But if you’re willing to take a more hands-on approach, you can build a similar structure yourself using a small number of low-cost index ETFs. Doing it yourself can reduce costs and give you more control over your regional mix. The trade-off is that you need to rebalance periodically and stay disciplined during volatility.
Here’s how I would deploy $10,000 within a TFSA using three broad market ETFs, starting with Canada, then international, and the US.
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$2,500 in Canadian stock
I would start with $2,500 in Canadian stocks iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC).
Canadian stocks make up only about 3% of the global market, but there are practical reasons to consider them in a TFSA. You eliminate currency conversion fees, avoid U.S. withholding taxes on dividends, and reduce the impact of currency fluctuations on your returns.
XIC tracks a broad basket of more than 200 Canadian companies and is weighted by market capitalization. That means larger companies like the big banks and energy producers have more influence, but no stock can exceed the limit built into the index methodology.
The rolling twelve-month interest rate is around 2.12% and the management expense ratio is only 0.06%. For the main Canadian exposure, it’s simple, diversified and cheap.
$2,500 in international stocks
Then I would go through BMO MSCI EAFE Index ETF (TSX:ZEA).
EAFE stands for Europe, Australia and the Far East. This ETF provides exposure to developed markets outside North America, including countries such as Japan, the United Kingdom, France and Australia.
Adding international equities reduces dependence on the Canadian and US economies. Different regions go through economic cycles at different times, which can smoothen overall portfolio returns over the long term.
ZEA has a management expense ratio of 0.22% and currently offers a return of approximately 1.98%. While slightly more expensive than domestic ETFs, it provides valuable geographic diversification.
$5,000 in US stocks
Finally, I would invest $5,000 in US stocks using Vanguard S&P 500 Index ETF (TSX:VFV).
This ETF tracks the S&P 500 Index, a benchmark of 500 major US companies selected based on size, liquidity and earnings quality. It is weighted by market capitalization, meaning that the largest companies, especially in technology and innovation-driven sectors, play a significant role in performance.
The US market remains the largest and most dynamic stock market in the world. A 50% allocation to VFV in your TFSA provides home currency exposure, eligible dividend income and exposure to global leaders across all sectors, and eliminates US withholding tax within your TFSA.
VFV is very affordable, with a management expense ratio of 0.09%, making it an efficient way to capture US growth.
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