Investment Policy Statement (IPS) for Sample ETF Portfolio

Note: While there are many different ways to develop an IPS, for this Sample ETF portfolio the IPS has been constructed using the format discussed in our Classroom: Portfolio Design - Step 9. And don't forget about the new Investment Policy Statement template in the IFM Tools section. It can make the creation of your IPS quick and easy!

  • Investment Portfolio's Purpose: The ETF portfolio’s primary objective is to safe-guard our savings and to earn a reasonable investment return. The portfolio's primary purpose is to help us accumulate savings that can be used to augment our income when we retire. A secondary purpose for the accumulated savings might be to help fund our children's education expenses, if needed.
  • Dollar Value of the Portfolio: The ETF portfolio will be used for the savings we accumulate within our Tax-free Savings Account (TFSA), which currently has a value of $25,000.00. We also plan to contribute $5,500 of additional savings, each June, to the ETF portfolio. All distributions received, interest, dividends and capital will be retained by the portfolio and reinvested according to the portfolio's IPS.
  • Scope: This IPS will be used to guide all of the investment decisions for the accumulated savings within our TFSA.  (Member's Note: Although we have selected a TFSA to hold this sample ETF portfolio, the portfolio is also suitable for tax-deferred accounts - RESP, RRSP, RRIF, etc.)
  • Portfolio's Time Horizon: The purpose of the portfolio is to safely accumulate savings that can generate an income to help support our future retirement. We plan to retire in approximately 20 years, in 2033. It is expected that in retirement the portfolio's objective will shift from one of accumulating savings to one of paying a steady income stream.
  • Risk Parameters:The portfolio’s first priority is to minimize the risk of long-term capital losses and then to maximize the earned investment income and capital gains. The investment quality guidelines are as follows:
    • Guaranteed Investment Certificates (GICs):  Only GICs issued by companies that are fully insured by the Canadian Deposit Insurance Corporation (CDIC) or an equivalent provincial insurance program will qualify as investments.
    • Bonds and debentures: Only individual bonds and debentures that maintain a credit rating of BBB or higher will be considered for the portfolio. The credit rating must be from an established credit rating agency, such as Dominion Bond Rating Service (DBRS). As the TFSA shelters investment income from taxation, the portfolio can also buy and hold Compounding bonds. Bond ETFs that use a set maturity schedule can be used within the portfolio. Keeping with our IFM investment approach, the portfolio will only hold bond ETFs that utilize an Equal-Weight  investment structure.
    • Preferred Shares: Individual preferred shares will not be included in the portfolio until the portfolio reaches a much larger size. Initially only preferred share ETFs will be held in the portfolio. We will focus on ETFs with low Portfolio Turnover Ratios (PTR), Low Management Expense Ratios (MER) and minimal Index Tracking Error.
    • Common Shares:  The common shares of individual companies will not be used within the ETF portfolio.
    • Exchange Traded Funds (ETFs):  Eligible ETFs will track independent and established indices.  We will focus on ETFs with low Portfolio Turnover Ratios (PTR), Low Management Expense Ratios (MER) and minimal Index Tracking Error. Market-Capitalization Weighted ETFs are eligible for the portfolio, but whenever possible ETFs using an Equal-Weight structure will be given priority. 
    • Inverse Exchange Traded Funds (ETFs): The portfolio is permitted to invest in ETFs that are structured to perform inversely proportionally to its underlying index as a defensive strategy against potential capital erosion from a declining stock market. This strategy is to be used as a substitute for selling individual ETF positions and thereby disrupting the portfolio's distribution stream.
    • Leverage or Margin: The portfolio is not permitted to borrow against its current investments, either by way of a margin account or bank loan, and the portfolio is not permitted to invest in any investment structures that use a leverage component. 
  • Expected Investment Rate of Return: Given the current investment environment, it is expected the investment portfolio will earn 4.65% per year. We expect the investment portfolio to generate an annual dividend and interest income of approximately 3.75% and the Growth investments to add 2.0% capital appreciation to the overall portfolio. We expect the GICs and bonds to earn approximately 3.50% in interest income, per year. The preferred share ETFs are expected to earn approximately 5.00%, per year. The growth ETFs are expected to earn approximately 3.00% in dividend income and approximately 3.50% in capital appreciation. 
  • Investment Approach: Because we view our investing activities as secondary to our savings activities, our investment approach must support our ability to accumulate savings and it must adhere to the following basic philosophical objectives.
    • Objective #1: Our investment portfolio must provide a consistent and, if possible, an increasing dividend and interest income stream.
    • Objective #2: Our investment portfolio must provide an expanding capital base, either as a result of additional savings contributions, accumulated income or capital gains, required to achieve Objective #1, after inflation and taxation.
    • Objective #3: Our investment portfolio must avoid risks that interfere with your ability to achieve Objective #1.
  • Liquidity Considerations: We do not anticipate needing to withdraw any funds from the portfolio prior to our retirement.
  • Asset Allocation: The portfolio will allocate no less than 65% to Fixed Income investments (GICs, bonds, preferred shares), and no more than 35% to Growth Investments.
    • By Investment Type: GICs and bonds will constitute no less than 50% of the portfolio. Preferred shares can be held to a maximum of 20% of the portfolio, and growth ETFs will not constitute more than 35% of the portfolio.
    • By Account Type: The portfolio of investments will be held within a Tax-Free Savings Account (TFSA).
  • Diversification: The portfolio will diversify its investments according to the following guidelines:
    • Number of Investments Held:
      • The portfolio will hold a minimum of five individual bonds, GICs and preferred shares, either individually, inside ETFs, or a combination of both. 
      • The portfolio will invest in ETFs constructed to match established indices and each ETF must hold 10 or more individual investments. 
    • Sector and Geographical: With the portfolio’s primary focus to safeguard and accumulate savings for retirement, growth investments foreign regions are not permitted in an effort to minimize the portfolio’s market cycle volatility and currency exchange risks.
    • Maturity Schedule: The fixed income investments will be invested such that their maturity dates will span four separate and individual years or more. 
  • Investment Costs: Our goal will be to keep the portfolio's average annual investment costs to a minimum, preferably less than 0.30% of the portfolio's current market value. By utilizing individual low cost ETFs and maintaining a maturity schedule spanning four years or more, maintaining low investment costs should be achievable.
  • Monitor, Measure, Re-balance: Every quarter a portfolio summary will be completed to provide a snap-shot of the portfolio’s asset allocation, Fixed Income maturity ladder, and to list current investment thoughts and concerns. Potential future investment changes are to be outlined quarterly. The quarterly Portfolio Summary and the Annual Performance Summary will enable the portfolio’s success or failure to be gauged when compared with the Projection of Future Portfolio Values. Annually, the portfolio’s value will be compared to the current projected value expressed in the projections to assess the need for change to the asset allocation, IPS and/or the Projection of Future Portfolio Values assumptions. For example, if the portfolio’s current value is close to the value expressed in the projections, then no changes are warranted. If the portfolio’s current value exceeds the portfolio’s projected value, then the portfolio should be rebalanced with the profit securely reinvested in bonds/GICs or preferred shares. If the portfolio substantially lags the portfolio’s projected values, then further review is required. The individual investments, the asset allocation, IPS and the assumptions used in the Projection of Future Portfolio Values should all be reassessed to ensure they are realistic.
  • Benchmarks and Review:  The portfolio uses the Projection of Annual Portfolio Value Comparison to establish its benchmark for comparison. The portfolio is reviewed and re-balanced quarterly and annually, if required.
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