MER for XAW and VEQT is 0.22%. You'll pay it on 75% of your portfolio (your equity allocation).
There are no fees on GICs.
Your cost for the first year would be $8.25 (plus commission on the ETF, if your online broker charges commission). 5000 times 75% times 0.22%.
- Canadian equity: XIC, ZCN, VCN, or VCE
- US equity: XUU
- International equity developed markets: XEF or ZEA
- Emerging markets: VEE or ZEM
- Canadian bonds: ZAG or VAB (or you can buy a GIC as in the first example)
- As for other bonds than Canadian, it's not easy to find inexpensive ETFs. It's okay to stick to Canadian bonds / GICs.
find ETFs that fit your asset mix
Your asset mix is the percentage of fixed income and equity in your portfolio. Let's say you've decided on 25% fixed income / 75% equities. To build the equity portion of your portfolio, you'll need to find a few suitable equity ETFs. On the fixed income side, you have a choice of fixed income ETFs or GICs (guaranteed investment certificates).
Here are some real-life examples using the same 25%/75% asset mix. The ETFs / GICs we mention can be found in our research tables on the previous pages (choose - ETFs / choose - GICs).
Whatever you do, avoid too many ETFs, especially when you have a small investment portfolio.
The more ETFs you have, the more complicated rebalancing is.
And, if you pay commission, the higher the cost.
It would be slightly higher in Example 3 (assuming you also used Canadian bonds only) because the emerging markets ETF MER is higher.
WHAT DOES IT COST?
Let's say that you have invested $5,000 for one year (and you did not incur any penalties or account fees).
Professionally managed portfolio index mutual funds often follow this template:
- Canadian, or other, bond markets (like US or global)
- Canadian equities
- US equities
- International equities (which usually means rich countries outside Canada and the US)
- Emerging market equities (less wealthy but fast-growing countries).
build your portfolio
OTHER IDEAS TO EMULATE
You can follow some simple ETF model portfolios recommended by financial advisors, like in this blog:
www.canadiancouchpotato.com
Here’s a series of videos on how to build ETF portfolios on several Canadian online broker platforms:
https://www.youtube.com/playlist?list=PLovWMWBk4UZnaH0Z2hBvtDidGsur2xDf7
EXAMPLE II: MIMIC PROFESSIONAL ASSET MANAGERS
Your portfolio will look like this:
An asset-allocation ETF may look like this:
EXAMPLE I: BUY 1 ETF AND GICs
For your equity allocation, buy 1 global equity ETF in your online broker account.
For your fixed income allocation, buy a GIC (guaranteed investment certificate) directly from the issuing bank, choosing one that offers a good interest rate. GICs come with less risk than bond ETFs.
You would pay the following MERs (on the portions of your portfolio invested in each fund shown above).
- Canadian equity 0.06%
- US equity 0.07%
- International equity 0.22%
- Emerging markets 0.24-0.27%, depending which ETF you choose
- Canadian bonds 0.09-0.13%
A portfolio index mutual fund
may look like this:
- Global equity ETFs: XAW or VEQT (an asset-allocation ETF that is 100% equity).
- GIC: consider the 5-year term (the longest insured maturity). Choose a shorter GIC if the 5-year rate is only marginally better than a shorter rate, like a 3-year.
- Both ETFs invest in the US and international developed and emerging markets.
- XAW excludes Canada but you live and work here, and your fixed income will be Canadian, so you should be all right.
- VEQT, on the other hand, is about 30% Canadian equities. Just so you know, Canadian equities make up about 4% of global equities.
Your cost for the first year would be (excluding any commission) $5.50 -6.70 in Example 2, depending on which bond ETF you choose, and $3.40-5.00 if you used GICs instead of a bond ETF.