How to Create a “Lazy” Canadian Investment Portfolio With Just 2 ETFs

I’m not a fan of stock picking. Unless you really enjoy it as a hobby, it can be time-consuming, complicated, and stressful. The stress of analyzing annual reports and following up on results reports can really add up over time.

Additionally, there is good evidence to suggest that most stock pickers do not consistently outperform the market over the long term. For this reason, I’m a big fan of “lazy” investment portfolios using exchange-traded funds (ETFs).

Why invest passively with a lazy portfolio?

For most investors, consistently beating the market over the long term is extremely difficult. Once you accept that, you can instead aim to match its returns with as little effort and cost as possible.

The goal here is to find the best ETFs that maximize broad market exposure and offer the lowest management expense ratio (MER). This reduces the sources of risk that are controllable – under-diversification and high fees.

The Canadian Two-Fund Portfolio

The Canadian two-fund portfolio literally takes 15 minutes to set up and an extra 15 minutes every year to rebalance. It costs 75% less in MER than a mutual fund from a financial advisor and will match market performance.

The Canadian two-fund portfolio consists of the following assets with variable allocations. Today, I will take the example of the “aggressive” 100% stock version:

  1. A Canadian equity ETF (20%-30%)
  2. A global equity ETF excluding Canada (70% to 80%).

We want to keep the Canadian equity portion of our portfolio overweight relative to the global market cap weighting (3%) for several reasons. These include lower fees and taxes, reduced volatility, and lower currency risk. This is called a “country of origin bias” and it is advantageous up to a certain percentage.

The Canadian equity portion

My choice to follow the Canadian stock market would be iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC). XIC holds a total of 241 holdings and limits the weighting of each underlying stock. This is to prevent an individual stock from becoming so large that it dominates the index.

XIC’s top 10 holdings include stocks like Shopify, Royal Bank, Toronto-Dominion Bank, Enbridge, Bank of Nova Scotia, Canadian National Railwayand Brookfield Asset Management. This makes it an accurate barometer of the performance of the Canadian stock market.

When it comes to MER, XIC is very cheap at 0.06% On a $10,000 portfolio, that works out to just $6 a year, so it’s not worth worrying about even if your portfolio is very bulky. XIC also pays a dividend yield of 2.43%, which is respectable and should be reinvested for total return.

The Everyone Outside Canada Part

BlackRock iShares MSCI All Country World Ex Canada Index ETF (TSX: XAW) contains a total of 9,440 stocks of all market capitalizations, roughly split between the following markets: US markets at 62%, developed markets at 26% and emerging markets at 12%. For an MER of 0.22%, you get fantastic diversification.

XAW’s top 10 holdings include stocks like Apple, Microsoft, Amazon, Alphabet, Tesla, NVIDIA, Berkshire Hathaway, Meta, and Semiconductor manufacturing in Taiwan. The dominance of US equities in XAW reflects the current heavy weighting of the US in global market capitalization.

Because XAW contains foreign shares, holding it results in a 15% foreign withholding tax on non-Canadian dividends paid. The current dividend yield of 1.78% already reflects this deduction, so there’s not much to worry about, unless your account is large enough to worry about the tax burden.

What about bonds?

Depending on your risk tolerance, investment goals and time horizon, you may want to consider adding a bond allocation to reduce volatility and drawdown. The closer you get to retirement, the more detrimental the risk-return streak will be. A bond allocation of 20-40% is recommended for most investors over 40.

Any global Canadian bond ETF would work here. Again, the goal is to keep costs low and maximize diversification. Don’t worry about whether you should buy corporate or government bonds, long or short duration bonds, investment grade or junk bonds, etc. Buy a Canadian bond universe ETF and stop!

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