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Discussion Starter #1
All - hope this message finds everyone well.

I have recently switched jobs, and took out funds from my defined benefit pension which are now in a LIRA account. I took the decision after factoring multiple things: time horizon (22+ yrs), DB returns, retirement age of pension plan, low interest environment meant higher commuted value, etc.

The amount is $125K which I am looking to invest. I have been a proponent of ETFs and have shortlisted the following few:

  • SPYG - S&P 500 growth exposure
  • QQQ - NASDAQ exposure
  • FDNI and DXG - International equity exposure
  • XIT - Canadian Tech exposure
  • ZCN - Canadian equities exposure
  • XDV/XEI/ZDV - not sure about which one and this provides exposure to Canadian Dividend stocks
I have trouble allocating between these ETFs. Also, you may notice that most of them are geared towards tech and I am personally okay with that since I am bullish on that sector. Having said that, I do seek ways to reduce volatility. ETFs by default are diversified but how do I further diversify it? Any ETFs I should certainly have in my portfolio?

Appreciate your thoughts/guidance on my approach.

I am with Questrade and buying ETFs is free with them so I was thinking to time the investments every 2 weeks over two months and average out the rates.

Thank you all.
 

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Appreciate your thoughts/guidance on my approach.
You mentioned you are hoping to reduce volatility. Where's your fixed income/bonds in this plan? That is the best way to reduce volatility.

I would choose only one of SPYG or QQQ. There's a lot of duplication and overlap here.

FDNI and DXG pretty much have no history, and I would avoid ETFs that haven't demonstrated history.

Overall this is too many ETFs. You will have a hard time sticking to an asset allocation over the years. I think you'll find it easier to manage if you reduce the number of holdings. For example you could forget about XIT since Canadian tech basically just tracks US tech and QQQ is far more diversified than XIT.

I don't know your risk tolerance and how much stability you like to have, but personally I would go for something like a 50% stock 50% bond allocation. Perhaps:

50% XBB
20% ZCN
20% XAW (rolling US and foreign together)
10% QQQ (extra tech exposure)

This is fewer positions, easier to manage, and includes bonds. The trailing 10 year return would have been 8% CAGR which is very strong for a 50/50 balanced fund.

During the market crash, from January 1 to the March 23 low, this portfolio would have lost only 15% which isn't bad. In comparison, XBAL (a typical balanced fund) was down 18% and a pure stock fund like VEQT was down 27%.

I think something like this would be a decent diversified portfolio. Your biggest challenge will likely be sticking with it over the long term, especially if tech weakens and some new hot sector appears. One can't keep jumping from one hot area to another... to get good long term returns you have to commit to the allocation mix and stick with it, even when it disappoints.
 

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Over a long horizon now, advisors are recommending a 30% FI holding vs the traditional 40-50%. I would go w a cash HISA ETF like CSAV or ZST Ultra ST bond fund. You don't want to be long in bonds w interest rates at .7% making no money and losing as interest rates rise too. It may take 5 yrs before they are back to even 2%.

Emerging markets are already in recovery and countries like China and India will continue to lead the world in growth. Good weighting in tech too at 18%.

30% CSAV
20% ZCN
40% XAW
5% ZQQ Nasdaq
5% ZEM Emerging markets
 

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With a 22 year horizon, and assuming one can handle the volatility of equity market swoons, I'd agree with Jimmy that the new 60/40 balanced asset allocation has moved to 70/30 or75/25. Fixed income is providing no return these days and thus provides primarily some anchoring (volatility reduction) of an equity portfolio until retirement. Then the fixed income becomes the 'cash reserve' to protect against 'sequence of returns' risk.

That all said, I don't understand the attractiveness of CSAV or ZST which at best has a 1% return.and dropping. It might be better to be in a true 5 year GIC ladder.

I also agree with James and Jimmy that the OP should not be overlapping, and should not be chasing performance. If the OP wants to have some tech, then fine.... have 5-10% in QQQ to satisfy the itch (even if the S&P500 is already about 20% tech), but rely on XAW for primary ex-Canada exposure. I have never been a fan of Emerging Markets since EM has always been a lawless wild wild West and is the first to implode when there are ripples in the water. XAW already has 12% in EM....why have more?
 

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He said he wanted ETFs . CSAV is liquid and rates will rise as interest rates rise.

I though XAW was just developed market so ZEM is not needed. EM are not the wild west anymore. They are as diversified as the S&P now and the risk is similar actually.
 

