The Dragon Portfolio for Canadian Investors

Written By David Wiitala

by David Wiitala using ChatGPT Deep Research - general information only, not to be used as advice

Introduction: The “Dragon Portfolio” is a diversified all-weather strategy (attributed to Chris Cole of Artemis Capit (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)ly 20% to each of five asset classes – equities, long-duration bonds, gold, commodity trend-following, and long volatility – to thrive across a century of varying mark (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Dragon Portfolio: Everything You Need To Know To Get Started!) (Dragon Portfolio: Everything You Need To Know To Get Started!). Canadian investors can implement a Dragon Portfolio using a mix of Canadian-listed and U.S.-listed ETFs/funds. In this (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)how each asset class can be accessed in Canada, consider currency exposure (CAD-hedged vs. unhedged options), propose two example portfolios (one mostly Canadian-listed, one using more U.S. ETFs), discuss portf (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)nt account types (RRSP, TFSA, taxable, CCPC), and outline best practices for managing (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti). All explanations are in clear, accessible terms for an investor with average experience.

Asset Classes and ETF Options in Canada

Below we examine each Dragon Portfolio component – equities, bonds, gold, commodity trend-following, and long volatility – with examples of ETFs/funds accessible to Canadians. We also discuss currency considerations (CAD-hedged vs. unhedged) for each asset class. (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)ssets – ~24% Allocation) ✅

Role in Portfolio: Equities drive growth during periods of economic expansion (the “serpent” phase in Cole’s allegory). The Dragon Portfolio study allocated 24% to stocks (Dragon Portfolio: Everything You Need To Know To Get Started!).

ETF Options (Canadian-listed): A simple approach is a broad equity index ETF covering global stocks or a mix of Canadian and international equities:

  • Vanguard All-Equity ETF (VEQT) – A one-ticket solution holding ~100% stocks globally (roughly 30% Canada, 70% U.S. and international) ( 3 Great Canadian ETFs for 2024 and Beyond | Morningstar ) ( 3 Great Canadian ETFs for 2024 and Beyond | Morningstar ). VEQT trades on TSX in CAD (unhedged). It provides instant global diversification, including a home bias to Canadian stocks (which can reduce currency risk and align with Canadian market performance).

  • iShares Core S&P/TSX Capped Composite (XIC) – Tracks the Canadian stock market. This can be paired with a foreign equity ETF to reach the 24% allocation (for example, 5% XIC and 19% foreign).

  • iShares All-World ex-Canada (XAW) or Vanguard FTSE Global All-Cap ex Canada (VXC) – These TSX-listed ETFs hold U.S., international, and emerging market stocks (unhedged) to complement a Canadian equity fund.

ETF Options (U.S.-listed): Many Canadians also use U.S. ETFs for broad equit (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti) (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)n RRSPs, as explained later). Popular choices include:

  • Vanguard Total World Stock ETF (VT) – A U.S.-listed ETF covering the entire global equity market (including Canada at market weight). This single fund in USD gives nearly identical equity exposure as a combined global portfolio.

  • Vanguard Total Stock Market (VTI) – U.S.-listed ETF for the entir (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti)arket. This could be paired with international equity ETFs (e.g. VXUS for all-world ex-US) to achieve global exposure.

  • S&P 500 ETFs (VOO/SPY) – U.S. large-cap exposure; could be used if one prefers a U.S.-centric equity allocation (noting that the S&P 500 makes up a large chunk of global market cap).

CAD-Hedged vs. Unhedged (Equities): Equity ETFs come in CAD-hedged or unhedged variants. For example, iShares S&P 500 ETF (XSP) hedges USD exposure back to CAD, whereas Vanguard S&P 500 Index ETF (VFV) or iShares Core S&P U.S. Total Market (XUU) are unhedged. A hedged equity fund aims to neutralize currency fluctuations, so your returns reflect purely the stock performance in CAD. An unhedged fund lets foreign currency movements add to (or subtract from) returns. When might you choose each?

Bottom line (Equities): A Canadian Dragon Portfolio can use a broad equity ETF (or a combination of Canadian and international ETFs) for the ~24% stock allocation. If using Canadian-listed funds, you might accept the default unhedged exposure (common for global equity ETFs) or choose hedged versions for U.S./international stocks if you want to reduce currency risk. If using U.S. ETFs, recognize that those will be unhedged USD investments – which is often fine for long-term growth, but you could partially hedge if desired (we discuss currency strategy later). Keep equity ETF fees low and diversification broad, since most index funds have similar returns apart from currency effects (Dragon Portfolio Explained (2025): Success in All Markets?) (Dragon Portfolio Explained (2025): Success in All Markets?).

Bonds (Long-Term Fixed Income – ~18% Allocation) ✅

Role in Portfolio: Long-term bonds provide deflation protection, income, and a counterbalance to equities. In the Dragon Portfolio, bonds (especially long-duration government bonds and credit) helped offset stock drawdowns and performed well in disinflationary or deflationary recessions (Dragon Portfolio Explained (2025): Success in All Markets?). The classic implementation used ~18% in a mix of long U.S. Treasurys and high-grade corporate bonds (Dragon Portfolio Explained (2025): Success in All Markets?).

ETF Options (Canadian-listed): Canadian investors can use domestic bond ETFs or Canadian-dollar-hedged foreign bond ETFs for this sleeve:

  • iShares Core Canadian Long-Term Bond Index (XLB) – Holds a broad range of Canadian government and corporate bonds with long maturities (typically 20+ years). This ETF provides high duration in CAD. In a deflationary scenario or equity crash, long Canadian bonds tend to rally (yields fall), boosting XLB’s price. Currency risk: None (assets and ETF are CAD).

  • Vanguard Canadian Long-Term Bond ETF (VLB) – Similar long-duration exposure across Canadian issuers.

  • BMO Long-Term US Treasury Bond Index ETF (ZTL/ZTL.F) – ZTL holds 20+ year U.S. Treasurys; it offers two classes: unhedged (ZTL, trading in CAD but exposed to USD movements) and ZTL.F which is CAD-hedged (ZTL.F - BMO Long-Term US Treasury Bond Index ETF (Hedged Units)). A Canadian can buy ZTL.F to get U.S. government bond exposure without currency risk. This is useful if you want the safety of U.S. Treasurys in crises, but your returns in CAD will then come purely from bond price moves and yield, not USD fluctuations.

  • iShares U.S. Treasury 20+yr Bond ETF (XTLB) – Hypothetical example if available; currently Canadian providers don’t offer many pure U.S. Treasury funds, but they often wrap U.S. indexes with hedging. (BMO’s ZTL above is the main option for long Treasurys in CAD.)

  • Corporate Bond ETFs: If you wish to include corporate credit (as Chris Cole’s research did with Baa-rated 20–30yr corporates (Dragon Portfolio Explained (2025): Success in All Markets?)), you could allocate part of the 18% to a long corporate bond fund. For instance, BMO Long Corporate Bond (ZLC) targets long-term corporates (in CAD), or iShares U.S. IG Corporate Bond ETF (XIG) for U.S. investment-grade bonds (available hedged to CAD as XIG.F). Corporates add yield but are slightly more correlated with equities during crises. It may be simpler to stick to government bonds for maximum safety.

