When I first watched Star Wars, I thought it would be impossible to improve on its perfection. What a blast it was! But that was before I became a huge fan of the Spaceballs spoof of the same. Likewise, as fond as we are of the original Canadian Portfolio Manager (CPM) model ETF portfolios, you may have noticed we’ve made some big changes lately. Most notably, there are now four CPM portfolio levels of complexity to choose from: Light, Ridiculous, Ludicrous, or Plaid.

If you’ve never seen Spaceballs, go ahead. Take a five-minute break to get a feel for these new names.

Now, back to the serious matter of CPM portfolio construction. As you might guess, each of our models’ four levels is more difficult to manage than the last … and arguably, more powerful. By the time you get to Plaid, you may find yourself wanting to sport a Dark Helmet for protection. (And don’t hesitate. Somewhere out on the Interwebs, I’m pretty sure there’s an embarrassing picture of me wearing one.)

In this series of posts – and related podcasts and videos – I’ll discuss each of our four model ETF portfolio levels in painstaking detail. Even with proper gear, you’ll want as much knowledge as possible to make an informed decision, before hurtling head first into a complicated portfolio you may regret.

Today, we’ll introduce you to the Light model portfolios (also known as “The Price is Light” models). We’ll also talk about the pros and cons of asset allocation ETFs in general. Finally, we’ll help you decide which ETF provider is right for you: Vanguard or iShares. Spoiler alert: It actually doesn’t matter much.

By the way, I’ve decided to exclude the BMO asset allocation ETFs in these discussions, mainly because they don’t have U.S.-listed versions of their products. This will be important when reviewing the other three, more complicated models. So, if you do decide to go with our Light portfolios, you can also consider the BMO asset allocation ETFs.


Shedding Light on the Light Portfolios Report

Raise your hand if this sounds like you: You have very little investment experience, a small-ish portfolio, and/or too many other things you’d rather be doing in your free time.

If any combination of these traits apply to you, our Light model ETF portfolios might be just the ticket for you and your investment adventures. Using single-fund Vanguard or iShares asset allocation ETFs, you’ll get diversified exposure to global equity and fixed income markets, at a fraction of the fees charged by most Canadian-based mutual funds.

The Light portfolios are available for download in the Model ETF Portfolios section of the CPM Blog. Clicking on either the Vanguard or iShares Asset Allocation ETF buttons in Step 2 will generate the report in a separate tab.

The Vanguard or iShares portfolios are displayed from left to right, ranging from a very conservative 80% bond, 20% stock portfolio, all the way to a very aggressive 100% stock portfolio. For either fund company, their five asset allocation ETF names and tickers are listed below the blue and grey donuts.

What if you’re not satisfied with the single-fund model portfolios? This might detract from the simplicity of a one-fund solution, but you could split your cash between two of the five one-fund solutions. For example, you could invest half your money in the Vanguard Balanced ETF Portfolio (VBAL) and the other half in the Vanguard Conservative ETF Portfolio (VCNS). You’d then have a custom, 50/50 stock/bond mix. But be forewarned: You will now be responsible for keeping roughly equal amounts invested in each fund.

Below the ETF tickers, you’ll find the percentage weights allocated to each of the underlying ETFs. The individual ETF names can also be found on the far left of the report.

Near the center of the report, you’ll find the estimated management expense ratio (MER) for each asset allocation ETF. This is the annual percentage cost to invest in the fund. New this year, we’ve added my foreign withholding tax ratio (FWTR), which estimates the unrecoverable foreign withholding taxes in tax-deferred accounts (like RRSPs and RRIFs), tax-free accounts, and taxable accounts.

Further down, the report displays hypothetical past returns of each model portfolio. Just remember, this doesn’t tell you much about future returns. New for 2020, we now have 25 years of semi-fictional performance. If you’d like to read up on the performance methodology, you can check out more details on page 2 of the report. (Although, honestly, I’ve never been asked a single question about it.)

More importantly, in bright red near the bottom of the report, you’ll find each fund’s worst 1-year return over the 25-year period. Pay close attention to these figures. Ask yourself: Are you really comfortable with these types of losses? Because you will eventually experience similar, or likely worse short-term returns in your actual portfolio.


