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Dealing with Drift in Asset Allocation ETFs

RobH1 Comment

I rely a lot on asset-allocation ETFs in my retirement portfolio, mostly XGRO in the CAD side of the portfolio and AOA on the USD side1. These ETFs (about 70% of my overall retirement portfolio, as you can see here), like all asset-allocation ETFs, rebalance their holdings periodically in order to stick to their asset allocation targets. This aligns perfectly with my way of investing; I’ve always tried to stick to my asset allocation targets portfolio-wide, assisted by tools like my multi-asset tracker spreadsheet. (If you aren’t familiar with asset-allocation as an investment strategy, you could give this article a read.)

XGRO’s asset allocation targets are written right in the prospectus2:

  • 80% Equity, with 36% US equity, 20% Canadian Equity, 20% International Developed Market Equity, 4% Emerging Market Equity.
  • 20% Bonds, 16% being held in Canadian bonds. The other 4% are designated “non-Canadian” but seems like it’s always US bonds.

Anyway, XGRO’s approach to making changes to the portfolio in order to maintain this target percentage is written in the prospectus too:

XGRO’s portfolio will be monitored relative to the asset class target weights and will be rebalanced back to asset class target weights from time to time …XGRO’s portfolio is not expected to deviate from the asset class target weights by more than one-tenth of the target weight for a given asset class

Page 419 of the iShares Prospectus (June 2025)

Now “from time to time” isn’t terribly precise. I thought I’d take a closer look at the history of XGRO’s asset allocations. So I dug through annual and semi-annual reports as well as the website. I focused on the Fixed Income (aka Bond) proportion of XGRO over time because that’s the asset class that’s most likely to drift lower3…equities typically outperform fixed income historically. So this is what I found:

So there is a bit of drift in the fixed income portion of XGRO, but in the past year I haven’t seen it off by more than 1.2%, meaning that the promise made in XGRO’s prospectus is being adhered to.4

Turning now to AOA, the fixed income proportion is clearly stated to be 20%, and rebalancing is stated to happen twice annually, in April and October. After that, things become a bit harder to work out56. The various equity contributions are determined by the target index, namely the S&P Target Risk Aggressive Index, which are constructed by using market capitalization of the various indices used7.

Anyway, like XGRO, what I’m most concerned about is the fixed income portion of AOA, and digging through the various reports, I came up with this:

Of late, the fixed income portion AOA has become small, almost 2% lower than it should be. And given that AOA is about 50% of my holdings, it means that my equity exposure is quite a bit higher than I would let it drift myself.

I suppose the next rebalancing in October 2025 will correct this, but I admit it makes me a little uneasy to see that sort of volatility in the asset allocation8. I could of course just sell some AOA and reinvest it in some bond fund (AOA uses IUSB and IAGG, which seem like fine choices) but then I’m just working around the asset allocation strategy I’m paying for in AOA’s management fees, which seems dumb. Not to mention that anything I do now will almost certainly have to be undone come October.

So I guess this all means I should just let sleeping dogs lie. I have minor bits of money to reinvest every month (I still contribute to my TFSAs) so using those funds to buy bonds are probably what I’ll do. It’s a tiny pre-correction that should be addressed come October…or by the next equity meltdown.

  1. And both are on my “ETF all-stars” page ↩︎
  2. And since detailed targets are clearly stated, these are the percentages I assume for XGRO in my multi-asset tracker spreadsheet. I could continually update the percentages since they calculated daily on XGRO’s page, but it seems like busywork. ↩︎
  3. My retirement decumulation strategy (VPW) relies on knowing what my asset allocation is, too ↩︎
  4. It does mean, however, that my equity exposure Is higher than I thought. ↩︎
  5. Well, or maybe I’m just not that smart — I’m not really sure if one can calculate the market caps needed to work out the allocations. ↩︎
  6. And unlike XGRO, I actually do track (from time to time) the underlying allocations of AOA so that my multi-asset tracker reflects reality. It was through my most recent update that I discovered that the bond portion of AOA was a lot lower than it had been. ↩︎
  7. Namely the S&P500, the S&P MidCap 400, the S&P SmallCap 600, the S&P Developed Ex-U.S. BMI, and the S&P Emerging BMI ↩︎
  8. It’s still within the stated drift that XGRO tolerates, however. So maybe I’m overthinking this. ↩︎

Capped Index Funds: Good Idea?