ETF Options (U.S.-listed): U.S. ETFs can also be used (especially in an RRSP account, where currency isn’t a big barrier – see account section). The prime example is:

  • iShares 20+ Year Treasury Bond ETF (TLT) – U.S.-listed, holds long-dated U.S. Treasury bonds. TLT closely matches the intended bond exposure in the Dragon Portfolio (Dragon Portfolio Explained (2025): Success in All Markets?). It’s USD-denominated. In a Canadian portfolio, TLT can be very powerful in deflation or market panics – Treasurys rally, and often the USD also rises against CAD, giving an extra boost if unhedged. (In 2008 and 2020 crashes, U.S. Treasurys and USD both jumped, so unhedged Canadian holders of TLT saw large CAD gains). However, day-to-day, holding TLT unhedged means CAD/USD moves will create volatility.

  • Other U.S. bond ETFs: e.g. TLH (10–20yr Treasurys), LQD (investment-grade corporates), etc. But TLT covers the long-duration piece most directly. U.S.-listed bond ETFs have the advantage of very low fees and high liquidity.

CAD-Hedged vs. Unhedged (Bonds): For fixed income, hedging is commonly recommended. Bond returns are usually modest (a few percent yield), so currency swings can dominate their performance. Hedging the USD exposure removes FX volatility, making the bond portion a stable anchor in CAD terms. For example, if you hold U.S. Treasurys:

  • A CAD-hedged Treasury ETF (like ZTL.F) will deliver near-pure bond returns. If U.S. yields drop (bond prices rise), you get that gain in CAD; if USD also strengthened, you won’t feel it (since hedge offsets it), but that’s okay because the bond itself did its job. If USD weakened, you also don’t suffer a loss on currency. Hedging ensures the bond piece reliably zigzags opposite to equities in local currency. This is important if you’re relying on bonds to provide a fixed CAD-value buffer (e.g. to rebalance into stocks after a crash).

  • An Unhedged bond holding (like TLT in a CAD account) will have higher volatility because of forex. In some crises, unhedged can be a bonus (USD spikes, amplifying your bond gains in CAD). But in other periods (e.g. strong growth or rising oil prices that lift CAD), an unhedged U.S. bond might lose value even if the bond itself is flat – simply because CAD strengthened. Generally, if the main goal for bonds is capital preservation and a hedge against domestic deflation, hedging them to CAD is prudent.

Bottom line (Bonds): Canadian bonds or CAD-hedged foreign bonds can fill the ~18% allocation. A domestic long bond fund (XLB/VLB) offers simplicity (no FX at all). Alternatively, U.S. Treasurys via TLT or ZTL can be used – likely hedged for stability, though some investors keep a portion unhedged, betting that USD will rise in the very scenarios where these bonds are needed most. The key is to get long duration, high-quality bonds that will shine when stocks struggle.

Gold (Physical Gold Bullion – ~19% Allocation) ✅

Role in Portfolio: Gold is a real asset that hedges inflation, currency debasement, and tail-risk events. The Dragon Portfolio allocated ~19% to physical gold (Dragon Portfolio: Everything You Need To Know To Get Started!) (Dragon Portfolio: Everything You Need To Know To Get Started!) to protect against inflationary “hawk” cycles and currency devaluation. Gold often has low correlation to stocks/bonds and can appreciate in times of monetary turmoil.

ETF Options (Canadian-listed): Canada offers several bullion products – many of them with both hedged and unhedged versions:

  • iShares Gold Bullion ETF (CGL and CGL.C) – CGL is the CAD-hedged units; CGL (TSX) gives you exposure to gold price hedged to CAD (iShares Gold Bullion ETF | CGL | COMMON HEDGE - BlackRock). Its sister CGL.C (same fund, different class) is the non-hedged version priced in CAD (Top Gold ETFs in Canada | WOWA.ca). Both are backed by physical gold bars. Choosing CGL vs CGL.C determines if you want to remove currency effects (more on that below).

  • Horizons (Global X) Gold ETF (HUG) – A CAD-denominated gold ETF that uses futures; it hedges USD fluctuations so that the price reflects gold in CAD (Horizons COMEX Gold ETF - HUG). HUG essentially delivers the COMEX gold price in CAD.

  • CI Gold Bullion Fund (VALT) – Available in Hedged (VALT) and Unhedged (VALT.B) units (Top Gold ETFs in Canada | WOWA.ca). Like CGL, it holds physical gold and offers share classes with or without currency hedging.

  • Purpose Gold Bullion Fund (KILO) – Similar structure with KILO (perhaps hedged) and KILO.B (non-FX-hedged) (Top Gold ETFs in Canada | WOWA.ca).

  • Sprott Physical Gold Trust (PHYS) – A popular Toronto-listed trust that holds allocated physical gold. PHYS is technically a closed-end fund (with redeemable units for gold). It trades in both CAD (PHYS.TO) and USD (PHYS.U). PHYS does not hedge currency – each unit represents a fraction of an ounce of gold, so the CAD price will reflect USD gold price and USD/CAD. PHYS is known for its secure storage and even potential tax advantages for U.S. investors (PFIC status), but for Canadians it behaves like an ETF with slightly higher tracking error (sometimes a premium/discount to NAV).

  • Royal Canadian Mint ETR (MNT) – An exchange-traded receipt for physical gold stored at the Mint. This is another way to own allocated gold in CAD. Like PHYS, it’s essentially unhedged (gold in vault).

ETF Options (U.S.-listed): U.S. gold ETFs can also be bought by Canadians (though there’s no strong necessity since Canadian ones are plentiful). Examples:

  • SPDR Gold Shares (GLD) – The largest gold ETF (USD).

  • SPDR Gold MiniShares (GLDM) – A low-cost version of GLD with a smaller share size and lower fee.

  • iShares Gold Trust (IAU) – Another large U.S. gold ETF.

  • Aberdeen Physical Gold Shares (SGOL) – Holds allocated bars in Swiss/London vaults, with low costs.

All of the above hold physical gold. They are unhedged (priced in USD). If a Canadian buys GLD or GLDM, the CAD value will fluctuate with both the gold price and USD/CAD.

CAD-Hedged vs. Unhedged (Gold): Gold presents an interesting case for currency hedging. Gold is often seen as an alternate currency itself. Here are the considerations:

  • Unhedged Gold (CAD): If you hold gold without hedging, effectively you own a quantity of gold, and its value in CAD will be Gold(USD) price × USD/CAD. This provides a diversification benefit: in scenarios where the USD is rising against CAD (often during global stress or commodity price declines), unhedged gold in CAD might hold its value even if gold’s USD price is flat or down. Conversely, if CAD strengthens (say due to booming commodity markets or a strong Canadian economy), gold’s CAD price could fall even if gold is steady in USD. Many Canadian gold investors choose unhedged (e.g. CGL.C, VALT.B, PHYS) because it gives exposure to gold as a world currency. During a global crisis, gold might rise and the USD might rise – an unhedged Canadian holder would get both effects. In inflationary scenarios where the USD is falling, gold’s USD price often surges, partly offsetting currency – but you still capture gold’s real gain.

