Constructing a balanced portfolio within your Retirement Group Plan

These days not many Canadians have retirement pensions. In lieu of pensions some employers offer Retirement Group Plans to their employees. 

Both my wife and I are lucky to have access to Retirement Group Plans via our employers. As is typical with these plans the employee contributes to his/her RRSP (within the plan) and the employer matches that contribution up to a maximum percentage of the annual base salary. For example, if the employee contributes 6%, the employer contributes another 6%. The employer caps its contribution at a predefined percentage. I have seen employer contributions typically capped at around 5% - 6%.

These plans are typically administered by an insurance company and have a small choice of segregated funds from which to pick from. The fees of these funds are not great; but there is always room for some “fee optimization” if you browse through all the funds that are offered.

We set on a quest to construct a balanced and diversified portfolio within our plans (administered by Manulife and Sunlife respectively). This kind of portfolio allocates 60% to equities and 40% to bonds. The equity portion is divided equally between American, Canadian and International stocks.

In the spreadsheet below you can see how we constructed the portfolios and more importantly you can see the individual funds fees and the total portfolio fee. I put together another post explaining how to calculate the total fee of any portfolio in case you want to give it a quick read.

You will notice that these funds require you to pay sales taxes. The exact value of what you pay is dictated by the “place of supply” rules and it is very hard to estimate. In the worst case scenario you will pay 15% sales tax; but in general it will be lower than that. I assumed a 15% sales tax for my calculations.

In the spreadsheet you will see the acronyms IMF (Investment Management Fee) and FMF (Fund Management Fees). They mean loosely the same and can be compared with the Management Expense Ratio (MER) of an Exchange Traded Fund (ETF).

The Manulife Balanced Portfolio has a total fee of roughly 0.40%. The Sunlife Balanced Portfolio had a total fee of roughly 0.30%.  As a point of comparison a similar portfolio constructed via ETFs will have a MER ranging from 0.17% - 0.22%. 

The fees are not great, granted; but the employer’s top up makes it worthwhile. Rebalancing these portfolios requires some work (but not much). You have to make sure you do not trigger short-term trading penalties (totally doable). We are rebalancing our portfolios once a year.

I hope this was useful. Drop a note in the comments section if you have some questions or want to contribute your own ideas. And finally, do not consider this to be investment advice of any kind. I am not an investment advisor and my knowledge of the markets is amateurish.

How to calculate the MER of an investment portfolio constructed from individual funds?

A portfolio can be put together by aggregating various independent funds, each of which carries its own fees.

These fees are expressed as an annual percentage of the value of the fund. Exchange Traded Funds (ETFs) and Mutual Funds normally use the term Management Expense Ratio (MER) to refer to these fees. Funds accessible via Group Plans might refer to them as Fund Management Fees (FMF) or Investment Management Fee (IMF).

Moving forward in this article I will be using the term MER when referring to either of them. This is just a simplification and the reader must infer that the right terminology depends on the type of fund.

The MER of a portfolio can be calculated by knowing the MERs and allocation percentages of the underlying funds. The formula below can be used for such purpose:

MER(P)  = MER(F1) * A (F1) + MER(F2) * A (F2) + … MER(Fn) * A (Fn)


Where:

• P is the portfolio.
• F1, F2, …Fn are the underlying funds of the portfolio; for a total of n underlying funds.
• MER(P) is the MER of the portfolio.
• MER(Fn) is the MER of fund Fn; with n =1, 2…, n.
• A(Fn) is the allocation target (in percentage) of fund Fn; with n =1, 2…, n. The sum of all allocation targets should be 100%. In other words, A (F1) + A (F2) + …+ A (Fn) = 100%.

For example:

Let’s consider a portfolio containing 7 underlying funds as in the table below:

Symbol	Allocation	MER
VUN	23.70%	0.16%
VAB	23.60%	0.13%
VCN	18.20%	0.06%
VIU	13.80%	0.23%
VBG	9.20%	0.38%
VBU	7.20%	0.22%
VEE	4.30%	0.24%

MER(P) = MER(VUN) * A(VUN) +  MER(VAB) * A(VAB) +  MER(VCN) * A(VCN) +  MER(VIU) * A(VIU) +  MER(VBG) * A(VBG) +  MER(VBU) * A(VBU) +  MER(VEE) * A(VEE)

MER(P) = 0.16%*23.70% + 0.13% * 23.60% + 0.06% * 18.20% + 0.23%*13.80% + 0.38% * 9.20% + 0.22% * 7.20% + 0.24% * 4.30%

MER(P) = 3.792%% + 3.068%% + 1.092%% + 3.174%% + 3.496%% + 1.584%% + 1.032%%

MER(P) = 17.238%%

MER(P) = 17.238 / 100 %

MER(P) = 0.17238%

MER(P) = ~0.17%


The MER of the portfolio above is approximately 0.17%. It resembles the underlying composition and allocation targets used in VBAL.

Conclusion: the MER of a portfolio as a whole can be calculated by applying a simple formula that takes the MERs and allocation targets of each underlying fund as input. This calculation provides DYI investors with a way to assess how expensive a portfolio is.

