iShares Canada's New Portfolio ETFs - How Do They Stack Up?

Wealthy Boomer's Jonathan Chevreau recently reported that iShares Canada has launched four new ETFs made up of a collection of iShares ETFs in different sectors and asset classes. The intent is apparently to provide one- or two-stop shopping in building a diversified portfolio with ETFs.

The four new funds are:

• XCR iShares Conservative Core Portfolio Builder Fund which is quite conservative with a high proportion of fixed income at around 70% and investments on the safe end throughout
  
• XGR iShares Growth Core Portfolio Builder Fund which looks like a balanced fund with a split of about half and half between fixed income and equities
• XGC iShares Global Completion Portfolio Builder Fund which has a curious mixture of non-Canadian equities and some ultra-conservative fixed income along with some volatile fixed income
• XAL iShares Alternatives Completion Portfolio Builder Fund which has some ultra-conservative assets along with a majority of highly volatile assets

Bottom Line:

• The only one that I would contemplate buying as a complete stand-alone portfolio is XGR. With a few tweaks in its composition and a reduction in MER to 0.4% or less, it would go from being merely ok to being a great product.
  
• XCR is too heavy on the fixed income and is too concentrated in Canada which makes up about two-thirds of the fund.
  
• XGC and XAL don't combine well with either XCR or XGR; a combination would be no better than XGC by itself as this chart of the composition of the basic new funds and possible combinations shows

The Details:
Here is what I think are the good and the bad points and some that could go either way, depending on your circumstances:

Diversification & Asset Classes- this is the outstanding feature of the new funds due to the wide sub-division among many asset classes, especially in the case of XGR, which has no less than 21 different ETFs. There is large cap equity, small cap, foreign equity, some foreign exchange exposure, government and corporate fixed income, real return bonds, real estate, and even commodities. Such diversity will bring about a high degree of stability to the portfolio. Some may view allocations as small as 1% to an asset class (like SCZ Global Small Cap Equity) as a disadvantage because even big changes to that 1% won't have much impact on the portfolio's value. But that is precisely the point, spreading the total investment portfolio around to minimize risk. An investor with a small portfolio, say $20,000, could not practically envisage building their own portfolio from ETFs where a 1% holding = $200 when the brokerage cost might be $25 or $30.

XGR's Asset Allocation

XCR's Asset Allocation

Some quibbles -
- there is no Equity Value fund at all in the portfolio, despite the research-proven performance boost from this type of holding.
- instead of the IVV S&P500 fund, which is just a large cap fund, it would likely have been better to use something approximating the whole of the US market like IYY or IWV
- I see little benefit from the complication of four different Canadian fixed income funds (XSB, XCG, XGB, XLB) which just replicate the whole of market when iShares has one whole of market fund XBB; I've seen nothing that indicates a lack of correlation amongst the different fixed income sectors represented by the four funds that would provide a diversification benefit to justify the extra funds. In addition, three of the four funds have higher MERs (see chart below) that could have helped BGI lower the overall MER of the portfolio fund.
- similarly, I fail to see why the US fixed income fund is LQD, the corporate sub-sector fund, instead of iShares excellent total bond market fund AGG
- the last fixed income element that I find unsatisfactory is the use of the US real return fund TIP instead of simply using a lot more XRB, the Canadian real return fund. Though I don't have charts to prove it, I would be very surprised if the correlation of XRB and TIP were not close to 1 - i.e. perfectly correlated - and therefore there would no diversification benefit from holding the two different real return funds. On top of that, to limit foreign exchange exposure on TIP, the XCR and XGR managers do foreign exchange hedging on TIP, which adds cost.