The Pros and Cons of Keeping It Simple

Now that you’re familiar with the Light model portfolio reports, let’s discuss some of the advantages and disadvantages of using all-in-one asset allocation ETFs. First, the benefits:

Less Effort – It doesn’t get much easier than this. As I mentioned earlier, you only need to place a single trade to gain access to thousands of Canadian and foreign stocks and bonds. Also, you won’t need to rebalance your portfolio to maintain its asset mix; iShares or Vanguard will take care of that for you.

Potential Cost Savings – The funds can save you money on trading commissions when you add new money to your accounts, as you only have to buy a single ETF to invest your cash. Many of the big bank discount brokerages still charge investors around $10 per trade. Also, management expenses are extremely low, at around 0.21% for iShares portfolios and 0.25% for Vanguard portfolios.

Less Angst – Since you can’t readily see the underlying funds in a single-fund structure (and how each is doing relative to the others), you should be less tempted to “tinker” with the portfolio, which is usually to the detriment of your end returns.

Simplified Tax Management – Tracking your adjusted cost base (ACB) in taxable accounts will take less time. You’ll only need to track the ACB of a single ETF, instead of for numerous funds.

Easier Portfolio Management – A couple of the asset allocation ETFs allow you to arrange pre-authorized cash contributions (PACCs), for automatically purchasing more fund shares each month. PACCs offer the ultimate “set-it-and-forget-it” investing experience.

Now, to the inevitable trade-offs for all this convenience:

What You See Is What You Get – Since you can’t adjust the underlying holding weights to suit your preferences, if you want a lower allocation to Canadian stocks, you’re out of luck.

Less Flexibility – Although the iShares and Vanguard asset allocation ETFs come in five flavours of risk, you may still prefer a different asset mix for your portfolio. In this case, you’ll need to combine at least two ETFs together, as I described earlier. This can defeat the products’ simplicity.

The Prices Paid – The MERs are slightly higher than if you had just purchased the underlying ETFs directly. Foreign withholding taxes may also be higher.

Tax Inefficiencies – When held in a taxable or non-registered account, the underlying bond ETFs can be slightly less tax-efficient than other fixed income options. This is due to tax-inefficient premium bond holdings, which I’ll explain in a future post. Also, since you hold the same ETF in every account, you can’t engage in tax-wise asset location strategies, and tax-loss selling opportunities may not pop up as often.

If you’ve made it this far, you’re probably realizing, while asset allocation ETFs are imperfect, they may still be the best option for most DIY investors. Next, let’s check out the main differences between the iShares and Vanguard asset allocation ETFs. We’ll also review how, or if, these differences have impacted historical risk and returns over the past two decades. (Here’s another spoiler: They mostly have not.)


Equity Home Bias

Investors and ETF providers alike tend to overweight their home country’s stock. In fact, the tendency is so common, it has a name: home bias. The Vanguard and iShares portfolios are no exception to this rule. They also are overweighted in Canadian stocks relative to foreign stocks.

Canadian stocks only make up around 3% of the global stock market, but Vanguard and iShares have both provided a higher weight to domestic stocks in their portfolios. In all five of their funds, Vanguard has allocated 30% of their equity mix to Canadian stocks, and 70% to foreign stocks. iShares has split their equity allocation 25%/75% between Canadian and foreign stocks.


Asset Class Vanguard Allocation iShares Allocation
Canadian stocks 30% 25%
Foreign stocks 70% 75%
Total 100% 100%


You may be tempted to favour the iShares ETFs, and their higher allocation to foreign stocks. After all, over the past decade, foreign stocks have outperformed Canadian stocks by around 4.6 percentage points per year. Before you decide, check out how dramatically fortunes were reversed in the decade just prior. From 2000–2009, Canadian stocks crushed foreign stocks by an average of 8.2 percentage points per year. Besides, remember that past performance tells us little about what to expect next.


Asset Class Annualized Return
2000 – 2009
Annualized Return
2010 – 2019
Annualized Return
2020 – 2029
Canadian stocks 5.6% 6.9% ?
Foreign stocks1 -2.6% 11.5% ?
Difference +8.2% -4.6% ?
Sources: Morningstar Direct, S&P Dow Jones, MSCI, FTSE Russell Indices as of December 31, 2019


If you had been invested over the past two decades, it would have made little difference whether you had selected a 30%/70% or 25%/75% Canadian/foreign stock split. Vanguard’s 30%/70% weights would have slightly outperformed the iShares’ 25%/75% allocation, but only by an average of 0.1% per year. And both portfolios would have had similar risk, with standard deviations at around 11.5%. So, if you’re still torn on which company to invest with, know that a 5% difference in Canadian stocks isn’t likely to have a noticeable long-term impact on risk or returns.

