The ETF Arsenal: Weapons Used To Arm A Basic Robocorp Portfolio & Their Role

Different holdings serve different functions within your overall portfolio. This post will review the different ETFs used in the Robocorp “Rookie” basic portfolio building tool. Robocorp is simply an aid for you as a DIY investor. So, it is important for you to understand what you are using, and why, as you build a portfolio for yourself.

ETF model portfolio

What are exchange traded funds (ETFs) and why use them?

Robocorp uses examples of index-tracking exchange-traded funds (ETFs) to construct a model portfolio. These ETFs are pooled funds, like traditional mutual funds, where you buy a share of the total fund. However, there are some important differences.

  • They are listed on the public stock exchanges. That means that they can be easily purchased and sold using a discount broker such as Qtrade. Trading ETFs usually costs under $10 and takes a few minutes.
  • In contrast to some mutual funds, there are no extra penalties for selling “early”.
  • ETFs can be transferred as assets-in-kind if you change brokerages. Conversely, some proprietary mutual funds would require you to sell them and move the cash instead. That could trigger capital gains tax if in a tax-exposed account (like a corporate or personal account).
  • There are some actively-managed ETFs, but most passively track an index. That means they do not stock-pick, but simply try to match their holdings with the holdings of an index. Some commonly recognized indexes are the TSX or the S&P 500, but there are hundreds.

Passive index-investing is simple and effective.

Index investing persistently pummels active management approaches over long time periods. The most recent SPIVA data continues to show this. Sure, there are 1 in 10 managers that beat the indexes for periods of time. Good luck picking them in advance. The main long-term predictability is the loss of returns to fees and taxes. You can win by not losing. Here is a good introductory video on ETF index investing.

In investing – simple is good.

ETF allocation
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Using ETFs makes investing simple. You can simply estimate your risk tolerance using a multi-modality approach to choose a stock:bonds allocation.

Then, buy ETFs to match that. ETFs hold hundreds or thousands of stocks. So, it makes diversification to decrease investment risk extremely easy.

For those using only registered accounts, it can even be super-simple.

Those who face little or no taxes or have lower savings rates, will usually build their portfolio inside a self-directed RRSP, TFSA, or RESP. They are tax-sheltered, making it easy.

It could even be just two ETFs and four minutes to build a diversified low-fee all-equity portfolio. Most people will also have a bonds allocation, bringing that to three funds. The Canadian Couch Potato Three Fund Model Portfolio is a great example.

There are now even asset-allocation ETFs that will emulate this for you and automatically rebalance for a slightly higher management fee (but still low at 0.22%).

Portfolio building can be more complicated if you face higher taxes.

Asset location optimization is attempting to match investment type and account type. Different types of investments and different account types have different tax and growth characteristics. An optimized portfolio can mesh these together to leverage the strengths and mitigate the weaknesses of each.

That deliberate portfolio design can be more optimal, but also more complex.

The complexity can be overwhelming. Worse, it could be financially crippling if it scares you off from investing. The worst possible outcome. It may not be worth it for those with static portfolios (no longer making new contributions) or with low tax burdens.

Unfortunately, most high-income professionals face significant tax burdens.

With their compressed time-frames to save for retirement, their portfolio usually spills over into taxable accounts. A slightly more complicated five fund portfolio that tweaks some of the ETFs used for taxed accounts is one approach. That can achieve some savings.

Considering the ultimate goals and taxation of different account types in the future when accessing them probably makes an even bigger difference.

This is where Robocorp fits in.

The Robocorp portfolio building tool makes those optimal asset location decisions simple. Probably even easier than having to manually do the math for even a three or five fund portfolio.

ETFs are its weapons.

optimal asset location

Why Robocorp uses specific ETFs.

I am not qualified to recommend or sell specific investments and I do not. However, there are specific ETFs built into Robocorp. There are many similar products from all of the major providers like Horizon, Blackrock, and BMO that could also be suitable. Robocorp is meant to be simple and not drown users in options. Plus, I am too lazy to build in hundreds of ETF combinations.

The ETFs used in Robocorp are for illustrative purposes and you should choose whatever investment product best suits your specific situation. Either as a DIY investor or with your advisor. I have no affiliations with any ETF companies but I do have a variety of the ETFs used in my own portfolio.

