When it comes to building a Tax-Free Savings Account (TFSA), I generally think simplicity wins. For many investors, an all-in-one asset allocation exchange-traded fund (ETF) is already enough. You get exposure to thousands of companies across multiple countries and sectors, automatic rebalancing, and low fees in a single investment.
But some investors want a little more customization. Maybe you want greater control over your Canadian allocation, or you simply prefer knowing exactly how much of your portfolio is invested domestically versus abroad. In that case, a two-ETF portfolio can work well.
By combining one ETF covering virtually the entire world outside Canada with another covering the Canadian stock market, you can own companies across countries, sectors, and market-cap sizes without making your TFSA difficult to manage.
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iShares Core MSCI All Country World ex Canada Index ETF
I would make iShares Core MSCI All Country World ex Canada Index ETF (TSX:XAW) the largest position.
XAW is essentially a global stock portfolio minus Canada. Through several underlying index ETFs, it provides exposure to thousands of companies spanning the United States, international developed markets, and emerging markets.
The U.S. receives the largest allocation because it represents the biggest portion of the global stock market. Beyond that, XAW provides exposure to developed economies such as Japan, the United Kingdom, France, Germany, and Australia, alongside emerging markets such as China, India, Taiwan, and Brazil.
The portfolio also stretches across sectors and market-cap sizes. Instead of trying to predict whether technology, financials, healthcare, industrials, or another industry will lead the market next, you simply own them all.
XAW currently charges a 0.22% management expense ratio (MER), offers a 1.19% trailing 12-month yield, and has returned 12.75% annualized over the past 10 years.
iShares Core S&P/TSX Capped Composite Index ETF
I would complete the portfolio with iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC).
XIC provides broad exposure to the Canadian stock market, including large-, mid-, and smaller-cap companies. Financials represent a major portion of the portfolio, alongside energy, materials, industrials, utilities, and other sectors where Canada has substantial representation. Pairing XIC with XAW also lets you choose exactly how much home-country bias you want.
For example, an investor could put roughly 70% to 80% in XAW and the remaining 20% to 30% in XIC. That still provides substantial global diversification while deliberately giving Canada a larger allocation than its relatively small share of the global stock market.
From there, there is not much else to do. Keep contributing to your TFSA, periodically rebalance the two ETFs back toward your target weights, reinvest the distributions, and give the portfolio time to compound.
XIC currently charges a 0.06% management expense ratio, offers a 1.92% trailing 12-month yield, and has returned 12.47% annualized over the past 10 years.
