In past posts (Part 1, Part 2) in this series, Reader J talked about his investment goals and his thoughts on his overall asset allocation. In the last post in this series, he discusses which funds he plans on using to capture exposure to different asset classes.
So based on my hare-brained idea of mixing indexes I’ve got to split the overall allocations further into the actual ETFs that will make it up. I don’t know the best way to do it properly, so I’ve often taken the coward’s way out and split it at arbitrary amounts. The equities are shown broken down into the % of the asset class and % of the portfolio as a whole.
I’ve split this allocation right down the middle, half for the standard S&P/TSX Index and half for a value / small cap equities. For this second part, I used 35% of a RAFI fundamental index, which apparently has more of a value tilt and then 15% small cap:
50% / 8% — iShares Composite Index (XIC)
35% / 5.6% — Claymore Canadian Fundamental Index (CRQ)
15% / 2.4% — iShares SmallCap Index (XCS)
United States Allocation
This split was even murkier because the Total Stock Market has exposure to all US stocks (small, mid, large, growth and value), I wasn’t sure how to tilt it to value & small cap. The super-low fees are awesome and make it even harder to justify combining with a fundamental index which costs nearly ten times more (MER of 0.65% vs. 0.07%). Also it should be noted the RAFI fundamental index is hedged in Canadian dollars and as explained earlier, my hope is that this allows the portfolio to carry a lower percentage of Canadian equities without as much currency risk.
In previous revisions, I had selected 2 different small-cap funds. The Russell 2000 index was eliminated because apparently right before the index is reconstituted it would be subject to price volatility that would drag performance by 1-2%. Then the iShares S&P SmallCap 600 was eliminated simply because Vanguard’s MER of 0.1% was half as expensive.
48% / 13.2% — Vanguard Total Stock Market (VTI)
40% / 11% — Claymore US Fundamental Index (CLU) – Hedged
12% / 4.13% — Vanguard Small Cap (VB)
Vanguard has great fees, so it’s an easy choice for a standard cap index. The interesting thing here is the RAFI fundamental index doesn’t hedge the currency. I found out even though these funds are in US dollars there is no US currency risk, the currency risk should be less volatile because it is actually Canada against a basket of currencies. I haven’t been able to find a small cap international index.
60% / 14.55% — Vanguard Europe Pacific Index (VEA)
40% / 9.7% — Claymore International Fundamental Index (CIE)
Emerging Markets Allocation
Vanguard has the lowest fees for international and there doesn’t seem to be much else I can do to add a value / small cap tilt, especially since the allocation is such a small part of the portfolio.
100% / 4.25% — Vanguard Emerging Markets (VWO)
I’ve split Real Estate into 75% Canadian, 25% International. The question here comes from iShares REIT Sector Index XRE. It has a high MER of 0.55% but only a few equities. With my estimated starting allocation of around $30,000 it might be best to unbundle and save a bit on fees. This is appealing because I’ve never bought and sold stock myself, this could serve as an interesting lesson. The next idea is what about owning REITs in a DRIP plan which has no fees, plus lots of real estate trusts give drips a 3% or more bonus/discount. It would be more work and harder to rebalance, is it worth it? Would a REIT portfolio try to mirror the cap weighted index or evenly spread out between different types of trusts (malls, offices, senior’s homes, residential, etc). Is it worth it?
75% / 6% — iShares REIT Sector Index (XRE)
25% / 2% — Wisdom Tree International Real Estate Index (DRW)
Cash & Bonds
For the cash component of the portfolio I feel safer having 6 months of core living expenses in a cash emergency fund in high interest savings accounts, current this is about $16,000 or 4% of the total portfolio.
The remaining 16% is going to be invested in short term bonds with the goal of lowering equity risk. The Sleepy Portfolio uses the iShares Bond Index (XSB) but I am planning to use the lower cost Claymore 1-5 Year Laddered Government Bond ETF (CLF). Since it lacks higher yielding corporate bonds present in XSB, so would it make sense to split the bond allocation further with 80% CLF and adding 20% of iShares Corp Bond Index (XCB)? Combined the weighted MER would be 0.2%, instead of 0.25% for XSB. Is it worth it?
How and at what point should you buy real bonds directly?
40% / 8% — Claymore 1-5 Year Laddered Government Bond (CLF)
10% / 2% — iShares Corp Bond Index (XCB)
50% / 8% — High Interest Bank Accounts