When it comes to making informed and sensible investing decisions, Ben Felix and Cameron Passmore of Rational Reminder / PWL Capital have taken a stab at creating low cost buy and hold ETF model portfolios for Canadian investors to consider via various combinations of long-only equity and fixed income configurations ranging from 40/60 to an all equity portfolio.
Given that there has never been a better time to be a DIY investor, in terms of a diverse low cost product range of ETFs, we’ll review the Rational Reminder Models Portfolios from a variety of different perspectives to highlight its potential strengths and weaknesses.
As a teaser, the ETF model portfolios are a combination of low cost Canadian, US, International Developed and Emerging market-cap weighted equities, a dip-your-toes sprinkling of small-cap value funds and Canadian aggregate bonds.
In other words, it’s a stocks and bonds only portfolio with a predominant stylistic concentration of large cap bullseye (market-cap weighted) beta strategies.
Let’s dive in to see whether or not this is indeed a sensible portfolio for Canadian investors and unpack how US investors can potentially cobble together the same portfolio as well.
Hey guys! Here is the part where I mention I’m a travel vlogger! This investing opinion blog post is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor.
source: Rational Reminder Podcast on YouTube
Who Created The Rational Reminder Model Portfolios?
Ben Felix and Cameron Passmore are the Canadian duo responsible for creating the popular Rational Reminder Podcast, Rational Reminder Website and high engagement Rational Reminder Community where investors of all walks of life can interact and discuss topics related to investing strategies and personal finance.
As a fellow content creator myself, albeit in the travel sphere as my day job, I greatly admire the effort Cameron and Ben have put forth to consistently produce informative content with a wide range of podcast guests and for creating a community space where investors can learn, grow and share ideas together.
source: Ben Felix (CSI – Common Sense Investing) on YouTube
Additionally, Ben Felix has a YouTube channel where he makes focused teleprompter-style scripted videos on a wide variety of investing subjects.
Now it would be remiss for me to not mention that although they may be better know by DIY investors for the content they create, their actual careers are with PWL Capital – where Cameron is the Executive Chairman and Portfolio Manager and Ben is Head Of Research and Portfolio Manager.
It’s impressive how the two of them have been able to juggle their professional commitments with PWL Capital and yet be such prolific content creators as well.
The Case For A Low Cost Market-Beta Portfolio
Before we unveil the curtain of the suite of Rational Reminder Model Portfolios, let’s first explore the case for owning a market-cap weighted portfolio of equities and bonds.
Boglehead style investors and the Rational Reminder Model Portfolios seek to own equity market-cap weighted indexes at the lowest cost possible.
Bad Active Management In Canada
In a world where not that long ago “bad active management” and triple digit basis points high fees eroded returns for investors like a reliable left-jab and right hook, it’s now possible to own a market-cap weighted index portfolio for single digit and low double digits basis points for Canadian investors (it’s even cheaper for US investors).
Canada is well known for many positive attributes but an unfortunate one is that it has some of the highest mutual fund fees in the world and a plethora of still existing gawd awful legacy investing products.
I have first hand experience with this.
The greatest gift I may have ever given my parents was to get them out of a “bad active management” mutual fund (that underperformed a market-cap weighted index) and had (now brace yourself for this) a 265 basis points management fee for the privilege of 1, 3, 5 and 10 year underperformance versus its benchmark.
Suffering succotash!
Own The Market For As Cheap As Possible
Hence, being able to own the entire market (as opposed to searching for a needle in the haystack) for as cheap as possible has revolutionized the way DIY investors can now assemble portfolios.
Market-cap weighting is essentially owning individual equities within the index weighted according to their relative total market capitalization.
As a hypothetical example, if you own the US Total Stock Market index and Apple makes up 3% of the market capitalization you’ll own 3% in your index fund.
If Apple’s market capitalization expands or shrinks relative to other securities it’ll be reflected in the index over time.
