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Cutting up a 3-ETF Portfolio Into a 5-ETF Portfolio in an RRSP Account

October 30, 2017 - 8 comments

In my last blog post, we worked out the approximate asset class weights for US, international and emerging markets stocks targeted by the iShare Core MSCI All Country World ex Canada Index ETF (XAW). Now that we’ve got our breath back and our allocations in order, let’s sharpen our scissors and start running through what it would take to slice up a 3-ETF portfolio holding a single global XAW fund into a 5-ETF portfolio holding the same positions in individual ETFs. 

For example, a balanced 3-ETF portfolio (such as 20% Canadian stocks, 40% global stocks and 40% Canadian bonds) could be recreated into a 5-ETF portfolio by multiplying the 40% global stock target asset allocation by each of the US, international and emerging markets stock allocation weights that we calculated in our previous blog. This would lead us to invest 21.37% of the portfolio in US stocks, 13.89% in international stocks and 4.74% in emerging markets stocks.

Money Makes the World’s ETFs Go Round

Do you remember why in the world we’d want to create a more complicated handful of holdings out of your simple three-part portfolio to begin with? The simple answer: money. In an RRSP account, there can be noticeable foreign withholding tax and product cost savings to be had by breaking up with your global stock ETF. The larger your portfolio, and the higher your allocation to global stocks, the greater the potential savings. 


By moving to a 5-ETF portfolio, you can potentially save $100s if not $1,000s per year.


Have I got your attention? Now to the logistics. 

Breaking Up for Fun and Profit

Here are what the allocations described above look like in table form: 

Stock Asset Class XAW Weight
Global Stock Portfolio Allocation
Balanced Portfolio Allocation
(A × B)
US 53.43% 40% 21.37%
International 34.71% 40% 13.89%
Emerging Markets 11.86% 40% 4.74%
Total 100.00%   40.00%


So if you were managing a $100,000 balanced portfolio, you would allocate $20,000 to a Canadian equity ETF ($100,000 × 20%), $21,370 to a US equity ETF ($100,000 × 21.37%), $13,890 to an international equity ETF ($100,000 × 13.89%), $4,740 to an emerging markets ETF ($100,000 × 4.74%) and $40,000 to a Canadian bond ETF ($100,000 × 40%). 

Intentionally Familiar Turf

I’ve included the portfolio weights for other asset allocations below (as of September 30, 2017). If you’ve already noticed that these portfolios closely resemble my 5-ETF model portfolios, give yourself a gold star, because this is no coincidence. My model portfolios are meant to approximate these asset mixes, albeit with fewer decimal points to clutter the view.

As of September 30, 2017

The Not-So-Fine Print 

There’s a catch, of course.  Isn’t there always? To score the cost savings that make the exercise worthwhile, you will need to purchase US-listed ETFs in your RRSP account. This requires mastering the Norbert’s gambit strategy for converting your loonies to dollars as cheaply as possible. (I’ve posted step-by-step Norbert’s gambit YouTube tutorials to help with this task.) 

If you feel intimidated by the process and would rather stick with your easier 3-ETF portfolio, that’s certainly your call. But before you dismiss the idea entirely, remember: The savings can be as much as the management expense ratio (MER) you’re already paying each year. For example, a balanced 3-ETF portfolio has an MER of 0.14%. The foreign withholding tax and product cost savings of a 5-ETF portfolio in an RRSP account is also about 0.14%. Are you sure you want to leave that much money behind? 

To help you decide, check out the table below, showing estimated tax and cost savings for a 5-ETF portfolio. If you have less than $50,000 in your RRSP account, a very conservative asset allocation, or both, you may decide the potential savings – about the cost of a modest meal – just isn’t worth the extra complexity. At the other end of the spectrum, if you can feast on major money spared, you may want to go for the gusto.

Estimated Annual Tax and Cost Savings: 5-ETF Portfolio vs. 3-ETF Portfolio 

RRSP Value ($) 100% bonds 20% stocks
80% bonds
30% stocks
70% bonds
40% stocks
60% bonds
50% stocks
50% bonds
60% stocks
40% bonds
70% stocks
30% bonds
80% stocks
20% bonds
100% stocks
$50,000 $0 $22 $35 $47 $57 $69 $81 $91 $116
$100,000 $0 $45 $69 $93 $114 $138 $162 $183 $231
$150,000 $0 $67 $104 $140 $171 $207 $243 $274 $347
$200,000 $0 $90 $138 $186 $228 $276 $325 $366 $463
$250,000 $0 $112 $173 $233 $285 $345 $406 $457 $578
$300,000 $0 $135 $207 $280 $342 $414 $487 $549 $694
$350,000 $0 $157 $242 $326 $399 $483 $568 $640 $810
$400,000 $0 $180 $276 $373 $456 $552 $649 $732 $925
$450,000 $0 $202 $311 $420 $513 $622 $730 $823 $1,041
$500,000 $0 $224 $345 $466 $570 $691 $811 $915 $1,157
Cost/Tax Savings (%) 0.00% 0.04% 0.07% 0.09% 0.11% 0.14% 0.16% 0.18% 0.23%


Number crunching

So now that you’ve seen the potential cost savings and you understand what’s involved with managing a 5-ETF portfolio, are you considering making a change? Feel free to leave your comments below about your experience managing a 3-ETF or 5-ETF portfolio, and why your chosen number works for you.

By: Justin Bender with 8 comments.
  28/06/2018 12:08:41 PM
Justine Bender
@Amam: That is correct – there is no foreign withholding tax benefit of using US-listed ETFs in an RESP or TFSA.
  17/06/2018 11:47:10 AM
Thanks for this information. I looked at the withholding tax information you also link to in the article. So my understanding is that there is a benefit to breaking it up in an RRSP account but that there wouldn't be a benefit to breaking it up in either RESP or TFSA. Am I correct or have I missed something? Thanks again.
  20/02/2018 12:12:55 PM
Justin Bender
@Eva: Although slightly more expensive, holding the Canadian-listed iShares Core MSCI EAFE IMI Index ETF (XEF) in an RRSP has roughly the same tax-efficiency as IEFA.
  18/02/2018 1:00:48 PM
Because IEFA is on the BATS exchange TDD customers have to call in to purchase it. They will charge only the $9.99 commission to place this trade for you (but confirm with the person you speak with so they are aware of this).
Justin, should I be nervous about buying it if TD won't list it on their trading platform? Is there an alternate U.S. listed ETF you could suggest that is similar to IEFA?
  18/12/2017 1:59:59 PM
Justin Bender
@Arun: There does seem to be an issue on TD Direct Investing’s site. I would call them up and ask them to add IEFA to their security list so that you may purchase it.
  11/12/2017 11:00:56 AM
I was trying this out. I bought ITOT and IEMG but I can't seem to buy IEFA on TD for some reason. The symbol does not show up. Anyone else experienced this ?
  08/11/2017 10:04:56 AM
Justin bender
@Albert: Thank you for your feedback. I definitely see the benefit of using XAW (even if it increases your product costs and foreign withholding taxes) for DIY investors that want a much simpler solution.
  01/11/2017 4:25:57 PM
Great article! Very informative - thank you! My two cents: I'll pay 0.16% for simplicity with XAW and the 3-ETF portfolio. If there was an ETF that combined world (IEFA) and emerging (IEMG) so it was a 4-ETF portfolio AND the savings was a bit more then I'd consider running Norbet's Gambet

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