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ETF building blocks: Three models for your RRSP

The exchange-traded fund sector has been criticized for spewing out new products like a fire hose, but there is an upside for investors.

More variety means more tools for precision portfolio building. ETFs used to be a way for investors to buy exposure to major stock and bond indexes through a vehicle that trades like a stock, but they've branched out into every sector imaginable. ETFs also target different financial demographics - value investors, growth investors, income investors, hyper-aggressive traders and socially responsible investors, to name just some.

Roughly 700 ETFs are available to Canadians on the Toronto Stock Exchange and U.S. exchanges. In this edition of the Portfolio Strategy column, we pick out some that can work well for registered retirement savings plans and then look at ways of blending them in a portfolio.

Three model portfolios are presented here as an illustration of how the low fees and flexibility offered by ETFs can work for different types of investors as an alternative to mutual funds and individual stocks. Your personal investing needs will differ, so be sure to do your own research.

Now, let's do some portfolio building.

SOUND AND SIMPLE

Target: Investors who want a basic, low-maintenance portfolio that emphasizes stocks but has a significant component of bonds.

The mix

5%: Claymore Premium

Money Market ETF

The assumption in including this new ETF is that you'll hold money in it indefinitely and won't be buying and selling a lot.

25%: iShares Cdn Bond

Index Fund

This ETF gives you exposure to the entire Canadian bond market, and it's vastly cheaper to own than a bond mutual fund.

5%: iShares Cdn Corporate

Bond Index Fund

Corporate bonds offer higher yields, but also more risk.

35%: iShares Cdn Composite

Index Fund

There are several other Canadian market ETFs you could use, but this one does a good job combining the benefits of low fees and broad market exposure.

15%: iShares CDN S&P 500

Index Fund

Here, you get exposure to the biggest U.S. corporations with currency hedging that ensures your returns match those of the S&P 500 without distortions caused by fluctuations in the value of the loonie. If you don't want hedging, try the iShares S&P Index Fund, which is listed on the American Stock Exchange.

15%: iShares MSCI EAFE

Index Fund

Provides "everywhere but North America" stock market exposure. A hedged version of this fund, the iShares Cdn MSCI EAFE Index Fund, is listed on the TSX, but it's more expensive to own and is arguably unnecessary given the large number of currencies you're exposed to with this ETF.

MORE RISK, MORE GAIN

Target: Investors who have a high tolerance for double-digit losses as they strive for higher average annual returns than more conservative portfolios would deliver.

The mix

35%: iShares Cdn Composite Index Fund

For a somewhat more aggressive stance, consider the iShares Cdn Growth Index Fund, which focuses on companies showing significant growth.

5%: iShares Cdn SmallCap Index Fund

The small fry on the TSX are covered with this ETF.

20%: Vanguard Total Stock Market ETF

Many investors think of the S&P 500 stock index when looking at the U.S. market, but this index includes only large companies. This Vanguard fund tracks the MSCI U.S. Broad Market Index, which includes large to very small companies.

15%: iShares MSCI EAFE

Index Fund

See "Sound and Simple."

5%: Claymore BRIC ETF

You get more concentration in Brazil, China and India than you do with a more diversified emerging markets fund (there's a little exposure to Russia as well).

10%: Claymore Oil Sands

Sector ETF

This ETF targets firms in the all-important Alberta oil sands.

5%: iShares Cdn Gold Sector Index Fund

Covers the shares of global gold-mining companies, including all the major Canadian ones.

5%: Claymore Global Agriculture ETF

Food is hottest thing in commodities and this ETF holds the shares of companies involved in food processing, fertilizer, farm machinery, seed supply and such.

THE GREEN PORTFOLIO

Target: Investors who want an RRSP portfolio that uses socially responsible investments where possible.

The mix

35%: iShares Cdn Jantzi Social

Index Fund

Holds the shares of large Canadian stocks that are members of the Jantzi Social Index, which includes only companies meeting requirements for corporate behaviour in areas such as the environment, corporate governance and social issues.

15%: iShares KLD 400 Social

Index Fund

Think of this ETF as being along the lines of a U.S. version of the Jantzi fund.

5%: PowerShares CleanTech Portfolio

A higher-risk sector fund that tracks an index of largely U.S. companies in the business of reducing energy consumption and pollution.

45%: Socially responsible

mutual funds

These will help you fill in the blanks in this portfolio. To date, there hasn't been enough interest in SRI investing for exchange-traded fund companies to broaden their offerings in this niche.

ON THE WEB

Here are some resources that can help you choose exchange-traded funds for your portfolio.

American Stock Exchange (amex.com): Most North American ETFs are listed on this exchange.

Globeinvestor (globeinvestor.com): The stock filters on this site allow you to search for ETFs listed on all major North American exchanges, and it provides quotes, charts and news for each. Check out the ETF Centre (found under Resources).

IndexUniverse (indexuniverse.com): News and views on the global ETF scene.

Morningstar (morningstar.ca): Analyst reports are available for a growing number of TSX-listed ETFs.

TheStreet.com: ETF news and views.

Yahoo Finance Canada (ca.finance.yahoo.com/etf): Screening tools plus educational material.

ETF spec sheet

Here's a list of all the ETFs used mentioned in this Portfolio Strategy column, along with pertinent details. Returns for ETFs listed on Canadian exchanges are reported in domestic currency, while U.S.-listed ETFs returns are reported in U.S. dollars.

12-month
FundTickerMERreturn*
Claymore Premium Money Market CMR-T0.25%n/a
iShares Cdn. Bond Index XBB-T0.30%- 1.5%
iShares Cdn. Corporate Bond Index XCB-T0.40%- 3.9%
iShares Cdn. Composite Index XIC-T0.25%1.9%
iShares Cdn. S&P 500 Index XSP-T0.24%- 8.5%
iShares S&P 500 Index IVV-N0.09%- 6.8%
iShares Cdn. MSCI EAFE Index XIN-T0.49%- 15.8%
iShares MSCI EAFE Index EFA-N0.35%- 7.3%
iShares Cdn. Growth Index XCG-T0.50%16.7%
iShares Cdn. SmallCap Index XCS-T0.55%n/a
Vanguard Total Stock Market VTI-A0.07%- 7.1%
Claymore BRIC CBQ-T0.60%49.6%
Claymore Oil Sands Sector CLO-T0.60%18.7%
iShares Cdn. Gold Sector Index XGD-T0.55%9.7%
Claymore Global Agriculture COW-T0.65%n/a
iShares Cdn. Jantzi Social Index XEN-T0.50%n/a
iShares KLD 400 Social Index DSI-A0.50%- 9.1%
PowerShares CleanTech PortfolioPZD-A0.70%16.6%
*to Feb. 20

SOURCES: GLOBEINVESTOR.COM AND COMPANY WEBSITES

© 2007 The Globe and Mail. All rights reserved.

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