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  • SPYG - S&P 500 growth exposure
  • QQQ - NASDAQ exposure
  • FDNI and DXG - International equity exposure
  • XIT - Canadian Tech exposure
  • ZCN - Canadian equities exposure
  • XDV/XEI/ZDV - not sure about which one and this provides exposure to Canadian Dividend stocks
I'm not a financial adviser, this is just my opinion, a random guy on the internet. To comment on your picks :

  • SPYG & QQQ are overlapping and you may just want to pick a Canadian ETF like HXQ unhedged or ZQQ hedged
  • DXG seems a good pick but high MER and if you want more world exposure to China and India, then XAW would be an option, but currently providing lower return and this pick will also overlap NASDAQ stocks and provide tech exposure
  • XIT you can pick that one if you really want exposure to Canadian tech but its top 4 holdings represent more than 80% of the ETF holdings (SHOP, CSU, GIB, OTEX)
  • ZCN you may want to decide if you want to hold all of S&P/TSX composite index or just the top 60 with XIU, but that one has a higher MER
  • XDV/XEI/ZDV if you want to reduce volatility and have fixed income then XBB or XSB is a better choice
How you allocate these will depend on your style, your beliefs and your risk tolerance.

You could do :
  • 40% XAW
  • 30% XBB or XSB
  • 20% ZQQ
  • 10% ZCN
You play how you wish with these 4 in a range of min 10% to max 40%.

  • Diversified growth, good returns, mid risk, mid volatility? Increase XAW
  • Trendy tech, currently higher return, higher risk, higher volatility? Increase ZQQ
  • Canadian exposure, lower return, mid risk, mid volatility? Increase ZCN
  • Fixed income, steady low return, low risk, low volatility, hedge against crash? Increase XBB or XSB
If you want to try out DXG you could split XAW into XAW & DXG :
  • 30% XAW & 10% DXG (depends on your opinion)
  • 30% XBB or XSB
  • 20% ZQQ
  • 10% ZCN
 

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He said he wanted ETFs . CSAV is liquid and rates will rise as interest rates rise.
Interest rates are not going anywhere for years. The OP never mentioned anything about fixed income either way. It was introduced by responses. A money market mutual fund might actually be a better choice, Example CIBC MMF Yields

EM are not the wild west anymore. They are as diversified as the S&P now and the risk is similar actually.
I don't believe it for a minute..... Minimal regulatory oversight, dictatorial regimes, currency exposure. There may be individual stocks on the NYSE such as Alibaba that have to provide "some" evidence of truthfulness. XAW is as much exposure to EM as anyone should tolerate.

Added: 10 year chart of Periodic Table of Annual Returns I think it would be worse with a 20 year look.
 

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Over a long horizon now, advisors are recommending a 30% FI holding vs the traditional 40-50%.
. . .
30% CSAV
CSAV (like PSA or ZST) are cash-like fixed income ETFs. These are not good choices for the fixed income part of your portfolio, because over the long term, cash (short-term fixed income) is guaranteed to underperform longer term fixed income. This is a fact of the bond market: it's what the yield curve means.

The normal yield curve, which is what we have right now by the way, tells you that the further out in time you go, the more yield you get in fixed income.

CSAV, PSA, or money market funds will underperform XBB over the long term. That's virtually guaranteed, no matter which way interest rates move. Therefore with the OP's long term 22+ year horizon, they should be in a standard bond fund with medium term exposure, something like XBB, VAB, ZAG.

Regarding how much to have in bonds:

It's definitely personal taste, but one has to consider the stabilizing effect and ask themselves if they really are going to be comfortable with higher % equities and less of the anchor. This is a difficult thing to figure out if you've never invested through a bear market before. It's not just a question of returns... you also have to think about what it's going to feel like.

The charts and theoretical performance stats that advisors and web sites show will never capture the emotional aspect of investing. You don't really know how much it hurts (or how painful it is) until it happens to you. And by the way, we haven't had a serious bear market since 2001. Just about everyone has forgotten just how brutal a prolonged stock bear market can be.

For newer DIY investors, I would recommend a lower % in equities and more fixed income, like 50/50. It could be different if you already have experience investing through bear markets, and if you know what that's like.