The MER of a VBAL-like portfolio constructed from VBAL constituents

You can construct your own DIY portfolio by sticking to the same underlying ETFs (and allocations) used by the Vanguard Balanced ETF Portfolio (VBAL). At the time of writing the MER of this portfolio that uses VBAL as a template is 0.05% cheaper than VBAL itself.

The spreadsheet below calculates the MER of the VBAL like portfolio by using data contained in the factsheets of VBAL and its underlying funds.  For more details refer to How to calculate the MER of an investment portfolio constructed from individual funds?

If you invest $100 for 20 years this extra cost (0.05%) means you are forgoing $1 in returns for the whole two decades period. This is not bad at all considering that having one found that rebalances itself (as opposed to 7 individual funds) will save you money in trading commissions. Not to mention that it will simplify considerably your investment process.

I would stick with VBAL unless the size of your portfolio is large enough so that the gross impact of that 0.05% can be felt. Also, as your portfolio grows you might want to diversify to other asset classes beyond the basic constituents of VBAL. With a large portfolio you might want to take control of the rebalancing process in the hope of limiting The Luck of the Rebalance Timing. You might prefer your own portfolio in the hope of making it more tax efficient than VBAL; but again, this makes more sense with larger portfolios.

As conclusion: VBAL is a simple and inexpensive option to implement a globally diversified and balanced portfolio with a 60/40 split between stocks and bonds. The 0.05% that you can save by implementing your own portfolio (using VBAL as template) can be thought as the cost for having automatic rebalancing and limiting the trade activity.

How to request the RRSP transfer rebate at Questrade?

Most brokers and financial institutions will charge you a transfer-out fee when you transfer your RRSP to a competitor. 

I suffered this recently when I transferred my RBC RRSP account over to Questrade. RBC charged me $50CAD upon transferring the funds in cash.

Fortunately, I was able to get that money back. Questrade has a transfer fee rebate promotion by which they will rebate up to $150 of those transfer-out fees, if you transfer an RRSP worth at least $25,000CAD (either in cash or assets).

In order to claim the rebate, you will need to wait 3 months after transferring the RRSP. Once you have had the RRSP active with Questrade for 3 months, just log into your Questrade account and upload the RRSP statement containing the transfer-out fee. Then you need to email or call whoever helped you in opening the account and ask him/her to process the rebate for you.

What happens if your previous institution statement does not show the transfer out fee?  This happened to me actually: my last RBC RRSP statement did not show any transfer out fee; but the first Questrade statement was exactly $50 short. 

So, I went to my RBC branch and asked for information about this issue. How come I have no trace in my statement of the missing $50? They opened an investigation and mailed back to me (over postal mail) with an explanation.

RBC sent me a letter confirming that they charged $50CAD in transfer out fees, but that was not reflected in the statement. I find this omission from the statement a little odd, but anyhow I used this letter in order to get my rebate with Questrade.

It took less than a week for me to get the rebate, after I uploaded my RBC statement/letter and emailed the Questrade specialist that helped me in opening the account. The $50CAD rebate was deposited in cash directly into my Questrade RRSP account.

On a side note, Questrade has some promotions for new users. With the Refer a friend promotion you can unlock cash bonuses upon opening an account online and making your first deposit.

• $1,000.00 deposit unlocks a $25 cash bonus for you.
• $10,000.00 deposit unlocks a $50 cash bonus for you.
• $25,000.00 deposit unlocks a $75 cash bonus for you.
• $50,000.00 deposit unlocks a $100 cash bonus for you.
• $100,000.00 deposit unlocks a $250 cash bonus for you.

To use this promotion you need an active Questrade user to refer you. I would be very glad to refer you. Why? Well, because I get some cash bonuses as well by referring you :-) If you want me to refer you click this link. Great, now both of us are in the money! Thanks.

Disclosure: For a complete list of promotions click here.

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How to calculate the weightings of VSB and VSC given a desired allocation of government and corporate bonds?

Let’s say I want to allocate 10% of my investment portfolio in government bonds and 5% in corporate bonds. For that I want to use short-term bonds ETFs.

After some research, I narrowed my choices of ETFs to these:

• Vanguard Canadian Short-Term Bond Index ETF (Ticker symbol: VSB)
• Vanguard Canadian Short-Term Corporate Bond Index ETF (Ticker symbol: VSC)

VSB is composed approximately of 72% government bonds and of 28% corporate bonds. On the other hand, VSC is composed roughly of 8% government bonds and of 92% corporate bonds.

Question: given the description above, what would be the percentages of VSB and VSC in our portfolio?

At this point, I am going to throw a couple of formulas at you. You can use them to calculate the weightings of VSB and VSC. I came up with these formulas by myself. I can share the algebraic demonstration…If you want it, drop a comment below. 