Market-Cap Weighted Indexing Vs Factor Strategies
Now the problem with such an index system, and the reason why I’m predominantly a factor investor, is that this style of indexing is large-cap centric and totally vanilla when it comes to exposure to value, momentum, quality (profitability), size, low volatility and yield.
Hence, the benefits of owning the market at a low cost have to be weighed versus the potential for 100s of basis points of outperformance offered by higher fee factor-focused strategies that have historically outperformed market-cap weighted indexes.
I’m of the opinion that fighting for crumbs under the table (exclusively focusing upon fees) is not as prudent as tilting your portfolio towards research supported factors that are being served for dessert on the table above.
I’m certainly contrarian with this particular take as one only needs to see the massive AUM flows for market-cap weighted strategies (from Goliath providers such as Vanguard and iShares) versus factor focused ones from the likes of Avantis, Alpha Architect and Cambria Funds just to name a few.
One of the strengths of the suite of model Rational Reminder Portfolios is that they don’t ignore the research.
There is a small portion of the portfolio carved out for factor exposure to size, value and profitability.
I’d argue it’s a nice start, however, it’s not enough to make a significant impact (more on that later).
The Rational Reminder Portfolios: From 40/60 to 100% Equity
Let’s pop open the hood to see what kind of goodies we have in store with the suite of Rational Reminder Portfolio ranging from 40/60 to all equity.
Straight from their website we have a nice visual of the various configurations of equity and bond mixes ranging from conservative, moderate, growth and aggressive: 60/40, 50/50, 60/40, 70/30, 80/20 and 100/0.
For the purposes of this review (and for sake of brevity) we’ll just explore the 60/40 and all equity manifestations.
60/40 Rational Reminder Portfolio (Canadian Version)
18% XIC.TO – iShares Core S&P/TSX Capped Composite ETF
18% VUN.TO – Vanguard US Total Market ETF
9.6% XEF.TO – iShares Core MSCI EAFE IMI ETF
4.8% XEC.TO – iShares Core MSCI EM IMI ETF
6.0% AVUV – Avantis U.S. Small Cap Value ETF
4.8% AVDV – Avantis International Small Cap Value ETF
40% ZAG – BMO Aggregate Bond Index ETF
60/40 Rational Reminder Portfolio (US Equivalent Simplified Version)
50% VT – Vanguard Total World Stock Index Fund ETF
6.0% AVUV – Avantis U.S. Small Cap Value ETF
4.0% AVDV – Avantis International Small Cap Value ETF
40% AGG – iShares Core U.S. Aggregate Bond ETF
100% Equity Rational Reminder Portfolio (Canadian Version)
30% XIC.TO – iShares Core S&P/TSX Capped Composite ETF
30% VUN.TO – Vanguard US Total Market ETF
16% XEF.TO – iShares Core MSCI EAFE IMI ETF
8% XEC.TO – iShares Core MSCI EM IMI ETF
10% AVUV – Avantis U.S. Small Cap Value ETF
6% AVDV – Avantis International Small Cap Value ETF
100% Equity Rational Reminder Portfolio (US Equivalent Simplified Version)
84% VT – Vanguard Total World Stock Index Fund ETF
10% AVUV – Avantis U.S. Small Cap Value ETF
6% AVDV – Avantis International Small Cap Value ETF
*Note that I’ve simplified the US versions of this portfolio by owning the total world stock index for market beta exposure at a reasonable 7 basis points expense ratio.*
Initial Portfolio Impressions
It’s impressive that the Rational Reminder portfolios are constructed to include a global equity mandate keying in on Canadian, US, International Developed and Emerging Markets equities with low cost ETFs.
The effort to include small-cap value into the equation also deserves applause as it’s certainly more mainstream to just be market-cap weighted over and out.
Also, owning an aggregate bond index at low cost provides a fixed income ballast and potential portfolio stability (although not this year) for those interested in growth, balanced or conservative allocations.
However, that’s where the praise ends from me.
In terms of its design this is not a beautifully constructed portfolio of equal quadrants (like the Harry Brown Portfolio) or with slices of 5, 10, 15, 20 or 25 percent building bocks.