Remember, this is your pension money. This is critically important money for your future. I don't know if you have other investments or pensions elsewhere, and maybe you do. In that case maybe you can take more risk with this money. But I manage my own pension (self employed, no pensions anywhere) and my pension nest egg is critically important. For this reason I have half of it in bonds and GICs, since I don't want to wake up one day and see the value slashed by 30% or 40%. I just don't want that.

Here's what $125,000 invested near a stock market peak can look like, in a 75/25 allocation using global equities. At one point the $125,000 shrinks to just $85,000 and even after four years, the investor still has a loss. This is very difficult for many people to handle.

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I should emphasize again, this is matter of personal taste. Some people can handle this ^ type of loss in their pension account, and 75/25 might be fine for them. Myself... I don't want to see that happen to my money. I've worked too hard to save this money and I don't want to suffer the stress and disappointment from chronic losses, lasting multiple years, that cut a huge % off my nest egg.
 

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Discussion Starter #11
Thank you everyone. You comments and insights are extremely appreciated, and this has been very educational for me.

I am 33 right now, and the 22 year time horizon stems from the fact that I wont be able to draw the funds from the LIRA account until I am 55. Having said this, I have invested in the past but never really experienced a bear market so perhaps I am underplaying the emotional side of things and simply chasing performance with the ETFs listed in my original post.

In addition, I had no idea about the existence of so many EFTs you guys listed. This means I dont need to convert my CAD to USD and still get exposure to US/Int equities through ZQQ, XAW and VSP.

Here is where I have landed after reading your suggestions:

XBB: 30-50%
ZQQ: 10-20%
XIT: 10%-20%
VSP: 10%
XIU: 10%
DXG: 10%

If I had invested 125K in Jan 2017, the CAGR until end of Mar 2020 would have been between 7.8% to 10.8% depending on how much I allocated in the top three ETFs above. This also assumes annual rebalancing. If I had invested in Jan 2020, the return would have been -6.5% to -8.4%, which isnt too bad.

Happy to hear your thoughts on these.

Thanks.
 

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I don't believe it for a minute..... Minimal regulatory oversight, dictatorial regimes, currency exposure. There may be individual stocks on the NYSE such as Alibaba that have to provide "some" evidence of truthfulness. XAW is as much exposure to EM as anyone should tolerate.

Added: 10 year chart of Periodic Table of Annual Returns I think it would be worse with a 20 year look.
The equity risk premiums (w currency risk) for China, S Korea and Taiwan now are only ~ 1.3% higher than developed countries. India is a little higher at 3%. Most of the semiconductors in the world are now are being made in the 1st 3 countries.

These markets are now ~ 15% of the world too and growing the fastest so you should hold some and XAW has a good weighting Their interest rates are similar too and most have much less debt. China and India are also among the highest for gdp growth. Average returns over 30 (8.16%) and 20 (6.48%) yrs EM beat the TSX and EAFE.

 

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CSAV (like PSA or ZST) are cash-like fixed income ETFs. These are not good choices for the fixed income part of your portfolio, because over the long term, cash (short-term fixed income) is guaranteed to underperform longer term fixed income. This is a fact of the bond market: it's what the yield curve means.

The normal yield curve, which is what we have right now by the way, tells you that the further out in time you go, the more yield you get in fixed income.

CSAV, PSA, or money market funds will underperform XBB over the long term. That's virtually guaranteed, no matter which way interest rates move. Therefore with the OP's long term 22+ year horizon, they should be in a standard bond fund with medium term exposure, something like XBB, VAB, ZAG.
That is incorrect. If interest rates rise CSAV will do better in the short term. We also do not have a normal yield curve. There is only a .2% difference between the 2 yr and 10 yr bond. I know you like to argue XBB but right now there is simply no reason to hold long bonds when the yields for cash and ST are ~ the same.

XBB is only 1.2 % ytm if you hold it for 8 yrs . But if interest rates rose 1% it would lose 8% in price while CASV would not lose any price depreciation and is better in a rising interest rate environment plain and simple. No pt in taking that price risk for ~ similar yields. A reason why most analysts are recommending ST bond funds. The reason why they have dropped their allocations to 30% from 40% too.

Once interest rates rise then you move back into longer term bonds. Right now when interest rates are at all time historic lows it makes absolutely no sense.
 

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That is incorrect. If interest rates rise CSAV will do better in the short term. We also do not have a normal yield curve. There is only a .2% difference between the 2 yr and 10 yr bond.
Yes CSAV would do better in the short term if interest rates go up. I said in the long term, XBB will outperform CSAV. The time horizon of the OP is 22 years. Surely you don't believe that cash will outperform regular (medium term) bonds over 22 years??