Portfolio Policy - Active or Passive?
The iShares fund fact sheets leave the definite impression that these funds might be actively managed when it says on page 1 of the prospectus:
"Barclays Canada will use an asset allocation strategy, as further described below, and may change the iShares ETFs, other issuers and/or derivatives in which an iShares Fund invests, and the percentage of an iShares Fund’s investment in such iShares ETFs, other issuers and/or derivatives at any time and from time to time." It's the waffle words "may change" that concern any investor looking for a constant asset allocation policy for a portfolio of passive index tracking funds, which is what is inside the new funds. For such a portfolio construction and such a relatively low MER, I could not believe that Barclays would actually try to outperform by active management and changing funds or allocation percentages to any appreciable degree. How could they make exorbitant profits that way? They'd have to employ a bunch of highly paid people pretending to know better than the market when to overload on XIU, TIP or whatever.

So I phoned up and the customer service personnel for the hoi polloi like me and you (i.e. those lowly folks who might not really know what is going on at Barclays in the fund management end of things, so their answer may be wrong) did assure me that the asset allocation was meant to stay relatively constant and that quarterly rebalancing would bring the percentages back into line. As to why the prospectus doesn't say that, their explanation was that such wording is required for flexibility. It just sounds like the lawyers did their usual thing and made the prospectus impervious to future lawsuits ... and clarity suffers. That's just stupid marketing and communication by Barclays IMHO.

Rebalancing
The challenge for an individual investor,even someone with a portfolio as large as $1 million, is that rebalancing a whole bunch of funds in a multi-asset class portfolio, can be expensive and complicated. As amounts increase, it is likely multiple accounts - RRSP, LIRA, RRIF, regular and soon TFSA - will add to the complexity. With smaller total portfolio amounts, the cost of rebalancing would be horrendous for someone who tried to replicate all these asset classes. If a 1% holding of $200 increased by 50% to $300, would it be worth a double (one sell, one buy) $10/25/30 brokerage commission to rebalance that $100? Barclays is offering something worthwhile.

Quibble: The advertized quarterly rebalancing is un-necessarily frequent. The research I've seen and previously posted about says once a year at most provides better returns.

Foreign Exchange Hedging
The use of many foreign holdings, which provides useful diversification, also introduces the risk of shifts in foreign currencies. XGR has about half its portfolio in non-Canadian fund investments and XCR about a third. Foreign currency exposure is itself a form of diversification benefit but without hedging, the portfolio effect can be overwhelming so most portfolio design includes hedging part of that amount. Both XGR and XCR hedge about half their foreign content, partly through using funds that are themselves already hedged, like XSP and XIN, but also through separate hedging operations. This proportion is in line with what I've read about how much hedging Canadians investors should do. The extra hedging is another value-add for the purchaser of the new funds since it would be complicated and more expensive to do on one's own.

Those investors who build their own portfolio and want some hedging have to limit the number of funds and asset classes they use, e.g. when using TD e-Series funds or iShares' ETFs.

Management Expense Ratio (MER)
Is the 0.6% MER for XCR and XGR too high? To find out, I first reconstituted the MER of XCR using the proportional sum of the individual component ETFs - it comes out to about 0.303%. Then I calculated what an investor could pay using best/cheapest in class funds for each asset class in XCR and XGR, which mainly means using Vanguard funds. You or I can make our own versions of XCR for 0.245% and XGR for 0.253%. In contrast, the 0.6% doesn't look great ... except we have to include the value/cost of rebalancing and hedging both in direct dollars and time/hassle/effort. Rebalancing costs vary by number of trades and size of portfolio. For $100,000 portfolio with 10 buy/sell trades a year at $10 each totalling $100, the MER equivalent is 0.1%. For a smaller portfolio the MER burden would be higher. Hedging cost is harder to figure directly but as a guide iShares' unhedged EFA has 0.35% MER while the hedged XIN has a 0.49% MER, a 0.14% difference. Using that, the MER value of hedging plus rebalancing could be 0.1+0.14=0.24%. I figure the MER of XCR and XGR are a bit too high - somewhere in the area of 0.4% would be more attractive because I have a bigger portfolio and I do less rebalancing.

