Making a low cost portfolio even cheaper

The Sleepy Portfolio was designed to be an ultra low-cost portfolio and the exchange-traded funds (ETFs) used in the portfolio were the cheapest available at that time. As you can see in the following table, the Sleepy Portfolio currently costs just 20 basis points (0.20 percent) per year. In other words, if you invest in a portfolio like the Sleepy Portfolio, you’ll incur a cost of just $200 per $100K of portfolio balance. If the portfolio were assembled with mutual funds that carry an average cost of 2.5 percent instead, the same portfolio would cost $2,500 per $100K. Costs matter a great deal in investing.

It is interesting to note the contrast in fees between US ETFs and Canadian ETFs in the Sleepy Portfolio. Half the portfolio is made up of US ETFs, which cost a weighted average of 8.4 basis points. The other half, which is made up of Canadian ETFs, cost a weighted average of 31.6 basis points. In other words, Canadian ETFs, even though they are cheap compared to traditional products, still cost as much as 4 times that of US ETFs!

Thankfully the advent of Vanguard and the launch of ETFs by BMO offer us the opportunity to cut the costs of the Sleepy Portfolio even further. By replacing some of iShares ETFs with lower cost products (see table below), the weighted average fees of the Sleepy Portfolio will drop to 14 basis points or 30 percent lower. It works out to a saving of $60 per $100K. An investor would incur trading commissions in making the switch, which can be reduced by making the switch when adding new money or rebalancing the portfolio. Caution must be exercised in taxable accounts because a switch to lower cost products might result in a taxable event.