Thank goodness for a stronger-than-expected bond market. Had it not been for that, my couch potato ETF portfolio would have fared much worse over the latest three-month period as equities around the globe lost ground.
It wasn’t supposed to be this way. Back in January, it was generally expected that bonds would get clobbered this year as a strengthening economy and rising inflation prompted central banks to raise interest rates. Instead, the recovery appears to be stalling, and there is once again talk of a double-dip recession. Sovereign debt fears in Europe are driving investors to perceived safe havens such as U.S. Treasuries and Government of Canada bonds as stock markets falter.
As a result, the units of the iShares DEX Universe Bond Index Fund (TSX: XBB), which make up 40% of the portfolio, are up slightly from my last review in March. Combined with three monthly distributions during that period, XBB has gained 2.6% since then.
By comparison, all three equity-based ETFs in the portfolio slipped slightly during the period. Because they represent 60% of the assets (book value), the bottom line is that my passive portfolio shows an overall profit of 3.6% since it was launched in January 2008. That’s down from 4.6% at the time of the March update.
This portfolio had an initial value of $10,024.68. The money was distributed among four iShares ETFs, and I have never deviated from the original composition or the asset mix. Leaving aside some small tracking error, the results to date are a reasonably accurate reflection of how the markets have performed in the 3 1/3 years since I launched this portfolio in my Mutual Funds/ETFs Update newsletter.
As you can see from the table below, Canadian bonds have outperformed all the other components of the portfolio by a wide margin with a cumulative return to date of 19.6% (capital gains plus distributions). Canadian stocks, which are represented by the iShares S&P/TSX Capped Composite Index Fund (TSX: XIC), are a distant second with a profit of 6.6%. However, it’s important to remember that the crash of 2008-09 took place after this portfolio was started. Given the severity of that downturn, it’s a wonder we have any gains at all here.
Our U.S. stock ETF is the iShares S&P 500 Index Fund (CAD-hedged) (TSX: XSP), which is hedged back to Canadian dollars. It recorded only a small decline during the latest period but is down 14% since the start of 2008. That tells us that the American market still has not fully recovered from the crash.
The worst performance has been turned in by the iShares MSCI EAFE Index Fund (CAD-hedged) (TSX: XIN), which invests in stocks from Europe, Australasia, and the Far East, hedged to Canadian dollars. It is down more than 28% since the portfolio’s inception, and it is likely to be a long time before we see breakeven here.
These results tell us a great deal about the theory of couch potato investing. Conceptually, it is a very simple idea – buy units in a few broadly-based equity ETFs that provide exposure to all world markets, add a bond ETF for asset diversification, and then sit back and relax. Assuming the historic rise of stock markets continues, the strategy will eventually pay off.
But human nature tends to be more impatient, and many investors would likely bail out in the face of the kind of dramatic market plunge we saw in 2008-09. Even those who stuck it out would be only marginally ahead at this stage. It is possible that using some different ETFs might change the numbers slightly, but the overall results would be similar. After more than three years, couch potato investors have little return on their money. Keep that in mind before you embark on this type of strategy.
Here is the latest report on the portfolio’s performance. Results are based on prices on June 3.
BALANCED ETF PORTFOLIO
|| Book Value
Gordon Pape is one of Canada’s best-known personal finance commentators and mutual fund experts and a regular contributor to the Fund Library. He is publisher of Mutual Funds/ETF Update, a monthly newsletter that provides advice on fund selection and strategies. Click here for more information on a three-month trial subscription.
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Commissions, trailing commissions, management fees, and expenses all may be associated with investment fund purchases. Please read the simplified prospectus before investing. Investment funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that a fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in a fund will be returned to you. Fund values change frequently and past performance may not be repeated. The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact author to discuss your particular circumstances.