  • CAD-Hedged Gold: A hedged gold fund like CGL or HUG delivers the gold price in CAD as if it were priced in Canadian dollars. For example, if gold goes up 10% in USD terms but USD falls 5% vs CAD, an unhedged holder would see roughly +4.5% (10% – 5%); the hedged holder sees +10% full move (because the USD drop is hedged out). Hedging gold can thus remove one layer of volatility. It might be appropriate if you strictly want gold’s real return as a commodity/inflation hedge, without adding USD exposure. Note that hedged gold will more directly track inverse moves of CAD: if CAD appreciates (often in global growth phases), hedged gold may still rise (or fall) purely on gold’s own supply/demand, whereas unhedged gold would decline due to CAD strength.

Which to choose? If gold is meant as a long-term store of value and crisis hedge, many lean toward unhedged (so you benefit when CAD is weak, which is likely when you need the hedge most). Over very long horizons, CAD/USD might not trend strongly one way, but hedging gold will incur some cost. That said, an investor worried about short-term CAD spikes or who wants gold purely as an inflation hedge (regardless of USD) might use hedged. One compromise is to split – e.g. hold half in CGL (hedged) and half in CGL.C (unhedged), to not have to bet on currency direction.

Bottom line (Gold): Around 19% in gold can be implemented easily via Canadian ETFs or trusts. Canadian-listed gold funds offer both hedged and unhedged series (Top Gold ETFs in Canada | WOWA.ca) – giving flexibility. Unhedged gold provides an effective hedge against USD depreciation and global crises (since gold is a global asset usually inverse to paper currencies), while hedged gold isolates gold’s own price movements. Either way, gold in a portfolio helps protect Canadian investors from inflation and currency debasement (e.g. if CAD were to weaken significantly or if all fiat currencies lose value, gold should gain). Just be mindful of the currency setting of your chosen fund.

Commodity Trend-Following (Managed Futures/Commodities – ~18% Allocation) ✅

Role in Portfolio: This category is designed to profit from trends in commodity markets (and potentially other asset classes) via systematic trading. In the Dragon Portfolio research, ~18% was allocated to “commodity trend-following” strategies (Dragon Portfolio: Everything You Need To Know To Get Started!) (Dragon Portfolio Explained (2025): Success in All Markets?). These are often implemented by Commodity Trading Advisors (CTAs) or managed futures funds that go long or short commodities based on momentum. The goal is to provide crisis alpha – gains in sustained market trends (e.g. a prolonged oil price spike or a deflationary collapse in commodity prices) that are uncorrelated to stocks/bonds.

For individual investors, directly hiring a CTA or running futures strategies is difficult, but there are ETFs and funds that attempt to replicate managed futures returns.

ETF/Fund Options (Canadian-listed): Pure commodity trend ETFs are relatively new in Canada, but a few options and workarounds exist:

  • Horizons/Global X Adaptive Asset Allocation (HRAA) – Until recently, HRAA.TO was an actively managed ETF that included systematic long/short global futures (across equities, bonds, commodities, and currencies) combined with “dynamic tail protection” (Global X ReSolve Adaptive Asset Allocation Corporate Class ETF - Global X Investments Canada Inc.). Essentially, HRAA was an “all-weather” fund using managed futures and volatility strategies – very much in spirit with the Dragon Portfolio’s alt sleeves. It was structured as a Corporate Class ETF to be tax-efficient (more on that in the CCPC section). Update: As of Mar 2025, HRAA was terminated (Global X ReSolve Adaptive Asset Allocation Corporate Class ETF - Global X Investments Canada Inc.) – but its existence shows the kind of multi-strategy trend fund that can fit this allocation. ReSolve Asset Management (the sub-advisor) may offer similar strategies in other formats (mutual funds or future ETFs).

  • Purpose Managed Futures Fund – Purpose Investments had filed for a managed futures ETF; one of their liquid alt funds (if available) could serve here. (At the time of writing, a retail-friendly managed futures ETF in Canada is still a gap – investors often use U.S. products or broad commodity ETFs.)

  • Broad Commodity Index ETFs: A simpler, if less precise, approach is to hold a basket of commodities. While this doesn’t trend follow, it gives exposure to commodity prices which tend to do well in inflationary booms (one of Dragon’s target scenarios). For example:

    • iShares GSCI Commodity Index ETF (COMT - U.S.-listed) or Invesco DB Commodity Index ETF (DBC - U.S.) can be bought for broad commodity exposure (Dragon Portfolio Explained (2025): Success in All Markets?). These funds hold futures across energy, metals, agriculture (with rules to reduce contango costs). A Canadian investor can buy DBC or COMT in a USD account. Canadian-listed equivalents are limited; there isn’t a one-stop TSX commodity ETF currently.

    • One could also combine commodity-specific ETFs (e.g. an energy ETF, a metals ETF), but that gets complicated and loses the systematic element.

  • CTA-Replication ETFs (U.S.-listed): Since Canadian options are few, many Canadians use U.S. ETFs in this category:

    • iMGP DBi Managed Futures Strategy (DBMF) – A U.S. ETF that uses a quantitative model to replicate the average positions of CTA hedge funds. It goes long/short futures in commodities, bonds, currencies, etc., aiming to deliver managed futures returns net of fees. This has become a popular choice for the “managed futures” slice.

    • KFA MLM Index (KMLM) – Another U.S. ETF tracking a diversified managed futures index (the Mt. Lucas index) with fixed allocation across commodities, currencies, bonds, applying trend signals.

    • Simplify Managed Futures (CTA) – An ETF (ticker CTA) that blends several trend-following strategies in one fund (Managed Futures: What to Know About This Strategy for ETFs).

    • These U.S. funds are accessible to Canadians via brokerage (in USD). They provide true trend-following exposure that a static commodity index won’t.

CAD-Hedged vs. Unhedged (Commodity Trend): This category often involves multi-currency futures, so the concept of hedging is nuanced. If you hold a U.S.-listed managed futures ETF like DBMF, its NAV is in USD, and it may hold futures on everything from WTI oil (priced in USD) to German bonds (priced in EUR) to gold (USD) to FX itself. Generally, these funds handle the currency exposures internally as part of their strategy (for example, if the model is replicating a USD-based CTA index, any foreign currency futures would be part of the positions). As a Canadian investor:

  • If you use a Canadian-listed commodity fund, it might hedge the USD in the futures contracts or it might not. For instance, HRAA was CAD-based; it likely hedged or natively traded in CAD margin. The specifics depend on the fund mandate.

  • If you use a U.S.-listed managed futures ETF (unhedged in CAD), you have two layers: the strategy’s own handling of currencies, and the USD/CAD exposure of the fund’s shares. Usually, it’s reasonable to leave this unhedged for diversification, since managed futures strategies themselves might take long or short USD positions as part of their program. Hedging the entire position back to CAD could actually interfere with the strategy (which might at times bet on USD rises or falls).