All-Equity Index Portfolio Annualized Return
2000 – 2019
Annualized Standard Deviation
2000 – 2019
30% Canadian stocks / 70% Foreign stocks1 4.9% 11.5%
25% Canadian stocks / 75% Foreign stocks1 4.8% 11.5%
Difference 0.1% 0.0%
Sources: Morningstar Direct, S&P Dow Jones, MSCI, FTSE Russell Indices as of December 31, 2019


Market-Cap vs. Target Weights

Beyond essentially insignificant equity home bias differences, there is a notable difference in how each company manages the foreign equity allocation within the portfolio.

Vanguard weights their U.S., international, and emerging markets equity allocations based on their current market cap. This lets these asset classes fluctuate freely within the constraints of the overall 70% foreign equity allocation, based on the relative stock market values in each region.

iShares has instead chosen specific target weights for their U.S., international, and emerging markets allocations. They stick to these target weights no matter what daily stock markets do.

Think of Vanguard’s strategy as being like the diet someone might take if they were not obsessed with their body weight. They might put on an extra five pounds during the winter, figuring they’ll lose the flab during beach season. The iShares’ strategy would appeal more to a disciplined health fanatic who weighs themselves daily and diets accordingly, lest they shed or gain an unwanted pound.

Given their current target weights, the iShares foreign equity allocation underweights emerging markets and overweights developed markets by around 5.8%, relative to Vanguard. So, if you prefer more emerging markets stocks in your portfolio, the Vanguard asset allocation ETFs may be the way to go.


Foreign Equity Weights: Vanguard vs. iShares

Asset Class Vanguard iShares Difference
U.S. stocks 56.8% 60.0% -3.2%
International stocks 30.7% 33.3% -2.6%
Emerging markets stocks 12.5% 6.7% +5.8%
Total 100.0% 100.0%  
Sources: CRSP, MSCI and FTSE Russell Index Fact Sheets as of December 31, 2019
Note: The market cap of Korean companies has been included in the emerging markets stock allocation for both companies.


If we adjust the foreign equity weights in our 25% Canadian stocks / 75% Foreign stocks index portfolio, we find this change resulted in slightly higher performance than our 30% Canadian stocks / 70% Foreign stocks index portfolio (5.1% vs. 4.9%), but with similar risk.


All-Equity Index Portfolio Annualized Return
 2000 – 2019
Annualized Standard Deviation
2000 – 2019
30% Canadian stocks / 70% Foreign stocks1 4.9% 11.5%
25% Canadian stocks / 75% Foreign stocks2 5.1% 11.5%
Difference -0.2% 0.0%
Sources: Morningstar Direct, S&P Dow Jones, MSCI, FTSE Russell Indices as of December 31, 2019


Fixed Income Home Bias

Within the portfolios’ fixed income allocations, Vanguard targets 60% Canadian and 40% foreign bonds. They also hedge away the foreign bonds’ currency risk, which makes them behave more like Canadian bonds. U.S., international, and emerging markets bonds are all included in this foreign bond allocation.

Similar to the equity allocation, the split between these foreign bond regions are determined by their current market caps, not by a specific target weight. Again, other than the 60%/40% split between Canadian and foreign bonds, there’s very little active decision-making going on here. This is ideal for those of you who prefer a more hands-off approach to indexing.

In comparison, iShares targets 80% Canadian and 20% foreign bonds in their portfolios. Like Vanguard, they also hedge the currency risk of their foreign bonds. Unlike Vanguard, their foreign bond allocation is entirely U.S. bonds, split evenly between government and corporate investment grade bonds.