Instead you’ve got slices that are harder to rebalance such as 9.6% and 4.8%.
Moreover, I’m a bit shocked by the amount of “home country bias” with regards to an equal slice of pie for Canadian equities versus US Equities.
Currently, Canada makes up 3.3% of the global stock market versus the US consisting of 60.5%.
With market-beta Canadian equities clogging up such a large part of the portfolio, there isn’t a whole lot of breathing room in my opinion for Small-Cap Value or Emerging Markets to shine.
Pros and Cons of the Rational Reminder Model Portfolios
Let’s move on to the pros and cons section of the Rational Reminder model portfolio review.
PORTFOLIO PROS
- Low cost easy to understand and invest in ETFs from major fund providers such as Vanguard, iShares and BMO
- Global equity diversification across Canadian, US, International Developed and Emerging Markets
- Customizable configurations based on the risk tolerance of the investor ranging from 40/60 to all equity
- Research supported factor exposure to capture size, value and profitability with Avantis ETFs
- Low cost aggregate bond index providing a diversified fixed income exposure
- Market-cap weighted indexes providing lower cost and general outperformance versus typical legacy active management funds
PORTFOLIO CONS
- No alternative sleeve to provide asset class diversification and all economic regime readiness and robustness beyond mere equity and bond combinations
- Most of the risk of the portfolio is tied up in market-beta strategies for both equity and fixed income
- Token exposure to factor equity strategies that doesn’t necessarily move the needle significantly
- Clear and sizeable home country bias towards Canadian equities
Alternative Portfolio Ideas For Factor Thirsty Investors
I’m of the firm opinion that if you’re going to hurl constructive criticism it’s equally important to have a potential solution at hand.
Canadian investors have at their disposal all of the puzzle pieces necessary to piece together a high conviction “factor focused portfolio” with exposure to both single and multi-factor strategies.
Moreover, if we’re going to reach south of the border for US listed ETFs (which I think is a great idea for strategies that don’t exist in the Canadian ETF marketplace) it makes more sense to find capital efficient solutions as opposed to factor funds which are already bountiful.
For instance, consider the following portfolio:
60/45/25 Factor Equities/Bonds/Alternatives Portfolio
10% VVL.TO – Vanguard Global Value Factor ETF
10% VMO.TO – Vanguard Global Momentum Factor
10% ZGQ.TO – BMO MSCI All Country World High Quality Index ETF
10% PZW.TO – Invesco FTSE RAFI Global Small-Mid ETF
10% XMW.TO – iShares MSCI Min Vol Global Index ETF
10% XDG.TO – iShares Core MSCI Global Quality Dividend Index ETF
20% KMLM – KFA Mount Lucas Index Strategy ETF
15% TYA – Simplify Intermediate Term Treasury Futures Strategy ETF
5% CYA – Simplify Tail Risk Strategy ETF
This easier to memorize 5, 10, 15 and 20% roster spot 60/40 alternative allocation utilizes capital efficient $TYA to provide 3X US intermediate treasury notional exposure effectively creating 26% space in the portfolio for an alternative sleeve.
With this additional “real estate” we’ll add managed futures trend-following fund $KMLM to provide long/short exposure to commodity, currency and fixed income indexes.
Furthermore, we’ll allocate a small portion to $CYA for an options based tail risk strategy.
Our equity sleeve consists of equal parts global exposure to single factor funds covering Value, Momentum, Quality, Size, Yield and Minimum Volatility.
We’ve eliminated “home country” bias as well.
An all equity configuration would look like this:
All Equity Factor Portfolio
20% VVL.TO – Vanguard Global Value Factor ETF
20% VMO.TO – Vanguard Global Momentum Factor
15% ZGQ.TO – BMO MSCI All Country World High Quality Index ETF
15% PZW.TO – Invesco FTSE RAFI Global Small-Mid ETF
15% XMW.TO – iShares MSCI Min Vol Global Index ETF
15% XDG.TO – iShares Core MSCI Global Quality Dividend Index ETF
Here you’ve got two 20% slots for the factors you believe in the most (in this hypothetical scenario I’ve selected value and momentum) with 4 remaining 15% slots to round things out.