There are a few special “niche ETFs” in the Robocorp line-up that may serve specific roles. However, it generally sticks with the broadest index funds possible. You lose diversification if you are using a bunch of small niche ETFs.

The Robocorp ETF Line-up & Their Portfolio Purpose

Canadian Equity: Vanguard FTSE Canada All Cap Index (VCN)

Management Expense Ratio (MER): 0.06% Dividend Yield: 2.81%

canadian etf investing

Strengths: It is in $CAD – the currency in which we live. It pays Canadian eligible dividends which are taxed favorably.

Weaknesses: Canada is only a small market globally (3-4%) and is dominated by the financial and natural resource sectors. A high concentration in Canada decreases our diversification across business sectors.

It also concentrates our risk by tying our fortunes even closer to the Canadian economy. We are already highly exposed to Canada economically. Canada’s financial health directly affects our jobs and the taxes that we pay for government services.

Portfolio Purpose: Equity growth and eligible dividend income.

US Equity: U.S. Total Market Index (XUU & ITOT)

Both track the total US stock market. XUU is listed on the Canadian exchange and ITOT on the US exchange. US-listed ETFs often have lower management fees due to scale. There is also a difference in dividend yield due to an extra layer of foreign withholding tax (FWT) for XUU. Only one of those two layers of FWT can be recovered in an RRSP. Using the US-listed version of an ETF has pros and cons that will be discussed elsewhere.

sector weighting

XUU Management Expense Ratio: 0.07%Yield: 1.61% (Plus 0.30% FWT recoverable in a taxable account, or partially in a corporate account. Not an RRSP or TFSA.)

ITOT Management Expense Ratio: 0.03% Yield: 1.65% (Plus 0.30% FWT that is recovered in an RRSP, taxable account, or partially in a corporate account. Not a TFSA.)

Strengths: It is in $USD – the dominant currency of the world. The US stock market is diverse across a variety of business sectors. It is also huge and represents about 40% of the world’s market capitalization. These ETFs tend to pay lower dividends as the companies (hopefully) use their profits for growth or to increase their share value instead.

Weaknesses: Dividends are taxed at the full income tax rate. There is also a 15% foreign withholding tax on dividends. It is recoverable in an RRSP or taxable account and partially recoverable in a corporate account. Not in a TFSA.

Portfolio Purpose: Equity growth. Exposure to the bulk of the world market.

Similar Funds: VUN (Canadian-listed;MER 0.16%) & VTI (US-listed;MER 0.04%).

Non-North American Developed Equity Markets (XEF & IEFA)

XEF (iShares Core MSCI EAFE IMI Index ETF) is Canadian-listed and holds foreign stocks directly. Holding them directly rather than wrapped in a US-ETF avoids an extra U.S. layer of FWT. There is still one layer of potentially recoverable FWT from the country of origin if held in a taxable account. 

MER: 0.22% Yield: 2.68% (plus 0.25% recoverable FWT in a taxable account or partially in a corporate account. Not an RRSP or TFSA.)

IEFA (iShares Core MSCI EAFE ETF) is the U.S.-listed version that also holds foreign stocks directly. The non-U.S. FWT (about 8%) is not recoverable. However, the U.S. FWT layer (15%) is recoverable in an RRSP/taxable account or partially in a corporate account. 

MER: 0.08% Yield: 2.40% (plus 0.41% recoverable U.S. FWT in RRSP, taxable, or partially in a corporate account. Not TFSA)

Strengths: These hold large mature companies diversely across the globe. They tend to pay higher dividends than U.S. companies.

Weaknesses: No one who knows where the growth in the future will be. However, these countries have mature economies that tend to be slower growing. Dividends are taxed at the full income tax rate.

Portfolio Purpose: Equity growth. Diversification around the globe to disperse our regional risk.

Emerging Markets (XEC & IEMG)

These track developing markets like those in China, Asia-Pacific, and South America.

iShares Core MSCI Emerging Markets IMI Index ETF (XEC) is listed on the Canadian exchange and basically holds the US-listed iShares Core MSCI Emerging Markets ETF (IEMG). IEMG holds companies directly. That means that there is an extra non-recoverable layer of FWT within XEC. There are also fewer tax treaties with developing market countries and fund management costs are higher.