In summary, unhedged is standard for commodity/managed futures funds, given their global nature. The currency impact on these funds is part of the return stream. If the idea of extra USD exposure concerns you, you might allocate to a CAD-hedged broad commodity index (if one were available) instead of a managed futures fund. But doing so would sacrifice the “trend” component.

Bottom line (Commodity Trend): Aim for ~18% in a diversified commodities trend strategy. In practice, a combination of a broad commodity index ETF and/or a managed futures ETF can fulfill this. For a mostly-Canadian solution, you might use a broad commodity ETF (even though it’s not trend-following, it covers the inflation hedge aspect) or look to Canadian alternative funds that run managed futures. For a more exact approach, incorporate a U.S. managed futures ETF like DBMF or KMLM (accepting the USD exposure). This slice of the portfolio is crucial for inflationary booms or multi-asset trends where both stocks and bonds might falter – it’s your “Dragon’s fire” during such times.

Long Volatility/Tail Risk (Protective Assets – ~21% Allocation) ✅

Role in Portfolio: This is arguably the trickiest part. Long volatility (or “long vol”) strategies profit from big spikes in volatility or severe market drawdowns. In Cole’s Dragon, ~21% was dedicated to long-volatility hedge funds or strategies (Dragon Portfolio: Everything You Need To Know To Get Started!) (Dragon Portfolio Explained (2025): Success in All Markets?). The idea is to hold assets that surge in value during market crashes or periods of chaos, providing insurance and dry powder when everything else is down. Examples include long-dated options, VIX futures strategies, or specialized tail-risk funds.

For retail investors, implementing long-volatility is challenging – many instruments (e.g. VIX futures or index options) either decay over time or are hard to manage. However, a few ETF products exist:

ETF/Fund Options (U.S.-listed): There are no major Canadian-listed “tail risk” ETFs as of now, so we look to U.S. markets for accessible choices:

  • Cambria Tail Risk ETF (TAIL) – An actively managed U.S. ETF specifically designed for tail-risk hedging. TAIL holds most assets in U.S. Treasurys (to earn some yield) and continuously buys put options on the S&P 500 as insurance (TAIL Cambria Tail Risk ETF) ([PDF] CAMBRIA TAIL RISK ETF FAQ). The put options are laddered with various expiries (1 to 6 quarters out) ([PDF] CAMBRIA TAIL RISK ETF FAQ). The fund expects to lose a small amount in calm markets (the cost of puts, partially offset by bond interest) but to spike in value during a major equity selloff as those puts gain value. This ETF makes the “long vol” allocation simple: it’s essentially offloading the complexity to Cambria’s managers. Performance: As noted by researchers, long-vol funds like TAIL can lag in bull markets (a form of insurance premium) (Dragon Portfolio Explained (2025): Success in All Markets?), but they shine in crashes.

  • Global X S&P 500 Tail Risk ETF (XTR) – Another U.S. ETF employing a protective put strategy on the S&P 500 (XTR - S&P 500 Tail Risk ETF - Global X ETFs). It’s similar in concept to TAIL (though different provider).

  • Simplify Tail Risk ETF (CYA) – A newer ETF by Simplify that seeks to provide income and capital appreciation while protecting against significant downside ([PDF] CYA | Simplify Tail Risk Strategy ETF). It often uses options structures (like put spreads) combined with some income generation.

  • Quadratic Interest Rate Volatility & Inflation Hedge (IVOL) – Not a pure equity tail hedge, but it’s an ETF that holds TIPS (inflation-protected bonds) and options that benefit from interest rate volatility or steepening yield curve (Dragon Portfolio Explained (2025): Success in All Markets?). It’s more of an interest rate hedge than an equity crash hedge, but it does fall under “long volatility” in a broad sense. (IVOL, for instance, would do well if bond market volatility surges or in stagflation).

  • DIY Option Strategies: Sophisticated investors might mimic long-vol by buying VIX futures or call options, long-dated index put options (LEAPS), or tail-risk notes. However, maintaining these (rolling expiries, determining strikes) is complex and beyond “set-and-forget.”

What about Canadian options? There isn’t a direct Canadian ETF focusing on S&P 500 puts or VIX. Some Canadian mutual funds or hedge funds (for accredited investors) do tail hedging, but those are not broadly accessible. One alternative some Canadians use is to allocate a small portion to VIX futures ETFs (like VIXY or VIXM in the U.S. which track VIX short-term or mid-term futures). However, note such ETFs suffer from decay in quiet times (the VIX futures curve contango). They are more short-term trading tools than long-term hedges.

Given the lack of Canadian-listed instruments, most Canadian Dragon implementations will rely on a U.S. ETF like TAIL for this slice, or accept an imperfect proxy (like extra long bonds or cash, knowing those tend to do okay in crashes if not as dramatic).

CAD-Hedged vs. Unhedged (Long Vol): Since these funds mostly hold U.S. assets (Treasurys and S&P puts are in USD), a Canadian holding TAIL or XTR will face USD exposure. Is it wise to hedge it? Consider: in a market crash, the U.S. dollar tends to strengthen against CAD (flight to safety). If you hold TAIL unhedged, in a crash your S&P puts payoff (because S&P falls) and your USD likely appreciates, amplifying your gains in CAD terms. That’s ideal – the long vol slice pays off even more when you need it. If you had hedged the USD, you would get the put gains but not the currency boost. On the other hand, in benign periods if USD drifts down, an unhedged tail fund will have slight currency drags (but those are minor compared to the overall insurance cost you’re anyway incurring). Generally, for tail hedges, leaving them unhedged is often preferred for maximum crisis performance. The currency is an extra kicker during the exact scenarios when the hedge is used.

If one were extremely concerned about USD fluctuations in non-crisis times, they might hedge some of the exposure – but doing so partially defeats the purpose of having a diversifying asset. Also, most tail funds don’t offer CAD-hedged share classes, so you would have to manually hedge by shorting USD or using FX forwards, which is complex.

Bottom line (Long Vol): Allocate ~20% to a tail risk strategy if possible. For Canadian investors, a reasonable choice is the Cambria TAIL ETF (Dragon Portfolio Explained (2025): Success in All Markets?) or similar U.S. ETFs that are specifically managed for downside protection. Recognize that these are insurance: they will likely have small negative carry in normal times (e.g., TAIL might lose a few percent per year when stocks rally, due to option costs), but they can dramatically appreciate in a market crash, providing liquidity to rebalance into cheap assets. If a dedicated long-vol ETF is not accessible or desired, one might use a combination of long bonds, cash, and perhaps occasional put purchases as a DIY approach – but ideally, keep some systematic tail hedge in the portfolio. Given the choice, leave this exposure unhedged to CAD to maximize its effectiveness in a crisis (when CAD is usually not the safe-haven currency).

With the asset classes and fund choices outlined, let’s put it all together into example portfolios.

Two Example Dragon Portfolio Implementations (for Canadian Investors)

Below are two sample portfolios that a Canadian investor could use to replicate the Dragon Portfolio’s mix. Both assume the target allocations roughly follow Cole’s recommended 20% segments (we’ll use 20% each for simplicity, recognizing the original was ~24/18/19/18/21 – one can tweak slightly). Adjust exact percentages as needed, but maintain the spirit (each sleeve roughly equal for balance).