XGR's MER Analysis

XCR's MER Analysis


Account Types and Taxes
One problem for which I cannot see a solution is that come the issuance of tax slips after year-end, these new iShares funds will distribute all types of income - interest, dividends and capital gains - for registered or non-registered accounts willy-nilly. If all you have is registered accounts then this doesn't matter. But if your portfolio spans both registered and unregistered accounts it is an important issue. It will not be possible to optimize for taxes by keeping all the interest income from bonds in registered accounts while directing less-taxed dividends and capital gains to the non-reg taxable account. This is perhaps the biggest drawback for me personally. By buying individual funds, I can put XRB with its interest income in my RRSP and cap gains-producing XIC in the taxable account.

Having only one fund to buy that is denominated in Canadian dollars, though it contains holdings from US exchanges in US dollars means that it is possible to avoid having to pay the currency exchange fees in registered accounts for those brokers who do not allow cash to be kept in US dollars. That is a benefit on initial purchase and when rebalancing.

Others who have reviewed and commented on the new funds:

• Rob Carrick in the GlobeAdvisor
• CanadianCapitalist

US Value Indexes - If it Ain't Broke, Don't Fix It

A comment was left on my posting The Slippery Meaning of Value in ETFs and Indexes stating that there was a problem in 2000-2002 that revealed the weakness of the simple price/book metric used by S&P for its Value indexes, which led to the inclusion of all sorts of other metrics to better assess 'value' by Russell, MSCI, Morningstar and Dow Jones/Wilshire. The comment concluded that I should compare the Russell with the S&P ETFs to see how the S&P underperformed compared to them and to the index. So here are some comparisons based on charts from Yahoo.

Large Cap
Both IVE, the iShares S&P Large Cap Value fund, based on the p/b metric, and IWD, the iShares Russell 1000 Large Cap Value fund, based on all sorts of other metrics, far outstrip the S&P 500 index, though the Russell is ahead during the period 2000-2002 but pretty well only during that period. see this first chart.







Small Cap
Again, both IJS, the iShares S&P 600 Small Cap Value fund, the one based on the p/b metric and the IWM iShares Russell 2000 Value fund (the small cap fund most comparable to IJS) outstrip the S&P 500 index. IJS outperformed IWM particularly in the 2000-2002 period. It is interesting that IWM tracks the overall market value index IWW, the Russell 3000, much more closely than IJR. see this second chart.







What does all this tell us? First, in the grand scheme of things, the seven years from 2000 to today isn't very long, so any conclusions are rather tentative. Second, both the large and small cap iShares ETFs seem to have return streams significantly enough different from the overall S&P 500 to make them useful diversifiers, as do the Russell funds. Third, the divergence of the large cap version IVE seems to have been temporary and confined to the period 2000-2002. Fourth, the similarity of performance of IWM and IWW seem to make IWM less useful as a diversifier for small caps.

Overall, the iShares value ETFs, using the original value measure of price to book ratio as uncovered in financial research, seems to have done the job, especially for small caps, though less so for large caps. In that light, why develop all these fancy, complicated alternate measures of value, none of which are proven in the long term?

The Best US Large-Cap Index ETFs Compared

Back in May in my post on the complete overhaul of my portfolio, I showed a chart of my selected ETFs along with some credible contenders in several asset class categories. In one of these, US large-cap companies, my choice was Vanguard's offering, the Vanguard Large-Cap Index Fund (ticker VV), over some very good other choices, the iShares S&P 500 Index Fund (ticker IVV) and the grand-daddy of ETFs, the SPDR aka Spiders (SPY). Along with those, I've included the iShares Canada S&P 500 currency hedged version (XSP) and the TD e-Series S&P 500 currency hedged fund (fund symbol TDB904) for the benefit of Canadian investors like me who don't want to face the negative consequences of a Canadian dollar continuing to rise vs the US$.

