A Model ETF portfolio – passive income experiment
‘How to start invest with little’ money and ‘how to build a solid portfolio for long term’ are the most common questions people ask about investment. I already discussed about the first one, now let’s discuss about how to build a solid, low-risk investment portfolio that generate a positive cash flow for long run with long-term growth.
Only for educational or Experimental purpose
Please note this is an investment experiment and should not be considered as professional financial advice. I am not a financial professional. This portfolio is not a real one, is a model portfolio which mean I am not using any real money to build this portfolio. Please consult with your financial professional before even considering using the information obtained from this website.
I will review the performance of the portfolio and re-balance it to meet the assigned assets allocation.
Investment plan and assumption
I build this portfolio using low-cost ETFs with initial investment of $10 000 (virtual money). I will not add new money or take money from this portfolio.
I assume there is no trading commission to buy ETFs. This is absolutely possible with Questrade stock brokerage where you can buy any ETFs without paying commission. Also, I assume there is no tax for the income generate by this portfolio. This is possible as well with a registered investment account (ex: RRSP).
Portfolio assets allocation
Every portfolio should start with assets allocation based on investment objectives, time horizon and risk tolerance. Purpose of this portfolio is to generate passive income for long-term with low-risk.
Thus, here’s the target assets allocation of the portfolio:
- Bonds – 30%
- Preferred Share – 5%
- Real estate investment – 5%
- U.S stocks – 20%
- Canadian stocks – 20%
- International stocks – 20%
Rebalancing strategy
I will rebalance this portfolio every month with cash flow; therefore, I will simply add ETFs to meet the targeted assets allocation by reinvesting the cash generate by the portfolio.
Performance check
I will check the performance by comparing the model portfolio with S&P/TSX Composite index and S&P 500. By the time I built this experiment (June 16, 2014), both indexes, TSX and S&P 500, are in near record high of 15,040.43 and 1,937.78, respectively.
Holdings
Here’s some model ETFs portfolios built around the asset allocation and portfolio strategies:
Bond 30%
- iShare High Quality Canadian Bond Index ( TSX: XQB) – 15%
The ETF gives investors exposure to a well-diversified, Canadian bond portfolio comprised of 60% government and 40% corporate investment -grade bonds.- Distribution yield: 2.98%
- Yield to Maturity: 2.27%
- Number of holding: 303
- MER: 0.12%
- Laddered Corporate Bond Index ETF (TSX:CBO) - 15%
This ETF provides exposure to a well-diversified corporate bond portfolio, with staggered maturity levels from 1 to 5 years.- Distribution yield: 4.14%
- Yield to Maturity: 1.87%
- Number of holding: 46
- MER: 0.28%
- iShare High Quality Canadian Bond Index ( TSX: XQB) – 15%
Preferred Share 5%
- BMO Laddered Preferred Share ( TSX:ZPR ) – 2%
This ETF invests in and holds the constituent securities of the Index in the same proportion as they are reflected in the index. The S&P/TSX Preferred Share Laddered Index includes Canadian rate reset preferred shares that meet size, liquidity, listing and quality criteria. It uses a five year laddered structure where annual buckets are equal weighted while constituent securities within each bucket are market capitalization weighted.- Distribution yield: 4.63%
- Number of holding: 135
- MER: 0.45%
- North America Preffered (TSX:XPF) - 3%
This ETF seeks to provide income by replicating, to the extent possible, the performance of the S&P/TSX North American Preferred Stock Canadian Dollar Hedged Index, net of expenses.- Distribution yield: 5.22%
- Number of holding: 525
- MER: 0.48%
- BMO Laddered Preferred Share ( TSX:ZPR ) – 2%
Real estate 5%
- Canadian Realestate ( TSX:XRE ) – 2%
The ETF gives investors exposure to securities of Canadian real estate investment trusts (REITs) listed on the TSX.- Dividend yield: 5.0%
- Number of holding: 15
- MER: 0.60%
- Global Realestate (TSX:CGR) - 3%