RobHLeave a comment

One nagging concern I’ve heard about index investing1 is that you can end up overly concentrated in a handful of stocks. For example, as of today, per XGRO’s fact sheet, for every $100 I have invested in XGRO, I’m actually investing almost $5 between two companies, NVIDIA and Microsoft. And for every $100 I have invested in AOA, it’s $7 in these two companies. Although that sounds like it might be a significant concentration, I found a way to test the correlation using https://www.portfoliovisualizer.com/asset-correlations. As you can see, XGRO and NVIDIA are not terribly well-correlated:

Not very strong correlation between XGRO and NVIDIA

…even though perhaps I perhaps wish they were (sigh):

Wishing XGRO was more strongly correlated with NVIDIA…

Anyway, if you’re still not comfortable with having too much concentration in your holdings, there are ETFs that limit exposure to any one stock in an index. iShares launched an ETF last year that tracks the S&P 500 while limiting the contribution of any member of that index to 3%. That product is called XUSC, which serves as a complement to its XUS uncapped S&P 500 ETF2. So when you compare XUS’s top holdings to those of XUSC, you can quickly spot the difference:

Top HoldingsXUS (S&P 500)XUSC (capped S&P 500)3
NVIDIA7.86%3.49%
Microsoft7.09%3.12%
Apple5.90%3.07%
Amazon4%3.07%
Meta2.86%2.93%
Broadcom2.49%2.96%
Alphabet class A2%1.66%
Tesla1.73%2.05%
Alphabet class C1.63%1.35%
Berkshire Hathaway1.62%1.93%
Comparing top % holdings between XUS and XUSC as of July 2025

For the TSX, there’s not a full equivalent. The closest pairing for the TSX is XIC4 and XIU:

TickerIndexCapped?# of stocks
XICS&P/TSX Capped CompositeYes214
XIUS&P/TSX 60No615

XIC holds a lot more companies, and in addition to capping any single company, this has the effect of shifting the emphasis to smaller companies. So does this make a big difference in performance? Let’s check using this calculator.

So not much difference; over the past 5.5 years, we see a very slight edge to XIU, the uncapped TSX60 fund.

Whether the relationship between XIU and XIC will be the same as XUS/XUSC is anybody’s guess. In my own case, I don’t own the capped version of the S&P 500, but I do own XIC over XIU, mostly because of its significantly lower MER (0.06% versus 0.18% for XIU).

  1. And my biggest holdings (AOA and XGRO) are nothing more than a collection of index funds: S&P 500, TSX, MSCI EAFE… ↩︎
  2. There’s also currency-hedged variants of these, but I never bother with hedging, it just adds expense and tracking errors. ↩︎
  3. You may wonder why an ETF that advertises itself as capping components at 3% has components that exceed 3%. I also have this question. I suppose they probably only trade when the exception is maintained for a period of time, or perhaps by a more significant margin. Otherwise, they’d trade stocks that hovered around the 3% threshold excessively. ↩︎
  4. The “C” is either for “Capped” or “Composite”, you decide. ↩︎
  5. I can’t explain why a “TSX 60” ETF has 61 assets. Maybe they count cash as the 61st? ↩︎

TD versus iShares: XEQT/XGRO/XBAL versus TEQT/TGRO/TBAL

RobH4 Comments

My post talking about BMO’s fee reduction for their asset allocation family enticed me to revisit competitive asset allocation funds. TD’s low-low fees (0.17% versus the 0.20% of iShares) are tempting.

So, quick sanity check — what’s the historical performance of XGRO versus TGRO?12

Per https://www.canadastockchannel.com/compound-returns-calculator/ (featured in Tools I Use) I see:

What? The TD fund has returned a full 2 percentage points better? This is a bit hard to believe. They must be rather different somehow?

Ah, yes. Revisiting their respective fund pages reveals that TGRO has a lower allocation for bonds — it’s only 10% versus the 20% for XGRO. More bonds will definitely lower return as a reward for lower volatility (I showed that effect here), so that probably explains the difference.

XGRO versus TGRO: Asset Allocation

So comparing the returns of XGRO versus TGRO wasn’t an apples to apples comparison. I could instead measure the relative returns of XBAL versus TBAL since the equity/bond ratios of these two are equivalent (both at 60% equity, 40% bonds)3. There are, however, some minor differences in the equity side of the equation:

XBAL versus TBAL: Asset Allocation

TBAL has a higher weighting in Canadian equity at the expense of some International equity, let’s see how that translates in the overall return:

That’s a lot closer, but the advantage still tilts TBAL’s way, which is another positive argument for considering it.

