My benchmark Sleepy Portfolio was assembled in the beginning of 2005 using ETFs available at that time and assumed that the portfolio was held in a RRSP account (hence the 25% limit on foreign-listed ETFs). Needlessly to say, things have changed quite a bit since then and if I were constructing the portfolio today, here are the changes I would make:
- Capture exposure to US equity through a total-market ETF like the VTI. The mandate for XSP has changed within the past two years. Instead of using derivatives to track the S&P 500, it now owns IVV (iShares S&P 500 index fund) and hedges the currency exposure. The MER for VTI is a tiny 0.07% compared to 0.24% for XSP.
- XIN also used derivatives to track the MSCI EAFE Index to get around the 30% limit on foreign content. For long-term investors, EFA is a better option because the XIN costs an extra 0.15% to hedge the currency exposure. It is debatable whether the foreign currency exposure in EFA needs to be hedged at all. While the EFA is denominated in US dollars, it tracks a basket of stocks that are denominated in Euros, Pounds, Yen etc. and a direct holding in EFA really provides exposure to these currencies, not the US dollar.
- There is an even cheaper option for investors wanting to track the MSCI EAFE Index. Vanguard’s two ETFs – VGK and VPL – together (three-fourths in VGK and one-fourth in VPL) track exactly the same index and cost slightly more than half that of EFA.
- I’ve already mentioned that VWO is preferable to EEM because it is much cheaper to own.
- David Swensen argues in his book Unconventional Success that real-return bonds are a core asset class. So, a portion of fixed-income exposure could be allocated to real-return bonds (XRB tracks the real-return bond index).
If I implement the Sleepy Portfolio today, it would be invested in a money market fund, XBB, XRB, XIC, VTI, EFA, VWO and XRE.
NB: I’ve been thinking about this post since I rebalanced the Sleepy Portfolio, but Dave’s thoughtful post on constructing his portfolio, inspired me to write this post.