For such long time horizons, if you had to choose between XBB and CSAV today, I'd put about 99% chance that XBB outperforms going forward 22 years.

And yeah it will be more volatile, let's be clear on that. XBB can drop significantly at times. I'm saying the long term performance will exceed CSAV.

I know you like to argue XBB but right now there is simply no reason to hold long bonds when the yields for cash and ST are ~ the same.
"No reason?" Of course there's a reason. Interest rates could go even lower, in which case XBB outperforms CSAV over the short/medium term.

We could get a deflation or depression scenario, in which case cash yields go to zero or negative, and XBB outperforms cash for the coming years.

The other scenario in which XBB would outperform CSAV, even over the short term, is if interest rates very gradually rise or if the yield curve steepens. Both of these help XBB performance.

You are putting too much emphasis on your specific forecast (that interest rates will rise and yield curve stays flat) without considering other possibilities for how bonds move in the coming years. Interest rates could go down. They could stay low. The yield curve could steepen.

XBB is only 1.2 % ytm if you hold it for 8 yrs . But if interest rates rose 1% it would lose 8% in price while CASV would not lose any price depreciation and is better in a rising interest rate environment plain and simple. No pt in taking that price risk for ~ similar yields.
This analysis is incorrect. You have to look at the time period over which interest rates rise. A sharp uptick of 100 basis points would cause a sharp 8% decline in price, but that's only when looking at the very short term. And it's a totally different story if interest rates gradually rise 100 basis points over the span of a few years.

Once interest rates rise then you move back into longer term bonds. Right now when interest rates are at all time historic lows it makes absolutely no sense.
You're not going to successfully time the bond market, this is a fantasy.

You are saying that the long term passive indexer should strategically trade in and out of different parts of the yield curve? There's just about no way they will do this successfully. Any more than they can time the stock market tops and bottoms.
 

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Yes CSAV would do better in the short term if interest rates go up. I said in the long term, XBB will outperform CSAV. The time horizon of the OP is 22 years. Surely you don't believe that cash will outperform regular (medium term) bonds over 22 years??
There is just no advantage to a LT fund when yields are similar right now. When there is some difference in yields then you can get into XBB but not now.

We could get a deflation or depression scenario, in which case cash yields go to zero or negative, and XBB outperforms cash for the coming years.

The other scenario in which XBB would outperform CSAV, even over the short term, is if interest rates very gradually rise or if the yield curve steepens. Both of these help XBB performance.
You can simply move into XBB when /if this happens and avoid any price loss. Again right now LT makes no sense for such piddly yields. I would agree w you when the curve is steeper but now when there is only a .2% difference btw 2 and 10 yr boc bonds.


This analysis is incorrect. You have to look at the time period over which interest rates rise. A sharp uptick of 100 basis points would cause a sharp 8% decline in price, but that's only when looking at the very short term. And it's a totally different story if interest rates gradually rise 100 basis points over the span of a few years.
I was looking at the ST so it is correct.

You are saying that the long term passive indexer should strategically trade in and out of different parts of the yield curve? There's just about no way they will do this successfully. Any more than they can time the stock market tops and bottoms.
No. Interest rates are at historic lows. They could go lower but that is doubtful. We have some growth and inflation already. It is not hard to sit in cash making similar yields and then if rates rise so the yield is significantly better move over. Not sure why this is some herculean effort. Again every analyst I have listened to suggests ST bonds. LT Bonds are really useless now for 1.2%. Maybe a GIC ladder is best.
 

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There is a differene between ultra ST and ST bond funds. Ultra ST is almost cash equivalents while ST bond funds typically have about a 2.5 year duration. I agree with Jimmy NOT to go into XBB (Medium term) or worse, Long Bonds at this time because there is a very flat yield curve. As much as we cannot know where bond yields are going, there isn't enough premium in 5 and 10 year bonds to risk price contraction should the yield curve rise on longer terms. At the same time, as much as we don't want to believe it, there is room for yields to fall more. I am thus more inclined to go with a ST bond fund like XSB for fixed income. XSB is essentially equivalent to a 5 year GIC ladder which is what I mentioned earlier.

