Diversifying Your Portfolio: A Response to Gordon Pape

I think Gordon Pape Got it Wrong

For the most part, I can read investment columnist Gordon Pape’s writings with composure. Every once in a while, however, he writes things that I think just aren’t so. His article, Diversifying your portfolio – how much is too much? published on 2023 May 29, is a case in point.


Pape writes in response to two recent questions sent to him about: (1) the number of ETFs necessary for a 7–10-year timeline, and (2) an assessment of a RRIF portfolio holding 160 stocks and 25 mutual funds.


Helpfully, Pape writes, “There’s no simple answer to these questions. It depends on how much diversification you want….” After that, I am less enamoured with his comments.


The Issue

What is the problem with Pape’s response? His answers assume that what his readers are asking for is a portfolio of global stocks. He answers with two possible ETFs. The first is ZGQ, the BMO MSCI All Country World High Quality Index ETF. It holds 458 stocks, which at first might tend to mean it is well diversified. However, he criticizes it for having so little invested in Canada that Canadian stocks fall into the Other category and for having a heavy weighting to US tech stocks. The second ETF he mentions is XAW, which is the iShares Core MSCI All Country World ex Canada Index ETF. He observes that this one has a “better geographic balance… but its track record is unimpressive.” Pape then goes on to say that he “couldn’t find a single fund that would do the job.”


He then goes on to say that a properly diversified portfolio needs to include a fund that tracks the TSX Composite (index), and suggests that for even more diversification, one should add funds that cover emerging markets and small capitalization companies. Finally, he suggests that one or two bond ETFs should also be added to the portfolio.


I appreciate that it is probably not an efficient use of Pape’s time to hunt down the ideal ETF in response to these readers’ questions, but I am puzzled at his criticisms of the funds he mentions. It’s as though he has created a couple of strawman funds to knock down. Why choose global equity funds that exclude Canada or fixed income, and then say that a suitable ETF does not exist?


I will give Pape this: ZGQ may indeed be less diversified than it should be. Holding 458 stocks may seem like more than enough, but when you compare that figure to Vanguard’s US-domiciled Total World Stock ETF (VT), which holds over 9,500 stocks, you might argue that a fund that claims to be global yet holds less than 5% of the world’s equities is inadequately diversified. It is odd, however, that his recommendation for a Do-It-Yourself all-stock portfolio is between 25 and 30 positions. Is there not an inherent contradiction here?


Diversified Options are Available

I think there is indeed a contradiction. Pape’s approach to investing, as seen in many of his articles and portfolios, focusses on active stock-picking strategies, whether that means individual stocks or actively managed funds. While he does occasionally mention broad-based index funds here and there, that is not his bread-and-butter, so to speak.


As mentioned, in this article Pape focusses on global equity funds. This category is fairly wide open, but there are some parameters. To quote from the Canadian Investment Funds Standards Committee’s definition of Global Equity:


Funds in the Global Equity category must invest in securities domiciled anywhere across the globe such that their average market capitalization is greater than the small/mid cap threshold, and invest more than 10% and less than 90% of their equity holdings in Canada or the U.S. Funds that do not meet any of the requirements of other geographic equity categories and have no formal restrictions that limit where they can invest will be assigned to this category.


The answer to Pape’s problem is to search more broadly. An investor can easily find suitable funds in the Global Equity category that meet his concerns except for the fixed income category, and if bonds (fixed income products) are appropriate, can search in categories like Global Equity Balanced, Global Neutral Balanced, or Global Fixed Income Balanced.


Asset-Allocation ETFs are a Simple and Accessible Solution

Let’s examine some of these options. I would argue that when Vanguard introduced its series of asset allocation ETFs in January 2018, it changed the game for DIY investors. Instead of having to choose from the actively managed mutual fund sphere, which too often provides mediocre returns because of high fees, Vanguard provided a diversified collection of ETFs that covered Canadian, US, developed International, and Emerging Markets, as well as Canadian, US, and International fixed income funds. Following Vanguard, BlackRock’s iShares introduced a similar series of asset allocation or “all-in-one” ETFs, as did Bank of Montreal’s ETF division. Other firms have followed, and iShares is notable for providing an ESG-oriented series as well. BMO has one ESG-oriented asset allocation ETF as well.


Below is a table of these ETFs. I’ve also added Mackenzie for its somewhat novel entry, MGAB, which is a globally diversified 100% fixed-income ETF. For most investors, however, this fund should probably be paired with some other investment.



I do not endorse any of these funds, or any funds for that matter, but they provide examples of ETFs that as far as I can tell, provide everything that Gordon Pape wants in an ETF. Let’s look at VGRO, for example, a Vanguard fund with an 80% equity / 20% fixed income allocation.


  • Diversification: 13,650 stocks; 18,423 bonds
  • Allocation to Canada: 24% via the FTSE Canada All Cap Index
  • Allocation to the United States: 34% via the U.S. Total Market Index
  • Allocation to Developed International Markets: 16% via the FTSE Developed All Cap ex North America Index
  • Allocation to Emerging Markets: 6% via the FTSE Emerging Markets All Cap Index ETF
  • Allocation to Canadian Fixed Income: 12% via the Canadian Aggregate Bond Index
  • Allocation to U.S. Fixed Income: 4% via the U.S. Aggregate Bond Index (CAD-hedged)
  • Allocation to Global Fixed Income: 4% via the Global ex-U.S. Aggregate Bond Index (CAD-hedged)


This fund seems to have all of Pape’s bases covered. The other ETFs do much the same job, with slight variations and investors can go up and down the equity/fixed-income balance if they want to increase or decrease their exposure to the expected volatility of their returns in exchange for a greater or lesser expected return on their investments.


You may wonder why Pape thinks that 25 or 30 individual stocks are adequate. There is a view among active fund managers, a correct view in my opinion, that to exceed expected returns from the markets, a fund manager cannot simply tweak the balances of a capitalization-weighted index. The only hope is to select a small group of investments that, based on the analysis of the fund manager’s team, are likely to outperform the index by a significant enough margin that the fund’s performance more than makes up for the extra costs associated with active management.


Theoretically, the DIY investor in individual securities can avoid all those costs by buying the stocks directly rather than holding them through a fund. In practice, however, it is all too common to pick stocks that have no theory behind them, that are overly concentrated in one sector, or that are traded into or out of at exactly the wrong time.


A DIY investor may still want active management, but I would probably argue that one search for a fund company that has a reputation for low fees, a clear investment philosophy, and offers funds with portfolios that are un-index-like in their makeup. And in exchange for the potential for long-term outperformance, be prepared for potentially frequent seasons of underperforming the funds’ benchmark index.


Where to go from here?

Where to go from here? Well, the first thing I would say is to test the opinions of investment writers against the evidence. When I write that, I of course mean Gordon Pape’s opinions, but I invite you to test the opinion I express here, too. I think that the arguments made for broad-based index investing are compelling and backed by solid research. Second, if you are investing on your own without a qualified investment advisor, you could do a lot worse than simply choosing from one of the ETFs in the table above. You may choose a more or less aggressive tilt than is appropriate for you, but at least you are not going to subject yourself to the “idiosyncratic” risk that is unavoidable when selecting just a few individual stocks and bonds.


This is the 199th blog post for Russ Writes, first published on 2023-05-29


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.


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