The Best $21,000 TFSA Approach for Canadian Investors

When it comes to building a tax-free savings account (TFSA), my default is usually an all-in-one asset allocation exchange-traded fund (ETF). These single-ticker solutions pool stocks and sometimes bonds from different regions, sectors and risk profiles, giving you a hands-off portfolio that rebalances automatically. For most people, that simplicity is worth the cost.

That said, if you’re willing to put in a little more hands-on experience, you can replicate a similar structure yourself using a small number of low-cost index ETFs. Doing it yourself can save you a few dollars on costs over time, but it does require discipline and a willingness to stick to the plan during market volatility. Here is a simple blueprint of a portfolio with three ETFs for deploying $21,000 within a TFSA.

50% in US equities

We start by allocating $10,500, or 50% of the portfolio, to US stocks. Vanguard S&P 500 Index ETF (TSX:VFV).

This ETF tracks the S&P 500 Index, which is often misinterpreted as simply the 500 largest companies in the United States. In reality, inclusion is determined by both a rules-based methodology and an index committee that screens for factors such as liquidity, size and earnings quality.

The ETF is weighted by market capitalization, meaning the largest companies have the most influence. Given the dominance of technology and innovation-driven companies in the US, this allocation will be the portfolio’s main growth driver.

The US market is the largest stock market in the world by capitalization, so it makes sense that it represents a meaningful part of a long-term portfolio. VFV is also very cheap, with a management expense ratio of 0.09%.

25% in Canadian equities

We then allocate $5,250, or 25%, to Canadian stocks via iShares Core S&P TSX Capped Composite Index ETF (TSX:XIC).

Canadian investors tend to have a home country bias and often own many more Canadian stocks than their global market weight would suggest. Although Canada represents only about 3% of the global stock market, holding domestic stocks can reduce currency risk.

This ETF tracks a broad basket of approximately 213 Canadian companies and is market capitalization weighted. Compared to US stocks, the Canadian market is much more concentrated in financials and energy, which helps diversify the large technology exposure from the US allocation.

Another benefit is income. XIC currently pays a rolling 12-month distribution yield of 2.17%, which is significantly higher than most US stock ETFs. Fees are also extremely low, with a management expense ratio of 0.06%.

25% in international equities

The remaining $5,250, or 25%, is allocated to international developed markets BMO MSCI EAFE Index ETF (TSX:ZEA).

EAFE stands for Europe, Australia and the Far East, and this ETF provides exposure to developed markets outside North America. This segment adds geographic diversification by including companies based in countries with established economies, strong institutions and long business histories.

ZEA currently pays an annualized distribution yield of 2.16%. Its management expense ratio is higher than North American ETFs at 0.22%, but that’s fairly typical for international equity exposure.