Diversification does not have to be complicated. At a minimum, I want my stock portfolio diversified across different countries and sectors so that my long-term returns are not dependent on one economy or industry performing well. For Canadian investors, you can accomplish most of that with just a handful of exchange-traded funds (ETFs).
Keep in mind that I am talking strictly about diversification within stocks here, not across asset classes. The portfolio below is 100% equities, so it can still experience substantial losses during a bear market. Older investors, anyone approaching retirement, or those with a lower risk tolerance may want to add bonds to reduce volatility.
But for a younger investor with a long time horizon, a focus on growth and the risk tolerance to withstand market downturns, I think a simple 50/25/25 combination of U.S., Canadian, and international stocks makes for a solid starting point.
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Vanguard S&P 500 Index ETF
For the largest allocation, I would put 50% into the Vanguard S&P 500 Index ETF (TSX: VFV). VFV tracks the S&P 500 Index, giving Canadian investors exposure to roughly 500 of the largest publicly traded companies in the United States.
The portfolio covers all major sectors, but given the size of today’s largest American companies, technology receives substantial representation. You also get exposure to financials, healthcare, consumer discretionary, communication services, industrials, and other major industries.
The U.S. remains the world’s largest stock market, so I am comfortable making VFV the 50% core of this portfolio. VFV currently charges a 0.09%% management expense ratio (MER) and offers a 0.85% trailing 12-month yield.
iShares S&P/TSX 60 Index ETF
Next, I would allocate 25% to the iShares S&P/TSX 60 Index ETF (TSX: XIU). XIU tracks 60 large, liquid Canadian companies representing many of the biggest businesses listed on the Toronto Stock Exchange.
Compared with the U.S. market, Canada has considerably less technology exposure. Instead, the portfolio is heavily influenced by financials, energy, materials, and industrials.
A 25% allocation is considerably higher than Canada’s actual weight in the global stock market, but I think some home-country bias can make sense for Canadian investors given the reduced currency exposure and access to eligible Canadian dividends.
XIU currently charges a 0.18% management expense ratio and offers a 2.1% trailing 12-month yield.
BMO MSCI EAFE Index ETF
For the remaining 25%, I would look outside North America with the BMO MSCI EAFE Index ETF (TSX: ZEA). ZEA tracks developed-market stocks from Europe, Australasia, and the Far East.
That means exposure to countries such as Japan, the United Kingdom, France, Germany, Switzerland, and Australia. These markets also have different sector compositions than Canada and the United States.
Adding them reduces the risk that your entire portfolio depends on North American stocks continuing to outperform indefinitely. ZEA currently charges a 0.22% management expense ratio and offers a 1.9% trailing 12-month yield.
