TFSA Portfolio Averages Almost 10%

Diversified group of exchange-traded funds provides international exposure at a low cost

There are many ways to use Tax-Free Savings Accounts (TFSAs), ranging from simple savings plans to aggressive stock-trading vehicles.

Ideally, I believe these plans should be used to maximize the benefit promised in the name – tax savings. So in March 2012 I set up a portfolio for readers of my Internet Wealth Builder newsletter whose primary goal is to do exactly that. I used exchange-traded funds (ETFs) for this purpose with the aim of achieving appropriate global diversification at minimal cost.

All the ETFs are equity-based; there is no fixed-income component in this portfolio. This makes it higher risk and therefore only suitable for investors who can handle volatility and have a long time horizon. This is definitely not a model to use if you are saving for retirement, a child’s future education, or a major purchase to be made within five years.

The original target was an average annual return of between 10% and 12%. The first year turned out to be a disappointment with only a 3.1% gain as defensive securities were the big winners in a nervous investment climate. The second year (to April 2, 2014) was better with a nice advance of 19.2% and at that point the two-year average annual compound rate of return was 10.83%, almost exactly at the mid-point of my target range.

iShares S&P 500 Index Fund (CAD-Hedged) (TSX: XSP). Small-cap stocks may have floundered but their large-cap brothers did very well, thank you. The S&P 500 index, which this fund tracks, set one record after another over the summer and the result was a gain of $2.07 a share, or 9.5%, in the value of this fund. It has become our portfolio’s second-best producer with a total return to date of 52.6%.

BMO Nasdaq 100 Equity Hedged to CAD Index ETF (TSX: ZQQ). This fund provides exposure to the top 100 stocks on the Nasdaq exchange. It hasn’t set any new records this year – it hit its all-time high in 2000 just before the tech crash. But it has performed well nonetheless as the technology sector continues to expand. The fund gained $4.69 per share (+16.5%) over the summer, bringing our total return to 59.3%. This ETF now ranks as the number one performer in the portfolio.

iShares MSCI EAFE Index ETF (CAD-Hedged) (TSX: XIN). This fund invests in large-cap companies from developed countries in Europe, Asia, and Australasia, hedged back to Canadian dollars. It’s really a Canadian replica of EFA, which trades in New York and which should be your choice if you don’t want the hedging feature. XIN has been a respectable but not outstanding performer with a gain of 4.8% since our last review and a total return to date of 19.5%.

iShares MSCI Frontier 100 ETF (NYSE: FM). This ETF tracks major companies in Third World countries from Nigeria to Vietnam. I added it to this portfolio in April at US$36.89. It has slipped back to US$35.24 since then however we received a distribution of $0.8264 per share in June that partially offset that drop. As a result, we are only down 2.2% on this one.

Gordon Pape’s Aggressive TFSA Portfolio

(as of Nov. 19, 2014)

Comments: It was a so-so summer for this portfolio, with a total return of 4.9% for the period. Since the launch, we are ahead 28.8% based on the original book value of $20,002.30. That reduces our average annual compound rate of return to 9.95%, a shade under our target range.

Changes: We’ll keep the basic portfolio intact for now. However, we will reinvest some of the retained distributions as follows.

XIC – We will buy 10 more shares for a cost of $237.60, bringing our total to 215.

XSP – We will buy five shares for $118.85 to bring our total to 205.

These small purchases are for modelling purposes only. If you want to reinvest your distributions, the most cost-efficient way is by using a dividend reinvestment plan.