The chart illustrates the factors that I believe justifies the conclusion that Vanguard is the best, though not by a great deal. I've coloured the cells light blue where the particular factor favours that ETF. The visual impression is a bit misleading since a number of cells at the bottom all have to do with tax efficiency.

Vanguard's VV is better on:

• MER, or Management Expense Ratio, which is the overhead paid to Vanguard to manage the fund - the lower the number, the better it is for the investor
• on the premium/discount, in this case the discount, which is the average amount the market price of the ETF deviates from the Net Asset Value (NAV), the value of the under-lying stock holdings; the smaller this number the better, the investor neither gains nor loses as the fund is fairly priced; in this case VV is tied with SPY for the best
• 3-year performance, which is higher in VV's case; now some will note that VV uses a different index than all the others, which use the S&P 500 and thus the result should not therefore be comparable. I'm going to stick my neck out a bit by saying that the others suffer from using the S&P 500, a flawed index (as noted by Peter Bernstein in his book, which I reviewed a few days ago). Check out the text below on the S&P 500's flaws and see if you agree with me. The fact that everyone uses it, as they do the far worse Dow, doesn't make it good!
• all the various tax efficiency measures; especially note that the ratios at the bottom of the table, higher in VV's case, mean that the investor loses less to the government through taxes on VV than the other funds. Canadians should note that the source of this is US websites like Vanguard and the absolute numbers reflect US taxpayers but I believe the relative advantage of VV is still there. The size of the 2006 distribution by VV, which would be a highest-rate income item for a Canadian, compared the that of IVV, confirms this conclusion.
  

There are a bunch of blank cells in the table, where I could not find the numbers despite hours of searching. Canadians will note more blanks for XSP and TDB904, where the available data on comparative websites like Morningstar, GlobeFund and those of the providers iShares Canada and TD Asset Management don't seem to be very forthcoming with data. I had to email iShares Canada to learn why their 3-year performance figure on their website differed so markedly from the S&P's results - turns out they only started hedging XSP in November 2005. Therefore, all note, the numbers may not be 100% accurate!

One disappointment for me in all this is how much one loses in buying XSP or TDB904 for currency protection. There's a big performance loss. It's curious that XSP managed in 2006 to distribute some of its distribution as capital gains instead of income, better because of the lower tax paid on capital gains over income. The tracking error of TDB904 at 6+% is abysmal. I had to calculate that one myself so it may be wrong but the high cash holding of 4% of assets, which came from Morningstar Canada, is consistent with such poor tracking.

The suggested weaknesses of the S&P 500 as a market index include:

• it is really only a large cap index with about 75% of the total market value of US shares
• it weights the companies within the index based on the value of the public float in the judgement of the Standard and Poors selection committee, so this biases the index away from a true market cap weighting that follows from financial theory
• some non-US companies are still in the index, having been grand-fathered upon moving away from the US
• some US companies that are illiquid are excluded like Warren Buffett's Berkshire Hathaway, a gigantic omission as it is a huge company
• delays in adding new companies in new sectors distort the true market weighting – it took a while before Google entered the S&P 500

see http://en.wikipedia.org/wiki/S%26P_500 and a letter by Darren Bramen on this page http://www.aicpa.org/pubs/jofa/apr2000/letters.htm

ETF Screeners, Tools and Primers

Since I have been spending huge amounts of time researching Exchange Traded Funds (ETFs) in preparation for a complete re-structuring of my investments based almost completely on ETFs, it might be of interest for me to relate what I have found of use on the Internet.