This ETF consists of the largest and most liquid securities within the global real estate universe that are likely to lead the global securitization of real estate.- Dividend yield: 1.60%
- Number of holding: 75
- MER: 0.73%
- Canadian Realestate ( TSX:XRE ) – 2%
Canadian Dividend stocks 20%
- Canadian Dividends Aristocrats ( TSX:CDZ) 20%
This ETF consists of common stocks listed on the TSE which are constituents of the S&P Canada Broad Market index (BMI). The security must have increased ordinary cash dividends every year for at least five consecutive years, and the float-adjusted market capitalization of the security, at the time of the review, must be at least C$ 300 million.- Dividend yield: 3.15%
- Number of holding: 65
- MER: 0.66%
- Canadian Dividends Aristocrats ( TSX:CDZ) 20%
U.S Dividend stocks 20%
- SPDR S&P Dividend (NYSEARCA:SDY) 20%
The ETF is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years.- Dividend yield: 2.21%
- Number of holding: 97
- MER: 0.35%
- SPDR S&P Dividend (NYSEARCA:SDY) 20%
Internationl dividend stocks 20%
- iShare International Select Dividend ((NYSEARCA:IDV) – 20%
This ETF seeks to track the investment results of the Dow Jones EPAC Select Dividend Index, which measures the performance of a selected group of equity securities issued by companies that have provided relatively high dividend yields on a consistent basis over time.- Dividend yield: 4.37%
- Number of holding: 101
- MER: 0.50%
- iShare International Select Dividend ((NYSEARCA:IDV) – 20%
I know there are some stocks overlapped in the ETFs, but it is negligible.
Portfolio Risk
Rising interest rates decrease the attractiveness in dividend stocks, so there will be some rotation out of dividend stocks. Thus, the prices for dividend stocks and bond ETFs could find tougher to keep up, resulting in lower or negative returns in capital gains than the broader market.
Summary
As I mentioned above, I will re-balance this portfolio and check the performance every month.
Portfolio summary
| ETF | # | Price | Total | Current % | Target % |
|---|---|---|---|---|---|
| CAB | 73 | $20.43 | $1491.39 | 14.93% | 15.00% |
| CBO | 76 | $19.73 | $1,499.48 | 15.02% | 15.00% |
| ZPR | 15 | $14.22 | $213.30 | 2.14% | 2.00% |
| XPF | 16 | $19.77 | $316.32 | 3.17% | 3.00% |
| XRE | 13 | $16.15 | $209.95 | 2.10% | 2.00% |
| CGR | 13 | $23.18 | $301.34 | 3.02% | 3.00% |
| CDZ | 75 | $26.60 | $1,995.00 | 19.98% | 20.00% |
| SDY | 26 | $75.82 | $1,971.32 | 19.98% | 20.00% |
| IDV | 49 | $40.58 | $1,988.42 | 19.91% | 20.00% |
Portfolio performance review
Check the latest portfolio updates here.
Again, this is not a recommendation to buy or sell stocks; it is an experiment to see the performance of well diversified ETFs portfolio. I built this portfolio in Questrade stock brokerage because there is no commission to purchase ETFs.
Thanks for the ideas….planning on adding some ETFs to my portfolio. Will definitely looking into your model for ideas.
Hello Steve,
Thank you for stopping by,
I would recommend you to do your own research on each ETFs before consider adding them in your portfolio.
Best Regards
In which accounts do you hold ZOR, XPF, and CGR – registered or taxable? Thank you.
Hello Belka,
Thank you for stopping by,
This ETF model portfolio is not real. Therefore, I don’t have most the ETFs in my real accounts. I would say keep them in your registered accounts to unnecessary tax.
Best Regards,
Awesome Dude, I am just starting my journey, could you please tell me what platform you use to buy stocks and ETF’s?
Hello Betty,
I use Questrade to buy ETFs,
Wish you all the best for your journey,
Best Regards,
Hello,
thanks for sharing. I am starting to use ETF for mine portfolio building.
Could you update more on how yours work out in the last two years?
THanks
David
Hello David,
I will try my best to update the model ETF portfolio in few days.
Thank you for your interest.
Cheers
I agree fully with the philosophy of using ETFs as a way of achieving sustainable passive income. First it minimized the cost/expense outflows, secondly provides instant diversification and lastly one doesn’t have to get worried about volatility because its a basket that will eventually be less volatile and individual companies/stocks.
