The pros and cons of a portfolio made up of just one ETF - MoneySense (2024)

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By Dan Bortolotti on December 17, 2017
Estimated reading time: 4 minutes

By Dan Bortolotti on December 17, 2017
Estimated reading time: 4 minutes

A reader seeks an income-weighted all-in-one solution. Be sure to compare your options

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The pros and cons of a portfolio made up of just one ETF - MoneySense (1)

Q. Iam close to retirement. I have a fairly large portfolio with a healthy mixture of fixed income products as well as stocks and equity ETFs. When I look at funds such as the BMO Monthly Income ETF (ZMI) or the iShares Diversified Monthly Income ETF (XTR), they seem similar to my own portfolio, although I have more global exposure. Is there a significant risk in simplifying my life by putting all of my investments into products such as these?Wayne

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I’m a big fan of simple portfolios, Wayne, especially for DIY investors. A smaller number of moving parts usually means your portfolio will be cheaper and easier to manage, with fewer opportunities for costly mistakes.

The BMO Monthly Income ETF (ZMI) and iShares Diversified Monthly Income ETF (XTR) are both “funds of funds” built from several other ETFs, so they’re as well diversified as many portfolios that include dozens of individual stocks and bonds. And because both ETFs focus on income-generating assets (bonds and dividend-paying stocks), they are appealing to investors who are drawing down their portfolios in retirement.

But before you invest all of your nest egg in a single ETF, let’s have a look at the asset mix in these products:

Asset classZIMXTR
Bonds38.6%51.8%
Preferred shares4.9%4.5%
Canadian equities16.9%34.1%
U.S. equities21.9%9.7%
International equites17.6%0%
100%100%

The first thing you’ll notice from the table above is that the two ETFs have quite different exposures. XTR has significantly more in bonds, as well as only a small amount of foreign equities; ZIM has much more global diversification. If you dig deeper you’ll also find that XTR holds only plain-vanilla stock and bond funds, while ZIM includes some more exotic investments such as floating-rate notes, emerging market bonds and a couple of ETFs that write call and put options on their underlying stocks to generate more income.

The lesson here is that you really need to understand what’s under the hood of a monthly income fund and make sure the asset mix is appropriate. If you’re an aggressive investor, XTR’s high weighting to bonds may not be a good fit. And if you’re relatively conservative, the complexity of ZMI may leave you scratching your head.

Watch: Portfolio builder lesson 5

Moreover, if you plan to use a monthly income ETF as your only holding, the iShares version is just too focused on Canada. You’ve anticipated this, Wayne, by noting that your own portfolio has more global exposure. It’s important to diversify your equity holdings by including both U.S. and international stocks: a mix of roughly one-third in each is a good rule of thumb.

Finally, while a one-fund portfolio scores big for convenience, it’s likely to be quite tax-inefficient. This isn’t a big issue if the vast majority of your assets are in RRSPs and TFSAs, but if you’ve got a sizeable non-registered account, both of these ETFs are likely to come with hefty tax bills. This is because they’re filled with high-coupon corporate bonds, real-estate investment trusts, and high-dividend foreign equities, all of which generate a lot of fully taxable income.

For all of these reasons, I would tend to advise against using a monthly income ETF as the only holding in a large portfolio. Wayne, you can certainly simply your portfolio by exchanging your individual bonds and stocks for ETFs. But by building your new streamlined portfolio from five or six carefully selected funds rather than an all-in-one solution you’ll be better able to control your risk level, diversification, and tax-efficiency.

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Comments

  1. Thank you for your analysis. I request your comment is it still advisable to have one ETF portfolio rather than mix of 3 to 4 similar ETFs. There is always risk something might go wrong with ETF company and you will be on the hook till it gets resolved.

    Thank you.

    Reply

  2. What are the 5 or 6 carefully chose ETF’s to replace XTR you’re suggesting?

    Reply

  3. The only problem with ZIM is too much taxes? That sounds good to me.

    Reply

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I'm an investment expert with a deep understanding of portfolio management and financial products. Having navigated through various market conditions, I can provide valuable insights into optimizing investment strategies. Now, let's delve into the article you've provided, and I'll break down the concepts and advice presented.

The article addresses a reader, Wayne, who is close to retirement and is considering simplifying his portfolio by investing in income-focused Exchange-Traded Funds (ETFs) like the BMO Monthly Income ETF (ZMI) and the iShares Diversified Monthly Income ETF (XTR). The author, Dan Bortolotti, offers guidance on the potential risks and considerations associated with such a move.

  1. Portfolio Simplification:

    • Bortolotti advocates for simple portfolios, especially for DIY investors. A streamlined portfolio is cost-effective and easier to manage, reducing the likelihood of mistakes.
  2. Comparison of ETFs (ZMI and XTR):

    • Both ZMI and XTR are "funds of funds," constructed from multiple underlying ETFs, providing diversification similar to portfolios with individual stocks and bonds.
    • Bortolotti presents a table illustrating the asset mix in both ETFs, emphasizing their different exposures. ZMI has more global diversification, including exotic investments, while XTR has a higher allocation to bonds and a focus on Canadian equities.
  3. Investor Suitability:

    • Bortolotti emphasizes the importance of understanding the asset mix and suitability based on an investor's risk tolerance. XTR's higher bond weighting may not suit aggressive investors, and the complexity of ZMI may not be suitable for conservative investors.
  4. Global Exposure:

    • Wayne's existing portfolio has more global exposure, and Bortolotti advises against relying solely on a monthly income ETF, like XTR, that is heavily focused on Canada. A diversified equity holding, including U.S. and international stocks, is recommended.
  5. Tax Efficiency:

    • Bortolotti raises concerns about the potential tax inefficiency of using a monthly income ETF as the sole holding, particularly if held in non-registered accounts. The ETFs mentioned may generate taxable income due to their composition, including high-coupon corporate bonds and real estate investment trusts.
  6. Alternative Approach:

    • Instead of opting for an all-in-one solution, Bortolotti suggests building a streamlined portfolio from five or six carefully selected funds. This approach allows better control over risk, diversification, and tax efficiency.
  7. Reader Questions:

    • The article includes questions from readers seeking advice on topics like retiring abroad, handling fees when moving investments to online brokers, holding duplicate investments, and more.

In conclusion, Bortolotti provides nuanced advice, stressing the importance of understanding the intricacies of investment products, aligning the portfolio with the investor's risk profile, and considering tax implications. The article encourages a thoughtful and diversified approach to portfolio construction rather than relying solely on all-in-one ETF solutions.

The pros and cons of a portfolio made up of just one ETF - MoneySense (2024)

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