ETF Primers, FAQs and Portfolio Principles:

• Wikipedia's ETF Entry - summary explanation of ETFs; lists of providers and exchanges around the world where ETFs are available; lots of links
• Efficient Market Canada's Example ETF Portfolio - Martin Gale explains how a Canadian can build a simple global portfolio using ETFs
• ETFs vs Index Mutual Funds and ETF vs Open-End Fund Shootout (Wm Bernstein) - pros and cons of each
• IFA Canada - lots of high-quality educational material as well as sample portfolios for this company that sells low cost funds, but the principles are the same.
• Altruist Financial Advisors - links to more complicated and technical references on ETFs (and many other investing topics) under the Reading Room tab
• Bogleheads Forum - fans of John Bogle, Vanguard Fund founder; lots of links to ETF and other investing material in the Reference Library, plus opportunity to ask questions of investing junkies who generally believe in low cost passive investing
• Seeking Alpha - extensive information on all aspects of ETFs, from basics, investment strategy, asset allocation resources and tools, indexes with many links, all of it annotated
  
• Financial Webring - Canadian investors, including those who write the most and have published some excellent resources; permanent section on funds and ETFs; good place for discussion and to ask questions

ETF Screeners and Comparison Data:

• Stock-Encyclopedia.com - Canadian, US and UK-traded ETFs in one place; useful categories / asset classes for portfolio building; ETF names are written out, not abbreviated; ticker symbols always visible to avoid confusion; ETF investment objective and reference index but little else - links to provider / sponsor websites for details; links to multiple quote websites like Yahoo, Bloomberg, Google, MSN Money; doesn't include all ETFs e.g. missing REITs like ICF, IYR; no side-by-side comparisons, portfolios or other fancy stuff but I found it to be very useful for preliminary identification of candidate ETFs because the site is so simple and quick and includes US and Canadian ETFs together
  
• MarketWatch.com (engine for Wall Street Journal and XTF.com - US ETFs only; Quickscreener tool has useful asset classes; includes Management Expense Ratio (MER), Net Assets, Performance, Turnover, Top Ten holdings, Sector breakdown in one compact, easy-to-read page but is missing Geographical breakdown for international funds and Number of Holdings; no links to Providers; fund names are abbreviated making some difficult to understand; no portfolio tool
• Morningstar.com engine for Investors Business Daily) Morningstar.co.uk and Morningstar.ca - US, UK and Canadian sites for each of those countries' ETFs and mutual funds; very sophisticated and complete but consequently complex and slow to use; important things are buried several clicks down, like ticker symbols, holdings, sector and geographical details; enables creation of a portfolio, which can then be characterized using the X-Ray tool to show sector and geographical dispersion, expected returns and other very useful stats to judge whether a proposed portfolio will be well diversified. Very cool! But it only works for the funds within that country so Canadian investors like me who want/need to use US funds to diversify properly cannot see the whole portfolio analyzed. It's still very handy and unique.
• IndexUniverse.com - US ETFs only; you need to register (it's free) to get access to the database and screener; same complete coverage of 498 US ETFs plus articles and commentary, discussion forum; the screener has a lot of variables one can choose but there are a lot of pre-set ones ticked having to do with performance so it is necessary to do a lot of un-clicking then re-clicking to select the factors one needs; the MER is one screen and it has a good increment of 0.25%; US investors have it easy since mutual funds and ETFs can be screened at the same time or separately; names of funds are somewhat abbreviated but not too badly and the ticker can always be made to appear; there are no market quotes, no links to provider websites and no sectoral of geographical breakdown of fund holdings, no total number of holdings within a fund, no portfolio capability.
• GlobeFund.com - Canadian ETFs along with mutual funds and it is hard to tell them apart from the way the data is presented and certainly the entry link doesn't mention ETFs. Nowhere, for instance, is the ticker symbol XSP shown for the ETF iShares S&P 500 C$ on this data page; it is possible to filter using MER, though the increment is only 0.50%; it is difficult to tell apart actively managed from passive funds, a matter of interest to me; the website is generally slow to respond; there are performance figures, sector and geographic weighting charts, though the latter doesn't work properly for the iShares EAFE ETF that is based on the US-traded ticker: EFA and so is marked as 100% US though it is everywhere but there underneath.
• Financial Post / National Post - Canadian mutual funds with the few domestic ETFs, though the website label doesn't say anything about ETFs ... oops, the Claymore Investments range isn't included; a lot less data than the other sites; with so little ETF choice in Canada it would be imperative to include them.
  
