is invested in technology stocks. The MER is 0.09 per cent.
iShares Core S&P/TSX Capped Composite Index ETF (XIC-T)
This one tracks the TSX Composite. It’s been a solid performer, with a one-year return of 28.24 per cent to Jan. 31 and a 10-year average compound rate of return of 12.85 per cent. The MER is a very low 0.06 per cent.
iShares MSCI Europe IMI Index ETF (XEU-T)
This fund tracks the performance of the MSCI Europe Investable Market Index. The gain for the year to Jan. 31 was 23.78 per cent. The 10-year average annual compound rate of return was 9.21 per cent. Geographically, the largest holdings are in Britain, France, Switzerland, and Germany, but all major European countries are represented. The MER is 0.29 per cent.
We’ve covered North America and Europe with the type of funds the reader wants. That leaves Asia, Australia, South America, and Africa. I can’t find a fund that focuses on that specific combination so here’s what I suggest.
Vanguard FTSE Pacific ETF (VPL-A)
This fund tracks the FTSE Developed Asia Pacific All Cap Index. It offers exposure to developed Asian markets (but not China), as well as Australia and New Zealand. Major holdings include Samsung, SK Hynix Inc. (semiconductors), Toyota, Mitsubishi, and the Commonwealth Bank of Australia. The one-year gain to Jan. 31 is 41.79 per cent; the 10-year average annual compound rate of return is 9.55 per cent. The expense ratio is 0.07 per cent.
iShares MSCI Emerging Markets ETF (EEM-A)
This is the final piece of the equities puzzle. This ETF gives us exposure to China, Taiwan, India, Brazil, South Africa, Mexico, Saudi Arabia, and others. It has an up-and-down track record but has been strong recently with a one-year gain of 33.34 per cent to Jan. 31. But a big loss of 20.55 per cent in 2022 pulled down its 10-year average annual compound rate of return to 7.73 per cent. The expense ratio is high at 0.72 per cent.
As for the fixed-income side of the reader’s request, he mentions unrestrained bond funds. These are actively managed fixed-income investment funds that do not adhere to a traditional benchmark.
They provide portfolio managers with maximum flexibility to invest across global fixed-income sectors, including high-yield bonds, bank loans, emerging markets, and currencies, in an attempt to generate positive absolute returns regardless of market conditions.
An example is the Mackenzie Unconstrained Bond ETF (MUB-T). It’s not a choice I would recommend. The one-year loss to Feb. 25 is 0.43 per cent and the five-year decline is 12.23 per cent.
A fund that’s doing better right now is the SPDR Bloomberg International Corporate Bond ETF (IBND-A). It is designed to be a broad-based measure of the global investment-grade, fixed-rate, fixed-income corporate markets outside the United States. It’s up about 13 per cent in the past year but that’s not indicative of longer-term results. Over the decade to Jan. 31, the fund had managed an average annual return of only 1.64 per cent.
If our reader wants to include U.S. bonds in the RESP, he could add the iShares U.S. IG Corporate Bond Index ETF (CAD-Hedged) to the list. It gained 5.59 per cent in the year to Jan. 31. The trading symbol is XIG-T.
These seven ETFs should provide exactly the coverage he is seeking.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.