How to Build an All-ETF Portfolio for Diversified Investing

In the past, Canadian do-it-yourself (DIY) investors often had to assemble portfolios by combining multiple exchange-traded funds (ETFs) — matching Canadian, U.S. and international equity ETFs with bond ETFs for lower-risk or older investors. That changed in 2018 when major providers such as Vanguard, iShares and BMO introduced asset allocation ETFs.

These funds give individual investors an easy way to own a globally diversified mix of stocks and bonds in set proportions, often at total expense ratios below 0.24%. For many people, buying and periodically adding to one of these single-fund solutions simplifies investing and reduces the need for active management. Still, investors willing to be more hands-on can build a customized ETF portfolio to gain extra diversification and potentially shave a few basis points off their costs. Below is a practical, step-by-step guide to doing that.

Determine your investment policy statement

An investment policy statement (IPS) is the foundation of any sensible portfolio. Many experts recommend consulting a fee-only Certified Financial Planner (CFP) to develop an IPS and to guide portfolio construction. A fee-only planner typically has fewer conflicts of interest than advisors paid by assets under management and can help you avoid costly mistakes such as high fees, poor tax placement or inadequate diversification.

If you prefer to go it alone, you can still draft an effective IPS. Treat it as a living document that outlines your objectives, constraints and rules for managing your investments. An IPS typically covers the following elements:

Asset overview

List every account you own — for example, a tax-free savings account (TFSA), registered retirement savings plan (RRSP), registered education savings plan (RESP), locked-in retirement account (LIRA) and any non-registered accounts. Record current balances and planned annual contributions. Include liquid reserves such as an emergency fund held in a high-interest savings account and note any workplace defined contribution or defined benefit plans.

Investment considerations

Clarify three core items that will shape your allocation:

1. Objectives: What are you saving for — retirement, a home down payment, education?
2. Time horizon: When will you need the money? Your horizon guides how much volatility you can accept.
3. Risk tolerance: How much short-term volatility and unrealized loss are you comfortable holding?

Asset allocation

Define the mix of asset classes you want — stocks, bonds, cash and possibly alternatives — and specify which accounts will hold each asset. For example, bonds often belong in tax-advantaged accounts due to their tax characteristics. State target proportions (e.g., a 60/40 split between equities and fixed income).

Rules: Establish practical rules for rebalancing frequency, dividend reinvestment, contribution priorities and funds to avoid (for instance, funds with fees above a specified threshold). Also document behavioural rules to prevent panic-selling or market timing, and include contact information for your fee-only advisor if you have one.

Canadian ETFs versus U.S.-listed ETFs

After completing your IPS, decide whether to use Canadian-listed ETFs or U.S.-listed ETFs. Canadian ETFs are generally more convenient because you avoid currency conversion when buying them.

U.S.-listed ETFs can make sense inside an RRSP because distributions from U.S. securities held in an RRSP are typically exempt from the 15% U.S. withholding tax. That exemption does not apply in a TFSA, so many Canadians prefer Canadian ETFs inside a TFSA. The tax savings in an RRSP often outweigh the costs of converting CAD to USD, though some investors use techniques like Norbert’s gambit to limit conversion fees. If you prefer U.S.-listed ETFs, choose a brokerage with low currency conversion costs.

How to choose ETFs: The basics

For most DIY investors, passive index ETFs are the natural choice. These ETFs track broad benchmarks — for example, the S&P/TSX 60 or global market-cap indexes — and tend to be cheaper and more predictable than actively managed funds.

Academic and industry research consistently shows that passive funds outperform the majority of active managers over long periods. For long-term investors, prioritize maximum diversification and low fees — two controllable factors that materially influence long-term returns.

How to choose equities ETFs

Construct equity exposure to reflect global market-cap weights: U.S., international developed markets (Europe and Asia Pacific) and emerging markets. Aim for coverage across all market sectors and a mix of large-, mid- and small-cap stocks in line with market capitalizations.

Many Canadian investors maintain a home-country bias — overweighting Canadian stocks to around 20%–30% of their equity allocation. Vanguard and others note this approach can reduce volatility, lower currency exposure and improve tax efficiency.

Keep management expense ratios (MERs) low; target a portfolio-weighted MER below about 0.20% so your DIY portfolio remains competitive with asset allocation ETFs that typically charge 0.20%–0.24%.

How to choose fixed-income ETFs

Decide how much to allocate to bonds and cash. A 100% equities portfolio is very aggressive and can be hard to hold through major drawdowns. Historically, high-quality government and investment-grade corporate bonds have reduced portfolio volatility, protected capital during downturns and offset periods of stagnant equity returns.

Bonds can underperform in rising-rate environments, but over long stretches they often act as a stabilizer. Include lower-cost, diversified bond ETFs and consider a Canadian tilt for tax and currency reasons, while recognizing that global bond ETFs add diversification benefits.

Cash serves as an additional buffer when both stocks and bonds fall together, and can be useful during periods of rising interest rates.

Here’s a sample model portfolio

Below is a practical example that follows a 70% equities / 20% bonds / 10% cash framework:

• 50% iShares Core MSCI All Country World ex Canada Index ETF (XAW)
• 20% Vanguard FTSE Canada All Cap Index ETF (VCN)
• 10% Vanguard Global Aggregate Bond Index ETF (VGAB)
• 10% iShares Core Canadian Universe Bond Index ETF (XBB)
• 10% Horizons High Interest Savings ETF (CASH)

The weighted average MER for this mix is about 0.176%, which translates to roughly $17.60 in annual fees on a $10,000 portfolio. This lineup offers global, market-cap-weighted equity exposure, a Canadian home-country bias, and allocations to quality bonds and cash to reduce volatility and drawdowns.

Over time, allocations will drift from targets — for example, equities may grow from 70% to 80% following a strong market rally. Rebalancing restores your intended risk profile by selling overweight positions and buying underweight ones. Choose a systematic rebalancing cadence — quarterly, semi-annually or annually — and stick to it to avoid emotional decisions that can harm long-term performance.

Also be mindful of ETF distribution schedules (monthly, quarterly or annually) and reinvest distributions promptly to accelerate compounding.

Building an all-ETF portfolio for Canadians

As John Bogle advised, when multiple solutions exist, choose the simplest one. You can construct a complete portfolio from four or five ETFs and potentially lower costs slightly compared with an all-in-one asset allocation ETF. But for smaller accounts, the savings may be marginal after trading costs and bid-ask spreads.

Asset allocation ETFs also offer a behavioral advantage: they reduce the temptation to tinker, overweight certain markets or abandon bonds during tough times. If you prefer a hands-on approach and are disciplined about rebalancing and tax-efficient placement, a DIY multi-ETF portfolio can work well. If you want a low-maintenance solution, an asset allocation ETF is a sensible choice.

Whatever route you choose, the fundamentals of successful investing are the same: contribute consistently, reinvest distributions, minimize fees and stay the course.

Read more about ETFs:

• What are ETFs?
• Best U.S. equity ETFs
• Best fixed-income ETFs for Canadian investors
• Making sense of the markets this week