I’ve followed this philosophy for my own portfolio except for a few changes like adding exposure to MICs and other options. In my opinion the only concern in the above portfolio is areas like Bonds (30%) which seems too high. Global Real Estate appears good but returns (yield) is too low for its high cost. I’m personally not comfortable with preferred ETFs, but this could work for well for some people.
However, passive investing with a steady yield (pref. monthly) is a sure way to build steady income and reduce risks. An income generating portfolio provides income (high/low) regardless of market conditions, so that would provide more cash for reinvesting or to finance some part of one’s expenses. Good work on the model portfolio. Please update us on how things are going currently.
Hello Sridhar,
I built this model portfolio for experiment purpose. My entire focus on individual dividend growth stocks. As you said, steady passive income is the way to build wealth for long term.
I will try to update this ETF portfolio as soon as possible.
Thank you for your comments,
Best Regards,
I’m curious as to how your model ETF portfolio has performed over the last two years. Will you be providing more updates?
Hi Rick
Thank you for stopping by, I am so sorry, I am still tracking the model ETF portfolio performance, but I didn’t have chance to update it here. I will try my best to post about it soon.
Cheers,
I like ETFs. I have a 401k plan that is flexible enough to allow me to get my hands on some ETFs in addition to the funds in the plan. I currently own SDY and it has done a nice job for me (what hasn’t though). I plan on adding additional ETFs once I am able to spend a little more time doing some research.
Thanks for the ETF list, I will have to investigate a couple of these IDV could be a solid addition to my portfolio.
Take care!
Thank you ILG for stopping by,
I have both IDV & SDY in my personal portfolio. Both ETFs gained more than 20% since I added them in my U.S holdings. I wish I should have bought them more.
Best Regards,
I love the idea. Reducing hurdle rates is one way to improve total return, and keeping costs rock bottom (ETFs) and using a firm to buy them commission free is a great way to do it. Nice work! -kerry @ stockmarketplaybook.com
Thank you Kerry for your comments,
Overall purpose of this model portfolio is generate a decent passive income with low risk way. I hope it may help to get some ideas for beginners.
Cheers,
Great mix of portfolio. I like the distribution. Some of the ETFs are unknown to me and I will have to take a look.
What is your motivation to add preferred ETFs to the mix? I have looked into it but decided against it – just want to hear your thoughts.
The distribution for CGR is pretty darn low for a real estate ETF.
Best wishes
R2R
Thank you R2R for stopping by,
I have included 5% preferred ETFs for fixed income. I used BMO laddered preferred shares (TSE: ZPR), it will adjust automatically with the changes in interest rate.
Also, CGR yield is pretty low, but I am expecting a higher capital gains in global real estate as population is keep growing exponentially. So, people need a house/land to live and do business. I will monitor the performance of this portfolio in monthly basis and adjust the assert-allocation accordingly.
Cheers,
Very low risk sleep well portfolio. I guess this can gain between 6% to 10% year over year for long-term.
Thank you Chris for stopping by,
Every investment has some sort of risk, but investing in something is my better than having cash in banks because of inflation.
I am expecting to have 7% yearly return in this portfolio; however, we cannot predict any in the market, but we can predict the dividends/distributions from the holdings.
Best Regards,
Best Regards,
Some might call this the ‘lazy” portfolio or the “set it and forget it” portfolio. It’s not a bad mix of a broad group of sectors and geography. As you mention, and I agree, interest rates will definitely have an impact going forward though I believe it will be somewhat muted in the beginning since rates are near zero now and even if they start climbing will still be very low by historical averages. Thanks for sharing.
Thank you DivHut for stopping by,
As you said, some may say it is a boring portfolio, but it will work well in difficult time. Also, I have included two laddered ETFs (CBO & ZPR) to handle the rising interest rates. Lets see the performance of the portfolio in the upcoming months.
Best Regards,
Thanks for the portfolio as it has given me a few ideas. I am constructing a ETF portfolio of about 200k for a recent retiree and its good to see the makeup of others. I will definatley go through your model to see if I am going to swap any of my picks out.
Good Day and Grind On!
Thank you Asset Grinder,
I am so glad that you found this model portfolio useful. I am going to use this as an experiment for my retirement portfolio.
Cheers,