Jimmy, I am not going to argue about EM any more since we will continue to disagree...except to leave you with one key major thought. GDP in any country is not all that well correlated with stock market capitalization. One can have all kinds of GDP growth every year and not have EPS growth or a return on equity. Without those things, price appreciation on stocks has no basis. Further, without certainty of rule of law and regulatory oversight, there is only marginal ability to float equity issues, except to speculative gambling Asians. IOW, in Emerging Markets, stock markets are casinos, very loosely correlated with GDP growth, and maybe not correlated at all once Party Secretaries revise the numbers to suit their purposes. No one's portfolio warrants any more EM than what XAW already provides. I will gladly punt if YOU want more.

The USA is the flip side. America's GDP can go into decline but the USA's market capitalization share of the global market will always be substantially more than their GDP share of global GDP. The reasons are patently clear. The SEC garners more respect than almost any other regulatory regime, the US buck is the world's reserve currency, and global multi-nationals are disproportionately HQ'd in the USA relative to US GDP. Reputable mega-corps will disproportionately list and seek capital on US markets (market capitalization).

2020 Global stock markets by country 2020 | Statista
2018 Percent of world GDP by country, around the world | TheGlobalEconomy.com (unadjusted for PPP) or if you like The $80 Trillion World Economy in One Chart

Don't make the mistake of using GDP as a proxy for market capitalization.
 

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In my humble opinion, you can get a nice portfolio with only three ETFs.

XBB for bonds. XIC for Canadian stocks. XAW for stocks outside of Canada.

Optionally, you can add an ETF for gold and an ETF for real estate (e.g. XRE). That depends how you feel about gold and real estate.

Say you want to keep everything really simple. You could do something like...

40% XBB
55% XAW
5% XIC

But it depends. Maybe you want something more aggressive and want more stocks. Or maybe you want more exposure to Canadian companies (Canadian dividends are taxed more favorably, but not a concern if you're just investing in a retirement account).

There are multiple ways you could structure this, depending on your personality, needs, and risk tolerance.

I'm not a financial advisor so don't take any of this as financial advice.
 

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I agree with Jimmy NOT to go into XBB (Medium term) or worse, Long Bonds at this time because there is a very flat yield curve. As much as we cannot know where bond yields are going, there isn't enough premium in 5 and 10 year bonds to risk price contraction should the yield curve rise on longer terms.
So what if longer term rates go up? So what if there is "price contraction"? XBB drops in price, but you obviously don't sell at a loss -- just as you wouldn't sell your stocks when they dip.

If longer term rates go up, then XBB starts generating higher returns (it rolls into bonds with higher yields) and performance rises. One should not avoid XBB based on fear of a short term price decline. The focus should be on the long term returns, just as with stocks.

One can't poo-poo timing the stock market and, a moment later, endorse timing the bond market by hopping around the yield curve based on these speculative forecasts of what bonds will do in the short term. Maybe interest rates will go up, but maybe they will go down.

Maybe they won't go anywhere. Maybe they will rise very gradually, which means XBB won't even drop. There are so many possible ways this could go and you guys seem to be formulating a trading strategy that is razor focused on one very particular scenario: a sharp rise in interest rates.

Big picture: over long time horizons, longer maturity bonds (like XBB) outperform short term bonds and cash.
 

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Here's a total return chart of US short term bonds (roughly similar to XSB) compared to 10-year bonds (roughly similar to XBB) during the very high inflation of the late 70s. The yield on the 10 year bond increased by about 9% during this time!

You can see the situation Jimmy is concerned about in 1979-1985, a span of about 7 years. During these years, short term bonds (like XSB) performed much better than the 10 year maturity bonds (like XBB). However, at the 10 year mark, the total return performance is about the same, and then bonds like XBB go on to outperform.

Looking at the long term picture, you were better off in XBB even with the huge increase in interest rates. But yes, there was some pain along the way... several years of underperformance versus shorter maturity bonds.

So how would you play this using XSB? I guess someone rings a bell in 1988 and tells you it's time to sell XSB and buy XBB? You're going to outsmart the whole bond complex?
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Interesting debate here. I haven't read a lot about bonds yet. Thanks for feeding my curiosity.

I ended up on this website with graphs of 10-year bonds and it just seems like the yield has been going down for the last 35 years. Canada Government Bond 10Y | 1985-2020 Data | 2021-2022 Forecast | Quote | Chart

And then I looked at European countries and they are all in the negative yield since at least a year ago and Switzerland has been in the negative for about 5 years. What does it mean and what happened? (I understand that it means the borrower will loose money, but what does it mean when a country has a negative yield?)
 
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