A. Portfolio Using Primarily Canadian-Listed ETFs (CAD-Focused)

Objective: Use Canadian-listed ETFs as much as possible, utilizing CAD-hedged options where available to reduce currency exposure. This portfolio can be implemented entirely in Canadian dollars. It’s suitable for investors who prefer to avoid U.S. exchange trading and currency conversion, or who want to minimize USD exposure.

Components (with example tickers):

  • 20% Equities: Equities with CAD bias, hedged global exposure. For example: Vanguard All-Equity ETF (VEQT) – 20%. This single ETF holds a globally diversified stock portfolio (~30% Canada, 70% foreign) ( 3 Great Canadian ETFs for 2024 and Beyond | Morningstar ). It is unhedged by default, but the sizable Canadian component and mix of currencies provides some balance. (Optionally, an investor could substitute 5% iShares S&P/TSX 60 (XIU) for Canada + 15% iShares S&P 500 CAD-hedged (XSP) for U.S., to explicitly hedge the U.S. portion to CAD. Another alternative: 10% in XIC (Canada) + 10% in XWD or XEF hedged. The key idea is to keep equity around 20% total.)

  • 20% Bonds: Long-term bonds in CAD. For example: iShares Canadian Long Term Bond (XLB) – 20%. This gives exposure to long maturity Canadian government and corporate bonds (average term ~20 years) in Canadian dollars. No currency risk, and high duration for maximum inverse correlation to equities in deflationary scenarios. (Alternate: 10% XLB + 10% BMO Long US Treasury Hedged (ZTL.F) to mix U.S. and Canadian bonds, but hedging the U.S. portion. Or 20% in a broad Canadian bond fund like ZAG for more conservative exposure, though that has lower duration.)

  • 20% Gold: Physical gold, CAD-hedged. For example: iShares Gold Bullion ETF (CGL) – 20%. CGL is hedged to CAD (iShares Gold Bullion ETF | CGL | COMMON HEDGE - BlackRock), so this position tracks gold’s price moves without USD/CAD noise. It will rise if gold’s USD price rises (as in inflation or crisis periods). We hedge here to align with the idea of focusing on the pure commodity inflation hedge. (Alternate: use the unhedged version CGL.C if you prefer to also gain from USD in a crisis. Or split 10% CGL and 10% CGL.C for half-hedged. Another option is Sprott PHYS 20%, unhedged. We choose the hedged CGL in this CAD-centric portfolio to stick with the theme of minimizing currency risk.)

  • 20% Commodity Trend/Managed Futures: Canadian alternative or commodity fund. For example: BMO Global Commodities ETF ( hypothetical ) – 20%. (In practice, since a perfect Canadian managed futures ETF is unavailable, an investor could use Invesco DB Commodity Index (PDBC) – 20% – which is U.S.-listed but has no K-1 and trades in CAD on the NEO exchange, or use a Canadian mutual fund alternative). If comfortable using one non-Canadian fund here: DBMF (Managed Futures ETF) – 20% (USD). However, to keep this “primarily Canadian,” one might also consider Purpose Multi-Strategy Market Neutral (PMM) or Picton Mahoney Fortified Futures Fund (if available). These are more specialized – lacking a straightforward ETF, one approach is to approximate with broad commodities. For simplicity, one could allocate, say, 10% to iShares GSCI Commodity ETF (COMT) and 10% to BMO Global Infrastructure ETF (ZGI) as proxies for real asset trends. (Admittedly, this category is the hardest to fill with Canadian-only tools. Some might skip strict trend-following and just use commodity equities or commodity indexes. The more dedicated the investor, the more they might lean on a U.S. managed futures ETF here, even in this portfolio. We’ll address that further in Portfolio B.)

  • 20% Long Volatility/Tail Hedge: Defensive/tail assets. There is no Canadian ETF here, so we have two options: (a) Use a U.S. tail-risk ETF, or (b) use a proxy. (a) Ideally, Cambria TAIL ETF – 20%. This requires buying the U.S.-listed fund, but it’s a small concession for crucial protection. If strictly staying Canadian, (b) one might hold 20% in cash or ultra-short bonds + leap put options. For instance, keep 15% in a high-interest savings ETF or short-term Treasury ETF (which won’t drop much if markets crash) and dedicate 5% to buying protective index put options each year. This DIY approach can emulate a tail hedge but requires active management to roll the options. Another purely Canadian proxy: Horizons Adaptive Asset Allocation (HRAA) when it existed, had tail protection built-in (Global X ReSolve Adaptive Asset Allocation Corporate Class ETF - Global X Investments Canada Inc.) – that could cover some of this exposure. Since HRAA is gone, one might use Purpose Global Risk Mitigation Fund (if it exists as a mutual fund for accredited investors). For our portfolio, we will assume the investor is willing to include TAIL ETF (USD) for a robust solution.

Summary of Portfolio A: This portfolio might look like – 20% VEQT, 20% XLB, 20% CGL, 15% PDBC + 5% COMT (for commodities), 20% TAIL. Nearly all components are Canadian-listed except the commodity slice where we allowed one U.S. fund. The overall currency exposure is modest: equities have some built-in CAD, bonds are CAD, gold is hedged, commodity slice partially unhedged, tail mostly USD but intended for crises. This mix should behave like a Dragon Portfolio in CAD terms: performing reasonably in inflation (gold, commodities up), in deflation/recession (bonds, tail hedge up), and providing steady growth (equities) in normal times.

B. Portfolio Using U.S.-Listed ETFs (Broader Mix, Accepting USD Exposure)

Objective: Leverage the wider selection and often lower fees of U.S. ETFs for each component, accepting currency risk where appropriate. This portfolio is more USD-heavy and may be best suited for an RRSP or for an investor comfortable managing CAD/USD holdings. It can improve fidelity to the Dragon concept by using specialized U.S. funds (especially for the alternatives). Currency exposure will be managed at the overall portfolio level (discussed later), rather than hedging each piece.

Components (with example tickers):

  • 20% Equities: Global equities via U.S. ETF. For example: Vanguard Total World Stock ETF (VT) – 20%. VT (USD) holds thousands of stocks across U.S., Canada, Europe, Asia, EM – essentially the entire global market in market-cap weights. This single USD ETF gives complete equity exposure. Alternatively, one could do 15% Vanguard Total Stock (VTI) + 5% iShares MSCI EAFE (IEFA) to tilt a bit more U.S., or include a slice of TSX 60 (XIU) in CAD if wanting extra Canadian exposure. But for simplicity, VT covers all equity. Currency: unhedged (VT is in USD and holds global stocks; the investor will experience USD vs CAD moves plus the underlying foreign currency effects within VT’s NAV – effectively the same as holding unhedged global equities).