I am curious about how different these two are under the hood.

The first obvious difference is that they use different market indexes to build their portfolios, summarized below:

TGRO/TBALXGRO/XBAL
CAD EquitySolactive Canada Broad Market IndexS&P®/TSX® Capped Composite Index
US EquitySolactive US Large Cap CAD IndexS&P Total Market Index
Int’l EquitySolactive GBS Developed Markets ex North America Large & Mid Cap CAD IndexMSCI EAFE® Investable Market Index, MSCI Emerging Markets Investable Market Index
Bonds FTSE Canada Universe Bond IndexFTSE Canada Universe Bond Index and others
Underlying indices tracked by TGRO and XGRO

So sure, the indices are different, but is it really a big deal? Doing a bit of digging I can confidently say that:

  • On the Canadian Equity front, TGRO’s holdings are more broad and include smaller stocks.
  • On the US Equity front, the opposite is true — XGRO holds more smaller US stocks
  • On the International Equity front, XGRO has exposure to Emerging markets that TGRO lacks
  • On the bond front, XGRO includes non-Canadian holdings, so a bit more diversified

Are any of these differences of great significance? No idea. Doubtful. TGRO has a recent small (0.5%) advantage, which is still worth digging in to. I took a look at the underlying assets…It’s easiest to do that by looking at the ETFs that underpin TGRO, one by one (TPU, TTP and TTE). XGRO’s product page shows the underlying assets so you don’t have to do the same (tedious) exercise for it.

Top CAD EquityTop US EquityTop Int’l Equity
TEQT/TGRO/TBALRBC, Shopify, TD, Enbridge, BrookfieldMicrosoft, NVIDIA, Apple, Amazon, MetaSAP, ASML, Nestle, Novo Nordisk, Roche
XEQT/XGRO/XBALRBC, Shopify, TD, Enbridge, BrookfieldMicrosoft, NVIDIA, Apple, Amazon, MetaTaiwan Semi, SAP, ASML, Nestle, Novo Nordisk
Top stock holdings, by asset category, for TGRO and XGRO

Hmph. Almost the same. I guess the difference is really coming down to an advantageous geographic mix for TBAL over XBAL, which may or may not be repeated. As compared to TBAL, XBAL’s greater focus on equities outside North America hurt its performance in the last 5 years.

All this to say that TGRO/TBAL look like fine products, with no real reason not to recommend them. For me, one small complexity with TGRO is its bond allocation, which is lower than XGRO’s, meaning that to keep my usual 20% bond allocation, I would have to either buy a standalone bond fund or buy a TEQT/TBAL combo (a 50/50 ratio works, I did the math).

Perhaps you’ll start to see some of these funds in my monthly update — stay tuned!

  1. I wouldn’t normally do this, especially since the funds don’t have a long history, but in this case I see that the TD funds use obscure (to me) indices so I want to quickly see if there’s a major difference in return. ↩︎
  2. XGRO is the mainstay of the CAD portion of my retirement portfolio and TGRO looks to be the same thing. ↩︎
  3. You may wonder if this is really a valid comparison since what I actually care about is TGRO versus XGRO. I think it is a valid comparison since TBAL and XBAL are still relying on the same underlying indices to build their respective funds, it’s just that the percentages vary. That’s pretty much how most all-in-ones approach the problem of building multiple risk levels: take a set of ingredients (the indicies) and mix them in different ratios to get to the final all-in-one product. It’s really a test to see if TBAL’s indices are somehow “better” than XBAL’s. ↩︎

Mini-Review: PortfolioPilot

RobHLeave a comment

I discovered PortfolioPilot (https://portfoliopilot.com/), a product of Global Predictions, because it’s mentioned in passing on Passiv’s dashboard. (You can read a bit about Passiv over here — the premium version of Passiv used to be offered for free to all Questrade users, but it’s now part of their shiny new subscription service1.)

So what is PortfolioPilot? Let’s hand it over to their AI assistant to weigh in on that question 🙂

PortfolioPilot AI Assistant v1.3 explaining what it is

On Passiv, the data provided by PortfolioPilot is limited to a portfolio score (out of 1000) and a “Forecasted Return” metric. The Global Predictions/PortfolioPilot assessments for my portfolio as presented on the Passiv dashboard are depicted below.