XEC MER: 0.26% XEC Yield: 2.04% (Plus 0.4% as recoverable FWT in a taxable account only. Not recoverable in an RRSP or a TFSA)

IEMG MER: 0.14% IEMG Yield: 2.16% (Plus 0.4% as recoverable FWT in a taxable account or RRSP. Not recoverable in a TFSA)

Strengths: This is where the world markets have the most potential for growth as they modernize. They have favorable demographics with a younger population.

Weaknesses: These markets are also higher risk and more difficult to invest in since they are developing! These funds pay dividends that are taxed at the full rate and there are some foreign withholding taxes that may be partially recoverable.

Portfolio Purpose: Higher risk and potential equity growth. Global diversification.

Bond ETFs (VAB & ZDB)

Vanguard Canadian Aggregate Bond Index ETF (VAB) VAB tracks the Canadian Bond Index. It is about 2/3 government bonds and 1/3 corporate bonds.

MER: 0.13% Average Yield to Maturity: 2.7% Average Coupon: 3.2% Average Duration: 10 Years.

Strengths: Low volatility. Inversely correlated to equity price. So, it helps to dampen portfolio volatility. The bonds held are part of a large and highly liquid market. This could also be useful as a source of funds to rebalance after a large equity market draw-down.

Weaknesses: VAB Currently holds premium bonds which are very tax inefficient. The interest paid, called the coupon, is taxed at the high regular income rate. The yield to maturity in VAB is less than the coupon payment. That makes these bonds less valuable when sold on the secondary bond market. This capital loss offsets the higher interest payment. However, it does not fully compensate when the tax is considered. The capital loss gets credited at only half the rate of regular income while the interest is taxed at the full rate. I discuss premium versus discount bonds in more detail here.

Additionally, interest rate yields are pretty low right now. It is fixed income, but not much income.

The BMO Discount Bond Index ETF (ZDB) tracks the Canadian Discount Bond Index. It has similar holdings to VAB in terms of debtors. However, these are discount bonds. That means that they have a lower coupon (interest payment) and a higher capital value on the secondary bond market.

MER: 0.09% Average Yield to Maturity: 2.61% Average Coupon: 2.2% Average Duration: 7.8 Years.

Strengths: Discount bonds pay a lower interest rate, but have an increased capital gain relative to premium bonds. This makes ZDB slightly more tax efficient than VAB and a better way to hold bonds in a tax-exposed account.

Weaknesses: The discount bond market is smaller than the bond market as a whole.

Portfolio Purpose: Smooth total portfolio volatility. A bond ETF that is inversely or uncorrelated to stocks is useful for rebalancing to buy equity at a discount after a market downturn. It also provides some fixed income, but that is really a secondary goal.

About the data: Trailing dividend yields are constantly changing as price and earnings fluctuate.

  • For Vanguard  funds, the 12 month trailing yield as of  Jan31, 2018 was used. The FWT was calculated (if applicable) as 15% for U.S. and 8% for non-US (validated against financial statement).
  • For iShares/Blackrock, the 12 month trailing yield as of Feb 13,2019 was used. The FWT for non-U.S. income sources was extrapolated from their 2017 financial statements. U.S. 15% FWT was used.


  1. I think a preferred shares ETF is also an interesting choice for corporate accounts. CPD and ZPR provide volatilty between stocks and bonds as well as pay their distribitions as eligible dividends as opposed to oncome for bonds. So rather than ZDB, these might be another good option.

    Also, Canadian Couch Potato recently had someone from Vanguard on his podcast who was discussing their asset allocation ETFs. They have a 30% asset allocation to Canada and discussed the reasons.

    First, in their retrospective models, this was the allocation that mimimized volatility (though no gurantee for future). Second, the tax treatment of eligible dividends. Third, it acts as a currency hedge against your international/US holdings thus makong currency hedged funds less useful.