Fixed Income Weights: Vanguard vs. iShares

Asset Class Vanguard iShares
Canadian short-term corporate bonds 15.0%
Canadian bonds 60.0% 65.0%
U.S. bonds (CAD-hedged) 18.4% 20.0%
International and emerging markets bonds (CAD-hedged) 21.6%
Total 100.0% 100.0%
Sources:  BlackRock Canada, Bloomberg as of December 31, 2019,


Fixed Income Duration

The iShares portfolios have also swapped out a portion of the broad-market Canadian bonds for shorter-term corporate bonds, which has reduced the average duration of their bond portfolio. (Duration is a measure of a bond price’s sensitivity to interest rate changes.) So, the iShares portfolios may be right up your alley if you’d prefer more corporate bonds in your portfolio, with less duration risk.


Weighted-average bond duration in the Vanguard Asset Allocation ETFs

Fixed Income Securities Allocation Average Duration (Years)
Vanguard Canadian Aggregate Bond Index ETF (VAB) 58.8% 8.0
Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) (VBU) 18.4% 8.3
Vanguard Global ex-U.S. Aggregate Bond Index ETF (CAD-hedged) (VBG) 22.8% 8.1
Weighted-Average Duration   8.1
Source: Vanguard Investments Canada Inc. as of December 31, 2019


Weighted-average bond duration in the iShares Asset Allocation ETFs

Fixed Income Securities Allocation Average Duration (Years)
iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH) 15.0% 2.8
iShares Core Canadian Universe Bond Index ETF (XBB) 65.0% 8.0
iShares U.S. Treasury Bond ETF (GOVT) 10.0% 6.4
iShares Broad USD Investment Grade Corporate Bond ETF (USIG) 10.0% 7.5
Weighted-Average Duration   7.0
Source: BlackRock Canada Inc. as of December 31, 2019


Striking a Balance

As most Canadians allocate a portion of their portfolio to bonds, I’ve run the historical performance over the past two decades on a typical balanced 60%/40% stock/bond index portfolio, which incorporates most of the equity and fixed income differences just discussed. In the charts below, I’ve referred to these two portfolios as the Vanguard Balanced Index Portfolio and the iShares Core Balanced Index Portfolio, which would be similar to VBAL and XBAL, before fees.

For both portfolios, we find identical performance and risk. In other words, even with all the slight differences between how Vanguard and iShares construct their asset allocation ETFs, we wouldn’t expect there to be much long-term difference in risk and returns. Bottom line? Investors should feel comfortable no matter which option they choose.


Balanced Index Portfolio Annualized Return
2000 – 2019
Annualized Standard Deviation
2000 – 2019
Vanguard Balanced Index Portfolio 5.3% 7.0%
iShares Core Balanced Index Portfolio 5.3% 7.0%
Difference 0.0% 0.0%
Sources: Morningstar Direct, S&P Dow Jones, MSCI, FTSE Russell Indices as of December 31, 2019


Management Expense Ratio (MER)

If there’s one rather obvious difference between iShares and Vanguard, it’s their annual fees. The iShares portfolios are slightly less expensive than Vanguard’s, at around 0.21% vs. 0.25%, respectively. However, a four basis point difference is hardly a sufficient reason to prefer one company’s funds over the other, especially in a smaller portfolio. For example, the fee advantage is only worth about $4 per year on a $10,000 investment.


Rebalancing Strategies

In terms of portfolio rebalancing, both Vanguard and iShares will take care of this for you.

iShares plans to occasionally rebalance their portfolios at their discretion. They do not expect to allow any asset class to deviate by more or less than 10% of its target weight. For example, the iShares Core Balanced ETF Portfolio (XBAL) has a Canadian equities target weight of 15%, invested in the iShares Core S&P/TSX Capped Composite Index ETF (XIC).

  • If XIC became more than5% of the portfolio [15% + (15% × 10%)], BlackRock would likely sell a portion to bring the asset class back in line with its target.
  • Likewise, if XIC became less than5% of the portfolio [15% – (15% × 10%)], BlackRock would likely sell a portion of any overweight ETFs, and use the proceeds to buy more shares of XIC.
  • In reality, BlackRock will typically use investors’ new cash flows to top-up any underweight asset classes. This should reduce the need to rebalance by selling securities at a gain.

Vanguard also plans to periodically rebalance their portfolios at their discretion. They do not expect to allow any specific fund to deviate by more or less than an absolute 2% of its target weight. For example, VBAL has a Canadian equities target weight of 18%, invested in the Vanguard FTSE Canada All Cap Index ETF (VCN). If VCN were to become more than 20% of the portfolio (18% + 2%), or less than 16% (18% – 2%), Vanguard would likely spring into rebalancing action. Again, they would try to use investors’ new cash flows to top-up any underweight asset classes, reducing the need to sell existing securities.