• iShares.ca - the most popular Canadian-traded ETFs with lots of useful data and explanations
  
• Vanguard and iShares.com - US websites of low cost US-traded ETFs that will likely attract most Canadian and UK (those who can trade on US exchanges) investors with a bent for passive index investing; good places to get the details on funds to round out the diversification objectives with other asset classes; Vanguard has a neat tool that lets you compare side-by-side any of its ETFs with another of any other company, e.g. for a European holding should it be VGK or IEV or EZU - Vanguard's tool provides more data than some of the big specialized websites above.

Happy research everyone. If anyone has other suggestions for sources, let me know.

Portfolio Magic ... 3+1 = 5!

If someone told you that you should buy for your investment portfolio a holding with low annual returns and high volatility of returns (wide swings from year to year, i.e. the "sleep at night" factor) would you not think that this is against common sense, that this would lower your overall returns and make the swings even worse? For example, why add an investment that increased on average 10.3% annually and with volatility of 24.3% (this is the standard deviation, the usual measure of volatility) to a portfolio that has a higher return of 13.7% annually with lower volatility of only 14.7%? Well, contrary to common sense, the marvels of diversification can make this worthwhile. Certain precise, though quite simple and understandable, circumstances that go to the heart of diversification, make this seemingly odd result come about. How does it work you ask?

The key is to combine investment assets that move, in the best case, in contrary directions – when one is going up the other is going down and vice versa. Beneficial, but less so, is the case where the assets move randomly or independently – sometimes together, sometimes in opposite directions. There is still benefit when the assets tend to move together, but not all the time, in a weak positive relationship. Most of the investment assets that can easily be bought by the average investor tend to fall into the last category so it isn't possible to build a high return portfolio with zero volatility but the improvement can be considerable.

Let's continue with the example, which comes from Roger Gibson's fine book, Asset Allocation. The mystery low return/high volatility asset is the Goldman Sachs Commodity Index and the portfolio is a combination of the S&P 500, the MSCI Europe, Australia and Far East Index and the (US) National Association of Real Estate Investment Trusts Equity Index. Gibson shows in chapter 8 that over the period 1972 to 1998, the combination of the four holdings would have increased returns a little, from 13.7% to 13.8%, and reduced volatility a lot, from 14.7% to 10.6%. The reason again for this remarkable result is again, that when commodities go up the others go down and vice versa, even though over the long term, all of them go up. To cap it all, each asset on its own, underperformed the combination of all four. That's the power of diversification.

An investment category that moves differently from others is termed an asset class. So what are the asset classes that can/should be combined in a portfolio that maximizes returns while minimizing volatility? The main ones identified by finance researchers are:

• cash / Treasury bills

• bonds, with further useful (i.e. with diversification benefits) subdivisions into corporate, government and international

• equities, with useful subdivisions into large cap, small cap, value, international Europe, EAFE and emerging markets

• real estate, purchasable primarily in the form of REITs, though one's home can be considered an investment to a degree

• commodities - energy, minerals, foodstuffs, gold, basic materials (steel, aluminium)

For examples of how these can be turned into actual portfolios with the purchase of specific ETFs or low-cost mutual funds (the latter being primarily available in the US alas), check out the Index Fund Advisors portfolios. The excellent book All About Asset Allocation by Richard Ferri that I previously reviewed also has example portfolios. The Efficient Frontier shows basic international equity portfolios with ETFs. Bylo Selhi has a handy list of the various low-cost funds available in Canada, some of which represent the above asset classes. For Canadians, since US mutual funds cannot be purchased, US-traded ETFs are the only route. Most (if not all) can be listed and searched for at Index Universe or Morningstar. In the UK, the iShares ETFs are the only low cost option for anything other than UK stocks or bond indices, or European stock indices, which are available from any number of fund companies.