    1. Hey Bari Doc,

      Preferred shares are an interesting asset class. I left them out of the basic version for simplicity. In the calculator, I would classify them as Canadian Equity since that is their tax treatment with eligible dividends. I use ZPR in my own corp portfolio for the eligible dividends and some further diversification. However, it is important to recognize that they aren’t as good as bonds for smoothing volatility. They also tend to get kicked hard in a market drawdown – so aren’t as good as bonds for rebalancing in that situation either. Analysis in a rate-falling environment (the past 30 years) has not shown as good a return for risk as one would hope. However, we may not be in a rate-falling environment as much anymore. Rate-reset preferreds (like in CPD and ZPR) should rise with interest rates as they reset.

      I agree with the comments about Canadian in the asset allocation ETFs. That is basically their role here too. Canadian currency and imperfect correlation (but still high) to other holdings smooths volatility in CAD a bit. I personally avoid current-hedged funds because of the extra fee drag and that USD volatility usually works in our favor when coupled to US stock volatility (deserves a whole post at some point).

      Thanks for the great comments!

  2. Hi – I’m wondering if you can comment on the value/benefit of tax optimization when looking at your portfolio as a whole vs the simplicity of replicating your asset allocation across accounts?
    I have iEMG ITOT IEFA VCN ZAG in RRSP, XAW VCN ZAG in TFSA and HST HXDM HSX in corp. Essentially I’m following CPM blog for registered accts and my fee only financial advisors advise to keep my corp in swap based funds for now ( I am aware of the legislative risk looming here)
    Playing with robocorp advises all XEF in TFSA, VCN in corp, and IEMG ITOT IEFA VAB in RRSP.
    Aside from the rationale for moving my bonds to the RRSP, I can’t even begin to comprehend/calculate whether the tax optimization trade off is worth switching this up. Not to mention the mental gymnastics around rebalancing across all accounts.

    Thanks again for the value you are providing to your readers.

    1. Hey Sleepy Doc,

      The answer is a bit complicated, but I will put out some posts about it. What you are doing seems to make sense to me (although I would likely keep my bonds in the RRSP rather than TFSA). The swap ETFs dodge much of the issues, but unfortunately are on the government budget hit-list.

      I ran a few 30yr simulations with annual tax calcs and rebalancing as needed when I was testing the calculator algorithms. There are several components. One is the efficiency while growing. Maybe a 0.3-0.5%/yr tax drag difference if in a high income bracket with a high bonds allocation. Less if a high equity allocation and lower income. More if going to hit the passive income limits and keep working. The other part is the taxation when taking things out later. That could make a 5-15% difference in after-tax retirement income down the road depending on the above variables plus timeframe and retirement income. This is all just ballpark and who knows what the tax world will look like.

      The other side of the equation is the effort to get those savings. Probably not worth it if in a low income bracket and manually doing it. However, I have a calculator built that will do rebalancing across accounts and allow for rebalancing thresholds thresholds to minimize selling in tax exposed accounts. Makes it pretty easy beyond some data entry and confirming that it makes sense. Will need to polish it up and put it on the internet soon. I will have to spend some time on the computer when summer wraps up – right now I focused on the mountain bike trails 😉

  3. FYI with Blackrock iShares ETFs MER isn’t everything – Ben Felix has identified (latest rational reminder podcast 129) that the core index fund XUU (and XAW) has developed 1.3% (and 1.7%) tracking error relative to its internal benchmarks over the past 12 months as a result of inefficiency arising from using 4 ETFs to access exposure to the US markets. He states inside the Rational Reminder community that Blackrock is aware of the issue but cannot fix it immediately due to unrealized internal capital gains. His recommendation is to use the Vanguard equivalent to XUU of VUN (and by extension VXC) in the meantime despite its slightly higher MER if you can switch to it without incurring a taxable event.

    1. Thanks AlphaDoc. That is actually quite interesting. Usually tracking error is a nothingburger, but that is quite large. I usually use the split out ETFs, and often the US-listed version. The highly liquid US ones usually have minimal error and sometimes even a bonus from lending out their securities via options etc. I wonder if some of the other bundled ETFs, like the all-in-ones, will have some of the same issues.

      1. The 4 ETF replication methodology basically missed out on Tesla and a handful of other companies including Moderna which had massive returns, became large cap but not SP500 members, and continued to have massive returns. The miss was more than the cost of a full service advisor this year.

        I suspect Blackrock learned its lesson – XEQT the newer all-in-one holds ITOT in USD for its US exposure and does not use the 4 ETF US replication strategy.

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