Pre-Authorized Cash Contributions (PACCs)

Two of the iShares asset allocation ETFs – XBAL, and the iShares Core Growth ETF Portfolio (XGRO) – are still eligible for PACC programs at select brokerages. This is because, instead of launching new ETFs back in December 2018, iShares simply changed the names, tickers, fees, and investment objectives of two existing balanced ETFs (which were themselves relics from the Claymore days, where the PACC program originated). Thanks to this grandfathering provision, investors in these two specific ETFs can still participate in the PACC program … for now.

If that’s of interest, here’s how it works:

  1. Fill out the iShares PACC enrollment form, attach a voided cheque, and mail the documents to a participating discount brokerage you invest with, like .
  2. Questrade will then complete their portion of the form and provide it to State Street Trust Company Canada (SSTCC) for processing.
  3. Once set-up is complete (after about 10 days), SSTCC will start to debit your bank account near the end of each month for the amount you specified on the form (it must be at least $50/month). The actual purchase occurs at the beginning of the following month, and the shares are deposited into your brokerage account mid-month.
  4. Only whole shares can be purchased, so any leftover cash is refunded to your bank account around the 5th of each month. If you’re targeting a specific monthly savings amount, you can occasionally move the leftover cash from your bank account to your brokerage account and invest it yourself.

Don’t trust yourself to buy more shares of your ETF through thick and thin? Or maybe you’d rather spend your spare time doing something more exhilarating than placing ETF trades. (Like watching or rewatching Spaceballs!) If so, the convenient PACC program may be just the thrust you need to accelerate your XBAL or XGRO investments.


So, Vanguard or iShares?

By now, I hope you’ve realized: An asset allocation ETF from either Vanguard or iShares would be a pretty good choice for most investors. If you prefer one based on the discussion above, great. If not, flip a coin. Heads or tails, you win. This is especially true if you compare either strategy to the hyper-active floundering most DIY investors engage in as they make their way across the ETF universe.

That said, for those of you who think Light speed is too slow, we can crank up the complexity level, and squeeze even more power out of your investment engines. Next up, we’ll introduce you to our Ridiculous model portfolios. Until then, may the investment force be with you.


Performance Methodology

Canadian stocks

01/2000-12/2019: Monthly returns of the S&P/TSX Composite Index

U.S. stocks

01/2000-12/2019: Monthly returns of the MSCI USA IMI (net div.) (in CAD)

International stocks

01/2000-12/2019: Monthly returns of the MSCI EAFE IMI (net div.) (CAD)

Emerging markets stocks

01/2000-12/2019: Monthly returns of the MSCI Emerging Markets IMI (net div.) (CAD)

Foreign stocks1

01/2000-12/2019: Monthly returns of the MSCI ACWI ex Canada IMI (net div.) (CAD)

Foreign stocks2

01/2000-12/2019: 60% U.S. stocks + 33.33% International stocks + 6.67% Emerging markets stocks, rebalanced monthly

Canadian short-term bonds

01/2000-12/2019: Monthly returns of the FTSE Canada Short-Term Bond Index

Canadian bonds

01/2000-12/2019: Monthly returns of the FTSE Canada Universe Bond Index

U.S. bonds (CAD-hedged)

01/2000-12/2019: Monthly returns of the Bloomberg Barclays US Aggregate Bond Index (CAD Hedged)

Global bonds (CAD-hedged)

01/2000-12/2019: Monthly returns of the Bloomberg Barclays Global Aggregate Bond Index (CAD Hedged)

Vanguard Balanced Index Portfolio

01/2000-12/2019: 23.53% Canadian bonds + 16.47% Global bonds (CAD-hedged) + 18% Canadian stocks + 42% Foreign stocks, rebalanced monthly

iShares Core Balanced Index Portfolio

01/2000-12/2019: 6% Canadian short-term bonds + 26% Canadian bonds + 8% U.S. bonds (CAD-hedged) + 15% Canadian stocks + 27% U.S. stocks + 15% International stocks + 3% Emerging markets stocks, rebalanced monthly