When it comes to building a Tax-Free Savings Account (TFSA), my default is usually an all-in-one asset allocation exchange-traded fund (ETF). These single-ticker solutions bundle together stocks and sometimes bonds from different regions, sectors, and risk profiles, giving you a hands-off portfolio that is automatically rebalanced. For most people, that simplicity is worth the cost.
That said, if you are willing to be a bit more hands on, you can replicate a similar structure yourself using a small number of low-cost index ETFs. Doing it yourself can shave a few dollars off fees over time, but it does require discipline and a willingness to stick with the plan during market volatility. Here is a simple three-ETF portfolio blueprint for deploying $21,000 inside a TFSA.
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50% in U.S. stocks
We start by allocating $10,500, or 50% of the portfolio, to U.S. equities using Vanguard S&P 500 Index ETF (TSX:VFV).
This ETF tracks the S&P 500 Index, which is often misunderstood as simply the largest 500 companies in the United States. In reality, inclusion is determined by both a rules-based methodology and an index committee that screens for factors like liquidity, size, and earnings quality.
The ETF is market cap weighted, meaning the largest companies carry the most influence. Given the dominance of technology and innovation driven firms in the U.S., this allocation becomes the primary growth engine of the portfolio.
The U.S. market is the largest equity market in the world by capitalization, so it makes sense for it to represent a meaningful portion of a long-term portfolio. VFV is also very inexpensive, with a management expense ratio of 0.09%.
25% in Canadian stocks
Next, we allocate $5,250, or 25%, to Canadian equities through iShares Core S&P TSX Capped Composite Index ETF (TSX:XIC).
Canadian investors tend to have a home-country bias, often owning far more Canadian stocks than their global market weight would suggest. While Canada represents only about 3% of the global equity market, holding domestic stocks can reduce currency risk.
This ETF tracks a broad basket of roughly 213 Canadian companies and is market cap weighted. Compared to U.S. equities, the Canadian market is much more concentrated in financials and energy, which helps diversify the technology heavy exposure from the U.S. allocation.
Another benefit is income. XIC currently pays a trailing 12-month distribution yield of 2.17%, which is meaningfully higher than most U.S. equity ETFs. Fees are also extremely low, with a management expense ratio of 0.06%.
25% in international stocks
The remaining $5,250, or 25%, is allocated to international developed markets using BMO MSCI EAFE Index ETF (TSX:ZEA).
EAFE stands for Europe, Australia, and the Far East, and this ETF provides exposure to developed markets outside of North America. This slice adds geographic diversification by including companies based in countries with established economies, strong institutions, and long operating histories.
ZEA currently pays an annualized distribution yield of 2.16%. The management expense ratio is higher than the North American ETFs at 0.22%, but that is fairly typical for international equity exposure.