  • 20% Bonds: Long-duration bonds (U.S. Treasurys) via U.S. ETF. iShares 20+ Year Treasury (TLT) – 20%. This provides maximum duration with AAA safety. TLT is a pure play on U.S. interest rates. It will typically rally strongly in global recessions or equity crashes (Dragon Portfolio Explained (2025): Success in All Markets?). In 100-year backtests, adding long Treasurys improved portfolios like Dragon by hedging deflation (Dragon Portfolio Explained (2025): Success in All Markets?). Currency: unhedged USD. (In an RRSP, holding TLT is common since interest has no withholding tax and USD exposure is fine. The USD exposure can help in crises as noted. If an investor did want to hedge this, they might choose BMO’s ZTL.F in Portfolio A; here we accept the USD for potential benefit).

  • 20% Gold: Physical gold via U.S. ETF. SPDR Gold MiniShares (GLDM) – 20%. GLDM is a low-cost gold trust (0.10% fee) that holds physical gold (Dragon Portfolio Explained (2025): Success in All Markets?). It’s basically identical to GLD but cheaper. This covers the gold allocation with high liquidity. Currency: unhedged (gold is priced in USD; you hold GLDM in USD, so CAD returns = gold’s USD performance + USD/CAD). As discussed, that’s fine as gold acts as its own currency. (If one preferred, they could stick to PHYS in CAD or move GLDM to a CAD-hedged gold ETF, but in this portfolio we assume comfort with USD exposure.)

  • 20% Commodity Trend: Managed Futures via U.S. ETF. DBMF – iMGP DBi Managed Futures ETF – 20%. This gives a robust commodity trend-following exposure by dynamically replicating CTA positions (Dragon Portfolio Explained (2025): Success in All Markets?). DBMF’s strategy has shown it can capture up and down trends in commodities, bonds, and currencies (for example, it had strong performance in 2022’s inflationary trend when stocks and bonds fell). Alternatively, KMLM could be used for a rules-based approach, or even CTA (Simplify) for a blend of strategies. Any of these will provide the “crisis alpha” and diversification intended for this 20% sleeve. Currency: unhedged (fund is USD, but note the fund’s returns come from a mix of underlying futures profits/losses – many of which aren’t directly currency-dependent; e.g. if it gains from oil rising, that’s a real return in USD that a Canadian can benefit from by holding it in USD). We accept the USD-based return stream.

    (If the investor wanted a simpler approach: an alternative is 20% Invesco Commodity Index (PDBC) to hold a broad basket of commodities as a proxy. But the managed futures should add more value by also shorting during commodity busts. Given this is a “broader mix” portfolio, we go with the more specialized choice DBMF.)

  • 20% Long Volatility: Tail-risk via U.S. ETF. Cambria Tail Risk (TAIL) – 20%. This gives straightforward tail hedging (treasuries + S&P500 put options) ([PDF] CAMBRIA TAIL RISK ETF FAQ) (Cambria Tail Risk ETF Overview - Money). If a 20% allocation to TAIL seems high (TAIL typically targets a notional exposure to puts far less than 20% of portfolio, since much is in bonds), one could argue to use 10% TAIL and 10% in something else like Simplify Volatility Premium (SVOL) which sells vol to earn income. However, selling vol is the opposite of long vol – not in Dragon’s mandate. So, we’d rather keep the full 20% in a defensive posture. Another option is splitting among tail funds: e.g. 10% TAIL, 5% in a mid-term VIX future ETF (VIXM), 5% in IVOL (rate volatility hedge). But for simplicity, TAIL alone is fine. It will lose slightly in most years, but in a 2008 or 2020 it can jump significantly (Cambria estimates a single-digit allocation to TAIL can hedge a much larger equity drawdown (TAIL Cambria Tail Risk ETF) ([PDF] CAMBRIA TAIL RISK ETF FAQ)). Currency: unhedged USD – again, likely advantageous in a crisis.

Summary of Portfolio B: In practice, this portfolio could be executed by holding USD-denominated ETFs for all five components: VT (equity), TLT (bond), GLDM (gold), DBMF (managed futures), TAIL (tail risk). Rebalancing can be done within the USD account. The entire portfolio will have exposure to USD/CAD (since all components are USD-based). The investor accepts this, knowing that in many adverse scenarios, USD tends to strengthen (providing a buffer for a Canadian). Still, they should monitor the currency impact. The benefit of this approach is precision and often lower cost: we’re using best-in-class ETFs for each slice (e.g. GLDM 0.10% fee vs a Canadian gold ETF at ~0.5%; DBMF active strategy that’s hard to find in Canada; TAIL a unique offering, etc.).

We will now discuss how to handle these portfolios in different account types and how to manage taxes and currency.

Account Type Considerations (RRSP, TFSA, Taxable, CCPC)

Canadian investors need to consider account location for each asset, as tax treatment and even availability can vary. We’ll address how to structure the Dragon Portfolio in: (1) Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), and (2) Taxable non-registered accounts, and (3) Corporate investment accounts (Canadian-Controlled Private Corporations – CCPCs).

RRSP (and RRIF/LIRA) vs TFSA – Registered Accounts

Tax Basics: Both RRSPs and TFSAs are registered accounts offering tax advantages:

  • RRSP: Contributions are tax-deductible, investments grow tax-free, and withdrawals are taxed as income. Crucially, RRSPs (and similar retirement accounts like RRIFs, LIRAs) have a special status in the Canada-U.S. tax treaty. They are recognized as pension accounts, so U.S. withholding tax on U.S. investments does not apply (with some caveats).

  • TFSA: Contributions are not deductible, but growth and withdrawals are completely tax-free in Canada. However, the U.S. does not recognize TFSA as a pension or tax-sheltered account (it’s seen as a regular account by IRS). This means U.S. dividends face withholding tax in a TFSA. Also, TFSAs don’t get the treaty benefits that RRSPs do.

Implications for Dragon Portfolio assets:

  • U.S. Withholding Tax:

  • Recommended Asset Placement:

    • RRSP: Best place for U.S.-listed ETFs and income-generating assets. All components of the Dragon can theoretically go in RRSP without Canadian tax until withdrawal. You’d want to leverage the treaty by, for instance, holding U.S. equity ETFs in RRSP rather than the Canadian-wrapped versions (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). Example: Holding VTI in RRSP instead of holding XUU (Canadian ETF holding U.S. stocks) can save that 15% drag (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). For gold and commodities, RRSP vs TFSA has no difference in foreign tax (gold has none, and futures ETFs largely have none beyond maybe U.S. Treasury interest in DBMF which is exempt anyway). Long volatility funds like TAIL hold Treasurys (no withhold) and options (no withhold). So RRSP is fine. One thing to note: RRSP has no capital gains tax on withdrawal, just ordinary income tax – but since all investments are tax-sheltered, it doesn’t affect how you trade inside.

