How the Couch Potato Portfolio did in 2015

With 2015 now in the books, it’s time to look back on the year that was.

It was another year of surprises: after the gurus continued to predict higher interest rates, the Bank of Canada shocked almost everyone by lowering the overnight rate twice in 2015: first in January, and then again in July. That spelled another year for higher-than-expected bond returns. And while it was a disappointing year for equities in almost all regions, the plummeting Canadian dollar caused the value of foreign equities to soar.

All in all, a diversified portfolio did quite well in the “year when nothing worked.” Yet another reminder of why it is so important to hold all of the major asset classes all the time and ignore the noise. Let’s look at the details.

The building blocks

Here are the returns of the individual TD e-Series funds and Vanguard ETFs that are the building blocks for Options 2 and 3 of my model portfolios:

Now let’s put these blocks together and see how the model portfolios performed. At the beginning of 2015, I expanded the TD e-Series and ETF models to include five different asset mixes, ranging from Conservative (30% stocks, 70% bonds) to Aggressive (90% stocks). Here are the returns for each version:

TD e-Series funds

Vanguard ETFs

Why the differences?

The first question that leaps out from these numbers is why the TD e-Series portfolios outperformed the ETFs across the board. After all, the e-Series funds carry management fees that are roughly 0.30% higher. There are two main reasons:

Different Canadian equity indexes. Vanguard’s VCN and its TD e-Series counterpart both track the broad Canadian market, hold roughly the same number of stocks, and use a traditional cap-weighted strategy. However, their index benchmarks are different: Vanguard’s ETF tracks the FTSE Canada All Cap Index, while the e-Series fund tracks the S&P/TSX Capped Composite.

The indexes have slightly different rules governing which companies are included and the weight assigned to each. As a result, from year to year their relative performance will vary slightly and randomly. This year the S&P index won out. Over the long term, these differences have tended to even out.

The ETF portfolios include emerging markets. The ETF portfolios get their foreign equity exposure from Vanguard’s VXC, which holds roughly 10% in emerging markets. This asset class was essentially flat in 2015: returns were a little above or below 0%, depending which index you tracked. The TD International Index Fund includes only developed markets, which performed much better on the year.

Again, this is simply a random result that worked in favour of the TD funds this year. Over the long term, adding emerging markets to a diversified portfolio should be expected to boost its expected return, though it may also increase volatility.

Later this week I’ll take a closer look at the 2015 performance of the Tangerine Investment Funds, the simplest of my model portfolio options.