Global Predictions/ Portfolio Pilot’s scoring of my portfolio, as depicted on the Passiv dashboard23

When I headed over to the PortfolioPilot website, I decided to set up an account and take a closer look.

After an initial set of questions to help figure out my risk profile, I was able to enter my entire portfolio manually, since it’s down to just 12 holdings these days. Pro tip: this is a US tool, so if you enter Canadian stocks/ETF, you have to add “.TO” to the name of the holding in question, e.g. XGRO.TO not just “XGRO”.

So once I did that, it spat out all kinds of pretty data. I do like the visualization per ETF held…this one is showing 3 month returns per ETF. Whether or not it’s including dividend payouts is not known.

3 month return of ETFs held in my retirement portfolio

It also gave me a little more insight into my portfolio score4:

Portfolio Score of my retirement holdings, per PortfolioPilot

This view reminds me of how QTrade does their portfolio assessments, something I thought was a plus of that provider. The downside protection warning indicated that I have too much invested in too few holdings, but since I’m on the free version, no further insight was provided. Both AOA and XGRO are tilted towards large US stocks…I suppose my Magnificent Seven holdings are a non-trivial part of the overall portfolio as a result, but I wasn’t able to delve further into this warning. That’s what you get for paying nothing, I suppose.

So some nice stuff here, nice visualizations, customized news based on what’s in your portfolio, all good. But there are some problems I see with their data.

Example one:

PortfolioPilot Asset class view: 35% “unknown”? Blind spot for Canadian ETFs, maybe?

The asset breakdown is very detailed, which I like, but at 35% “unknown”, it’s kinda useless. No way I can see to figure out what ETFs are causing it trouble. Guess I’ll see what support has to say.

They have specific recommendations, which I also like, but again, I see issues:

PortfolioPilot suggested actions

So here, my issue is with action #2. It was recommending replacing XEQT (an ETF all-star) with VE.

Now, setting aside for a moment that VE and XEQT are pretty different in terms of what they hold, (to start, VE has no Canadian or Far East exposure), the REASON the suggestion was made was to save on management fees. PortfolioPilot claimed that VE attracted no fees, making me a sucker for paying 0.20% to hold XEQT. A quick look at the VE page dispelled that idea immediately — the MER is 0.22%. Following their advice would have led me to pay MORE in fees, not less. Shrug.

Anyway, I spent all of 30 minutes with this tool, and although it shows promise, some of the errors I spotted do not fill me with confidence in recommending it to others.

Anyone out there using it? Got other thoughts? Let me know at comments@moneyengineer.ca!

  1. But per some Reddit threads I have seen, users with more assets with Questrade may get it anyway. I await some sort of official communication before commenting further. As of right now, I still seem to have full access to the tool. ↩︎
  2. I dunno, 95th percentile seems “Excellent” to me.
    ↩︎
  3. Not really sure how to interpret that. Does that mean between 8% and 10% annual return, or does it mean -1% to 19% annual return? I would tend to believe the latter, since that’s more in line with an 80% equity portfolio, but no explanation is offered… ↩︎
  4. I suppose my score is a bit higher because it also includes my remaining QTrade holdings, which Passiv doesn’t support. Or maybe not. ↩︎

Taxes in Retirement

RobH1 Comment

There’s really no avoiding paying taxes, even in retirement. You probably have to do some budgeting to make sure you aren’t being caught unaware, though.

My retirement today is funded from a combination of my spouse’s part-time salary, my/my spouse’s RRIF, selling off assets from my non-registered account, and interest/dividend income from non-registered accounts.

The big difference, as I’m slowly becoming aware, is that aside from my spouse’s paycheque (which has the usual tax deductions / CPP contributions / EI contributions), there is nothing being set aside to pay my tax bill come April 2026. So it goes without saying that I had better make sure there’s a nugget somewhere that I set aside for the upcoming tax bill.

How much should that be? Enter a tool I use to help figure out that sort of thing, referenced in the “Tools I Use” section of this blog: namely, the Basic Canadian Income Tax Calculator1.

The Basic Canadian Income Tax Calculator, from TaxTips.ca

The basic tool, as implied, is pretty basic. It doesn’t include any sorts of deductions aside from the basic personal deduction and dividend tax credits. There’s an advanced calculator that has a bunch more inputs, but for the purposes of this article, the basic tool is good enough.