    • TFSA: Ideal for assets with growth potential but low recurring taxable distributions (since you can’t recover foreign tax nor deduct losses, you want assets that maximize capital gains). For Dragon Portfolio, TFSA could hold things like gold (no dividends), perhaps the managed futures (DBMF does pay small distributions if any, mainly capital gains internally), and maybe Canadian equities (Canadian dividends in TFSA have no Canadian tax, and no foreign tax since it’s Canadian companies). But U.S. dividend payers in TFSA lose 15% – it’s not the end of the world, but it is inefficiency. Some workarounds: certain Canadian ETFs use total return swaps to mimic U.S. equity exposure without paying dividends (e.g. Horizons S&P 500 ETF (HXS)). HXS accumulates the total return of the S&P 500 without distributing, and since it doesn’t directly receive dividends (it gets swap payment reflecting them), it effectively sidesteps U.S. withholding. In a TFSA, HXS can be very tax-efficient for U.S. equity exposure (no 15% drag, no Canadian tax either) (Withholding Taxes on VFV in TFSA? : r/PersonalFinanceCanada). The downside is a slightly higher fee and some counterparty risk. Similarly, Horizons had HGB for gold, etc., though HXS is a standout for U.S. stocks in TFSA.

    • Both RRSP and TFSA shelter you from Canadian tax on interest, dividends, and capital gains. That means placing the bond portion in either is wise (shielding the interest that would be fully taxable outside). Long bonds (XLB or TLT) are perfect for RRSP or TFSA – they spit out interest (fully sheltered) and you can rebalance without tax.

    • The long vol (TAIL) portion is also ideal in registered accounts – TAIL’s periodic gains or losses (from option trades) won’t be taxed yearly, and any big payoff in a crash can be redeployed tax-free. If TAIL were in taxable, its bond interest is taxed and any gains from options might come as taxable distributions or realized gains.

    • Avoiding forbidden assets: RRSPs and TFSAs generally can hold all these ETFs, but be cautious with very niche U.S. instruments (like certain ETNs or partnerships). For example, if you considered a commodity limited partnership fund, it could generate UBTI (unrelated business taxable income) which can jeopardize the tax-free status if over $1000. The ETFs listed (VT, TLT, GLDM, DBMF, TAIL) are conventional and fine.

    • Currency in RRSP/TFSA: Most brokerages allow USD holdings in RRSP now, meaning you can buy U.S. ETFs in RRSP without forced conversion each trade (avoiding repeated FX fees). If not, one can use Norbert’s Gambit to convert CAD to USD cheaply (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). TFSA often also has USD side. Currency fluctuation doesn’t trigger tax in registered accounts, so you’re free to hold USD assets and convert whenever with no tax implications – just consider the conversion cost.

Summary: For maximum tax efficiency: Put U.S.-listed portions of the Dragon (like the equity and bond ETFs in Portfolio B) inside an RRSP to avoid U.S. withholding (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). TFSA can hold the components that either don’t incur foreign dividends (gold, maybe managed futures, Canadian stocks). If you need to put U.S. dividend payers in TFSA, know you lose 15%. If you run out of RRSP room, it might be better to use a Canadian ETF-of-ETFs for U.S. stocks in TFSA (which still suffers withholding at fund level but sometimes can be slightly less – e.g. XSP still loses 15% inside it ([PDF] Tax implications of investing in the United States)). Always utilize the RRSP for U.S. dividend-paying ETFs first, since that tax saving is material.

Non-Registered Personal Accounts (Taxable Accounts)

If you are investing in a regular taxable account (individual/joint), the Dragon Portfolio can still be implemented, but tax-efficiency becomes a priority. Key points for each asset class:

  • Equities: Canadian investors pay tax on dividends and capital gains. Canadian-listed equities (Canadian stocks) pay eligible dividends which have a tax credit (lower tax rate) in taxable accounts. Foreign equity dividends (from U.S. or international stocks or ETFs) are taxed as foreign income at your full marginal rate (no dividend credit), but you typically can claim a foreign tax credit for any withholding paid (up to the Canadian tax due on that income) (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). For example, U.S. stocks in a taxable account will be withheld 15% by the IRS, but you’ll report 100% of the dividend as income and claim the 15% as foreign tax credit. Net effect: you pay roughly the same as if it was Canadian interest income, just that part went to IRS and part to CRA. Capital gains are taxed at half your marginal rate (50% inclusion). So growth assets that realize gains (instead of paying big dividends) are tax-efficient.

    Implication: In taxable accounts, prefer equity funds that don’t throw off large distributions. Broad index ETFs are fairly tax-efficient (they pay dividends, but not much in capital gains distributions). For the Dragon equity slice: one could use Canadian-listed index ETFs so that any foreign withholding is handled inside (you’d still get foreign income reported, though, and possibly a credit). Alternatively, you can use Horizons swap-based ETFs (like HXS for S&P 500, HXT for TSX) – these pay no distributions at all, converting everything into deferred capital gains. In a taxable account, HXS/HXT can be extremely efficient (no annual taxable income; you only realize a capital gain when you sell, taxed at half-rate). The downside is slightly higher MER and tracking risk. But many taxable investors use swap ETFs to minimize annual taxes.

    In summary, for equities in taxable: Canadian dividends are okay (tax-preferred), foreign dividends are less ideal (but manageable with credits), and the ideal is more growth/less yield. Rebalancing is also an issue – selling assets to rebalance triggers gains. One might minimize trades or use new contributions to rebalance if possible.

  • Bonds: Interest from bonds or bond ETFs is fully taxable at your marginal rate. No special credit. In a high bracket, ~50% tax on interest is common. Thus, holding the bond sleeve in taxable is usually not recommended. If you must, consider using tax-advantaged bond funds. For example, Horizons HBAL/HBB ETFs use swaps to turn bond interest into capital gains (HBB is a total return bond index ETF that accrues value without distributions). That dramatically lowers tax on fixed income if held in taxable (since you only pay capital gains tax on sale). Another approach is holding strip bonds or zero-coupon bonds that accumulate (then you only realize a capital gain if bought at discount? Actually, strips have imputed interest tax annually in Canada, so not great). Given these complexities, most would allocate bonds to RRSP or TFSA and not keep them in taxable. If the Dragon must be in taxable, you could reduce the nominal bond allocation and perhaps replace with GICs (for safety) or high-dividend stocks (though that alters the strategy) – but ideally, use a swap ETF like HBB for the bond portion to at least convert interest to deferred gain.

  • Gold: Physical gold ETFs typically do not pay any income (no dividends on gold bars!). So they are quite tax-efficient in that you only incur a taxable event when you sell (capital gain or loss). In a taxable account, holding something like PHYS or GLDM means you can defer gains indefinitely. When you do sell, any gain in CAD is a capital gain (50% taxable). One caveat: in Canada, gold bullion is treated as a commodity – but as long as you are holding for investment, gains are capital gains. If one were actively trading gold or using it like currency, CRA could at extreme treat it as income, but that’s rare for ETF investors. So gold is fine in taxable. Gold miners, on the other hand, would pay dividends and such, but we’re focusing on bullion. So the 19% gold can sit in taxable with minimal annual drag.

  • Commodity Trend/Managed Futures: These funds can have more complex tax treatment. A managed futures ETF (like DBMF) in a taxable Canadian’s hands will likely distribute some income at year-end (maybe 60/40 blended capital gain if structured as a partnership in the U.S.). However, since you are a Canadian holding a U.S. ETF, you’ll get a T5 slip showing foreign income, short-term capital gain, etc. It can be messy. If available, a Canadian mutual fund that does managed futures might be structured to allocate gains as capital gains. Alternatively, a commodity index ETF (like PDBC) is structured to avoid K-1 by treating income as non-qualified dividend (in the U.S.). To a Canadian, that would appear as foreign income (fully taxable). Not ideal.