% VSC = S * [ ( X - Y*R ) / ( Z*R – Y*R + X – W )  ]
% VSB = S * [ (Z*R - W) / (Z*R – Y*R + X - W)  ]

Where:

• X is the percentage of VSB dedicated to government bonds; in our example would be 72.
• Y is the percentage of VSB dedicated to corporate bonds; in our example would be 28.
• W is the percentage of VSC dedicated to government bonds; in our example would be 8.
• Z is the percentage of VSC dedicated to corporate bonds; in our example would be 92.
• S is the sum of the weightings of government and corporate bonds in our portfolio; in our example S would be 15 (10 + 5), because we want to have 10% in government bonds and 5% in corporate.
• R is the ratio of government bonds to corporate bonds; in our example R would be 2 (10 / 5).

Finally, let’s evaluate each formula:

% VSC = 15 * [ ( 72 - 28*2 ) / ( 92*2 – 28*2 + 72 – 8 )  ] = 1.25%
% VSB = 15 * [ (92*2 - 8) / (92*2 – 28*2 + 72 – 8)  ] = 13.75%

Answer: if we want to hold 10% in government bonds and 5% in corporate bonds; then 1.25% of our portfolio should be allocated in VSC and 13.75% should be allocated in VSB.

The usefulness of the formulas lies in the ability to change your target weightings for government and corporate bonds. This will of course result in new values for R and S that can be used to revaluate the formulas, allowing you to calculate the new percentages for VSB and VSC.

Finally, notice that the values of X, Y, Z and W do not change often. They represent the weighting of the different bonds within these ETFs. Refer to “Sector weighting (% of net asset value)” within the corresponding ETFs fact sheets if you want to determine these values yourself.

Please show your appreciation by clicking the Google Plus (G+) button close to the title of this article. 

VSB fact sheet:

https://www.vanguardcanada.ca/individual/mvc/loadImage?country=CAN&docId=249

VSC fact sheet: 

https://www.vanguardcanada.ca/advisors/mvc/loadImage?country=CAN&docId=552

An ETF based Balanced Portfolio for Canadians

I decided to build my own balanced portfolio to grow my hard earned money. No more mutual funds with expensive MERs neither miserable GICs nor saving deposits. For my portfolio I will be using ETFs, which have very low MERs and offer a degree of diversification.

I based my portfolio on the Millennial Portfolio presented by Garth Turner. Below I am listing the different weights per asset classes of the portfolio (taken as a quote from Garth’s blog post).

Canadian bond index ETF

20%

Preferred share index ETF

20%

Canadian equity index (large cap) ETF

15%

US equity index (large cap) ETF

20%

International equity index (large cap) ETF

20%

REIT index (Canadian) ETF

5%

So, what now? The next step is finding the corresponding ETFs for the different classes of assets. I researched a little bit about what ETFs to use and I selected the following ones:

Fixed income portion of the portfolio (40% in total):

• Government and Corporate bonds: VSB – 16.5%
• High Yield Bonds: CHB – 3.5%
• Preferreds: XPF – 20%

Growth portion of the portfolio (60% in total):

• Canadian Equity: XIC – 15%
• American Equity: VSP – 20 %
• International Equity (developed nations): XEF – 15%
• Emerging Markets: XEC – 5%
• Canadian REITs: VRE – 5%

I decided to use only large cap equity ETFs at the moment. I am building this initial portfolio with about $25k CAD, which is not too much. As the portfolio grows, I will consider more diversification by adding also medium and small caps into the mix.

I also decided not to add real return bonds to my portfolio at this moment (I will probably do so in the future). The reason for not adding real return bonds is that the FED is very likely to start rising the interest rate this month. If that happens, the long term bonds will be nailed. As it so happens, the real return bonds ETFs that I have found so far have very long terms. 

OK, now what? The broker of course. I decided to use Questrade. 

Questrade does not charge you when buying ETFs (well, ECN fees might still apply but that is not in their hands). It will charge you though when you sell ETFs (min. $4.95 / max. $9.95). You most likely will have to sell some ETF shares when rebalancing your portfolio, but that should not happen very often: maybe once or twice a year. 

As far as I can tell Questrade has the lowest commissions in Canada when trading ETFs. If you know of a better broker, please let me know with a comment below.

Questrade has some promotions for new users. With the Refer a friend promotion you can unlock cash bonuses upon opening an account online and making your first deposit.

• $1,000.00 deposit unlocks a $25 cash bonus for you.
• $10,000.00 deposit unlocks a $50 cash bonus for you.
• $25,000.00 deposit unlocks a $75 cash bonus for you.
• $50,000.00 deposit unlocks a $100 cash bonus for you.
• $100,000.00 deposit unlocks a $250 cash bonus for you.

To use this promotion you need an active Questrade user to refer you. I would be very glad to refer you. Why? Well, because I get some cash bonuses as well by referring you :-) If you want me to refer you click this link. Great, now both of us are in the money! Thanks.

Disclosure: For a complete list of promotions click here.

The same goes for the selection of ETFs I made. If you think my selection sucks and have in mind some better alternatives, please, let me know as well. Your comments are very welcome.

Remember, I am an amateur investor and these are my first trades. So, everything that you read here, is to be used at your own risk.  I am neither a financial advisor nor an expert on this subject. I am a merely a rookie investor and I want to share my investing experiences on this blog.

If you thing this post has any value, please show your appreciation by clicking the Google Plus (G+) button close to the title of this article. 

Happy investing!