For Canadian investors seeking multi-factor exposure (value, momentum, quality and size) across the board you’ve got all of the necessary ingredients as well.
60/45/25 Multi-Factor Equities/Bonds/Alternatives Portfolio
30% XFS.TO – iShares MSCI Multifactor USA Index ETF
15% XFI.TO – iShares MSCI Multifactor EAFE Index ETF
10% MEME.B.TO – Manulife Multifactor Emerging Markets Index ETF
5% XFC.TO – iShares MSCI Multifactor Canada Index ETF
20% KMLM – KFA Mount Lucas Index Strategy ETF
15% TYA – Simplify Risk Parity Treasury ETF
5% CYA – Simplify Tail Risk Strategy ETF
Below is the all equity version.
All Equity Multi-Factor Portfolio
50% XFS.TO – iShares MSCI Multifactor USA Index ETF
25% XFI.TO – iShares MSCI Multifactor EAFE Index ETF
15% MEME.B.TO – Manulife Multifactor Emerging Markets Index ETF
10% XFC.TO – iShares MSCI Multifactor Canada Index ETF
And for patient US investors reading this article I haven’t forgotten about you either!
60/45/25 Multi-Factor Equities/Bonds/Alternatives Portfolio
30% ACWF – iShares MSCI Global Multifactor ETF
30% AVGE – Avantis All Equity Markets ETF
20% KMLM – KFA Mount Lucas Index Strategy ETF
15% TYA – Simplify Risk Parity Treasury ETF
5% CYA – Simplify Tail Risk Strategy ETF
All Equity Multi-Factor Portfolio
50% ACWF – iShares MSCI Global Multifactor ETF
50% AVGE – Avantis All Equity Markets ETF
Ticker ACWF gives you global multi-factor exposure to value, momentum, quality and size whereas AVGE (the new Avantis fund of funds) provides both global core and factor exposure all in one.
Something that needs to be mentioned clearly is that the portfolios I’ve outlined above do involve higher fee products.
Unfortunately, factor funds and alternative investments have higher associated costs (albeit not prohibitive), however, the potential for long-term outperformance versus market-cap weighted indexes makes them worthwhile in my opinion.
You’ll have to do your own independent research to come to the same conclusions I have (or not).
Nomadic Samuel Final Thoughts
I plan on doing many more reviews of model portfolios in the coming weeks and months as my investing blog continues to expand.
You’ll notice that I’ll offer alternative allocations to the portfolios I’m reviewing as a mainstay feature within these blog posts.
This isn’t in any way, shape or form meant as a jab towards the creators of these portfolios.
My intent is to offer potential solutions for investors seeking to take things one, two or three steps further in terms of conviction levels.
Since the Rational Reminder Portfolios features “factor strategies” as part of the equation, I’ve included portfolio ideas for investors seeking higher concentrated allocations.
Another option is to just play with the percentages of their model portfolios to find something that fits perfectly for your personal level of current conviction.
For instance, if you’re less keen on having overweight Canadian equities and want more small-cap value it’s easy enough to shave down XIC.TO while adding more of AVUV and AVDV.
I’ve really enjoyed the contributions both Ben and Cameron have made towards educating investors on a wide variety of topics related to personal finance.
They’re really making a difference out there!
Hence, I think this is indeed a “sensible portfolio” given its overall low costs, global market-cap weighted exposure and small allocation to research supported factors.
However, that doesn’t mean I don’t think it can be improved and I’ve outlined some clear ways I think investors can take things a step further if they’re of the mindset that capital efficiency, an alternative sleeve and higher conviction factor strategies are the most prudent way forward.
But at the end of the day investing is a highly subjective endeavour and there is no one-size fits all portfolio out there.
I’m curious to hear your opinion about the Rational Reminder Model Portfolios?
Does it tickle your fancy or do you see potential room for improvement?
Let me know in the comments below.