A word of caution is that, as Ferri shows with numerous graphs on every asset class, the advantageous correlation relationships can be absent or reversed from year to year or for periods of many years at a time. The relationships work over long periods when the variations smooth out. While 3+1 is no longer always equal to 4, patience is still a virtue in investing.

Remodeling a UK Equities Portfolio

For the past week, I've been pre-occupied in reviewing a UK relative's investments and it is a familiar story. This person is not at all interested in managing investments day to day but does want to save money in the long term. The result has been a hodge-podge of assets that are inefficient and poorly diversified despite owning a number of different funds. The chart on the left, taken from Trustnet, shows the various holdings. Despite the variety of names, all are essentially composed of UK equities and when one delves into the funds, one discovers the same major companies such as BP, HSBC, Royal Dutch Shell, and Barclays. The funds display the familiar under-performance relative to the index, the FTSE in this case, as four out of eight failed to beat the FTSE All Share gain of 44.3% over the past five years. For comparison, I added into the chart an index tracking fund - the M&G Index Tracker A Accumulation. As is typical of index funds, the M&G tracker also under-performs the index, gaining only 40.6% over the five years.

One thing that has surprised and disappointed me is the small number of Exchange Traded Funds available in the UK. iShares offers only a FTSE 100 (the 100 largest companies) and a FTSE 250 (the next largest companies after the 100) ETF but no FTSE All Shares tracker at all. Perhaps that is because the iShares ETFs are registered in Ireland and so do not qualify for dividends tax exemption when held within the tax-free ISA (similar to RRSP in Canada). That gap led me to search among the regular funds (called OEICs in the UK) for index trackers such as M&G's. Their management fees and expenses are thankfully not too high, as one would hope: M&G's comes in at 0.3% annually. It is interesting to note the uniform 1.5% management fee applied by all the other OEIC funds, no doubt as the result of adhering to the FSA's Stakeholder program whose aim is to ensure fair conditions for fund investors. In addition, the above returns do not account for the initial charge or front end load on the OEICs that vary from 4% to as much as 6.25%. To put it another way, making up the initial lower amount invested takes about five years at 1% return more per year. Can the winning funds continue to out-do the market or is it likely they will revert to the mean? All this is to say that I've suggested getting out of OEIC into market tracking funds.

The other major change is to suggest to my relative to take advantage of the ISA program under which one can contribute up to £7000 annually in a non-taxable account. Why was that tax advantage not used? It's just not knowing about it in this case.

There is a huge number of funds available in the UK and it is a big chore sorting through and comparing them. I found a number of useful sources like the website of the UK regulator, the Financial Services Authority, which has comparative tables for all types of investments and shows all the charges (why can we not have something similar from our Canadian regulators?). There is also the Trustnet website, for performance tables and charts that allows one to enter and track a portfolio with updated values.

The lack of diversification beyond the UK also needs to be corrected. Therefore, IUSA (iShares S&P500), IAPD (iShares Asia Pacific Dividend Plus), IEEM (iShares Emerging Markets) will be substituted for the UK holdings where these can be put either into ISAs or PEPs (another UK tax-free plan - it was the pre-cursor to the ISA and can still be held as a "grandfather" type of account). For regular taxable holdings, about a third of the total equities will still be in the UK but as the M&G FTSE All Shares Index Tracker. The last chunk will go into M&G European Index Tracker, a broad based OEIC fund with 0.5% annual fees and no initial charges.

It has been instructive to see how a typical passive investor can evolve a portfolio by accident that can be improved with such simple measures as better diversification, lower fee funds and use of tax-free accounts.

The next stage was to find a place to buy and hold these new assets, a big job in itself and worthy of a future post.