For the purposes of this tool, your income is in 4 buckets:

  • Other income: This is how 100% of RRIF payments are treated, as well as interest from non-registered assets (e.g. interest from a GIC, bank account, HISA, some ETFs)
  • Capital gains: This is only applicable to non-registered accounts. Note that many ETFs actually generate capital gains and a corresponding T3/T5 slip even if you don’t touch the fund at all2. Larger capital gains are typically generated when you sell an ETF that you’ve held for a while, which includes everything I hold in my non-registered accounts.
  • Canadian eligible dividends: This includes dividends paid by all public companies in Canada.
  • Canadian non-eligible dividends: I don’t have any of those, but if you own shares in a private corporation, you might.

Since my 2025 strategy is to simply collect RRIF minimum payments, I already know what that dollar amount is. I also execute non-registered asset sales monthly to fund my retirement, as I mentioned here. This generates capital gains every month; the exact amount this will sum up to in 2025 is unknowable in advance since it depends on factors like:

  • what specific asset I choose to sell
  • the price of the asset at the time I choose to sell
  • how many shares of the asset I sell at that price

I do track a metric I call “capital gain dollars per dollar of asset sold3” so I can compare the capital gain impact of generating (say) $1000 cash for every asset I own in my non-registered account. So I have a bit of control over the capital gain metric for a given year, but not a lot. My spouse also has non-registered assets in her name, but since she’s earning a salary, I’ll let that be for now.

Some examples might help illustrate the different tax impacts of different withdrawal strategies.

Let’s consider 4 examples, all of which give you 100k gross salary, before taxes:

  • The “RRIF and interest only” strategy: All income for the year is generated by either RRIF payments or interest payments from non-registered accounts.
  • The “non-registered asset sale only” strategy: All income for the year is generated by selling assets in non-registered accounts that create 70 cents of capital gain for every dollar of income thus generated4.
  • The “Dividends only” strategy: All income for the year is in the form of dividends. You’d need a pretty large portfolio to generate 100k of dividend income, just sayin’.
  • The “Blended Approach” strategy: Income comes from a mix of RRIF payments, non-registered asset sales, and dividends. You could play with the percentages yourself; this is an excellent way to see how different liquidation strategies generate (in some cases) very different tax bills.

The table below uses the basic tax calculator to generate the tax bill of the different payment strategies.

Withdrawal strategyRRIF + Interest incomeIncome from asset salesActual Capital GainDividendsTotal Gross IncomeTotal Tax Bill (ON)Avg Tax Rate
RRIF and Interest only100k000100k21.4k21.4%
Non Registered asset sales only0100k70k0100k3.9k5.6%
Dividends only00100k100k3.3k3.3%
A blended approach50k25k17.5k25k100k10.6k11.5%

Fair warning: don’t try to use this table to estimate your own situation. I chose 100k to keep the math easy, but since Canadian tax brackets have different tax rates, the overall gross salary chosen makes a huge difference in the tax bill — enter the numbers yourself!

My retirement planner advised me to target an average tax rate of no more than 15%, and besides the “RRIF and interest only” approach, all of the withdrawal strategies in the table accomplish that. The other takeaway is that on an income of $100k, all of the approaches generate a tax bill in excess of $3k — which happens to be the magic number CRA uses to determine whether or not you have to pay tax in installments.

As a result of doing this exercise, I’ve started a monthly automated contribution to a separate “tax” account5 so that I have money at the ready to pay my tax bill next year. All DIY retirees may want to do the same!

  1. You will probably have to close a bunch of ads before ultimately getting to the page that matters. It’s a forgivable tax to for this useful site, IMHO. ↩︎
  2. If you prefer to avoid annual capital gains, dividends and interest payments, then Global X has ETFs that are designed to do just that. I hold HXT (for Canadian Equity) and HXS (for US Equity) in my non-registered accounts for this reason. ↩︎
  3. This is just the per share capital gain divided by the current share price. I use Adjusted Cost Base to keep track of my capital gains. ↩︎
  4. This is a bit higher than the average of my portfolio, which is about 60 cents for long-held assets. You could choose a different number based on your own holdings. You only pay tax on half of your capital gains, and the calculator knows this. ↩︎
  5. I used Wealthsimple for this since it’s stupidly easy to create a new investment account. And they pay a reasonable amount of interest. ↩︎