    One possible route: Use a Canadian mutual fund corporation or an alternative fund that rolls up returns. Some Canadian “liquid alternative” funds (offered by firms like Picton Mahoney, Ninepoint, etc.) attempt to minimize taxable distributions by using derivative strategies. For example, if a fund trades futures, often gains on futures might be treated as 100% income in a trust, but if in a corporate class, they might offset with losses or only realize when needed. It’s quite technical. The simpler message: Try to keep the commodity/managed futures sleeve in a registered account. If in taxable, be prepared for possibly higher tax on any distributed gains (could be interest-like or foreign income). On the bright side, these funds often aim for capital appreciation with minimal distributions. Check the T3 slip of any Canadian alt fund at year-end to see if it paid out income. Some might have none (meaning NAV grew and no taxable event until you sell – ideal).

  • Long Volatility (TAIL etc.): TAIL ETF in a taxable account will pay monthly distributions from its Treasury holdings (e.g., it might yield ~1-2% from bond interest). That interest is fully taxable. Also, when TAIL profits on puts, it could distribute short-term gains. However, TAIL’s mandate might instead keep rolling options and reflect gains in NAV (which you realize when selling shares). If TAIL does distribute a large gain after a crash, that would be taxed in that year (but you also likely have offsets from other losses in your portfolio then). Generally, tail hedges are best in registered to avoid these issues, but if in taxable: one strategy could be to not hold a continuous tail ETF but rather buy protective puts directly (then any payout you get from exercising or selling the put at profit is a capital gain to you, and if it expires worthless it’s a capital loss which can offset other gains). Direct option losses can offset gains on other investments (useful in taxable). But managing that is advanced.

Use of CCPC vs Personal: If you have both personal taxable and a CCPC, note that personal capital gains are taxed at ~half the rate of interest, whereas in a CCPC the mechanism is different (discussed next). Sometimes it’s better to hold passive investments personally if you can utilize the lower dividend tax or capital gains inclusion rates, rather than inside a corp that has high initial tax then refunds.

Foreign Exchange in Taxable: One more note – whenever you trade U.S. securities in a taxable account, any currency gain or loss when you convert money or when the security fluctuates in USD is part of your capital gain/loss. CRA considers the purchase and sale in CAD terms. For example, if you buy TLT at $100 USD when USD/CAD = 1.25 (cost $125 CAD) and sell TLT later at $100 USD when USD/CAD = 1.35 (you get $135 CAD), you have a $10 CAD currency gain even though in USD you “broke even”. That $10 is a capital gain. This happens in the background – your broker will report the CAD proceeds and CAD ACB. So currency moves can create taxable gains/losses even if the asset’s local price didn’t change. Over time, these might net out, but it’s something to be mindful of (especially if CAD has large swings while you hold USD assets). You cannot elect currency as the functional currency for personal taxes – you must compute in CAD. So good record-keeping of ACB in CAD is important.

Summary: Taxable accounts demand smart choices: minimize highly-taxed income (interest, foreign dividends) and defer gains. For a Dragon portfolio, try to keep bonds and long vol (which have interest) out of taxable. Gold is tax-friendly (no annual tax). Equities can be managed via swap ETFs or at least efficient index funds. Managed futures/commodity funds are tricky – if possible, hold them in the portion of the portfolio that’s registered. If not, look for tax-efficient structures (maybe corporate class funds). And remember to claim foreign tax credits for any withholding on foreign income (Part I: Foreign Withholding Taxes for Equity ETFs | PWL Capital: Bender Bender & Bortolotti). For large portfolios, the ideal might be to implement some of Dragon in an RRSP/TFSA and the rest in taxable, prioritizing what goes where (asset location optimization).

CCPC (Canadian-Controlled Private Corporation) – Corporate Investment Accounts

Many business owners hold investments through their corporation. A CCPC faces a different tax regime for passive investment income. Key points:

  • High Tax on Passive Income: Income from investments inside a CCPC (interest, rental, foreign dividends, etc.) is taxed at a high passive rate ~50% across provinces (Passive income taxation for Canadian-controlled private corporations). This is essentially the integration mechanism: the corporation pays ~50% upfront. However, part of that is added to a Refundable Dividend Tax on Hand (RDTOH) account. When the corporation pays out dividends to you personally, it can recover some of that tax. Effectively, the system tries to ensure combined corporate + personal tax on passive income ends up similar to if you earned it personally. But initially, it’s a steep tax within the corp (Passive income taxation for Canadian-controlled private corporations). For example, $1 of interest earned might incur ~$0.50 tax in corp; if the corp later pays you a dividend, it might get ~$0.30 refunded, and you pay personal tax on that dividend.

  • Capital Gains Advantage: Only 50% of a capital gain is taxable in a CCPC (same concept as personal). The taxable half is taxed at ~50%, and the other half goes into the Capital Dividend Account (CDA). The CDA can be paid out to shareholders as a tax-free capital dividend. So if your corp realizes a $100 capital gain, $50 is taxable ($25 tax roughly), and $50 can eventually be distributed tax-free. Also, a portion of that $25 tax goes into RDTOH (because capital gains are part of aggregate investment income). So capital gains are relatively efficient in a corp – roughly only 25% of the gain stays taxed if the CDA is paid out. This means focusing on capital gains-generating investments is smart inside a CCPC.

  • Dividends in Corp:

    • Canadian eligible dividends (from public companies) received by the CCPC are taxed at ~38% upfront, but this amount goes to the eligible RDTOH pool. When the corp pays out an eligible dividend to you, it can refund $0.38 on the dollar from that pool. In effect, Canadian dividends in a CCPC get taxed in your hands similarly to if you held personally with the dividend tax credit, with the corp acting as a flow-through (there’s some small leakage if the timing is far apart, but essentially it’s integrated). So holding Canadian dividend-paying equities in a CCPC is not terrible – the corp will pay tax then refund it when passing it out. If you don’t plan to pay it out for a long time, the corp holds a pre-paid tax asset.

    • Foreign dividends (and interest) are taxed ~50% and go to the non-eligible RDTOH. When any dividends (eligible or not) are paid to you, the corp can refund from this non-eligible pool (typically $1 of refund for every $2.61 of dividends paid out for non-eligible, which corresponds to that ~38% of pre-tax concept). So eventually you recover some, but you as shareholder will also pay personal tax on that dividend (though at a lower rate since you get dividend credit only on the part that was Canadian, foreign doesn’t get a credit – but foreign source in corp usually results in a non-eligible dividend to you which is higher personal tax than eligible). Confusing, yes – but bottom line: foreign income in corp gets hit hard (50% upfront, and when paid out you get some back but still likely ended up more tax than if you held in RRSP for sure, or even personally with foreign tax credit).

  • Small Business Deduction (SBD) Grind: If your corporation earns more than $50k in passive investment income in a year, it starts to lose its small business tax rate on active business income in the next year (CCPC tax planning for passive income). Specifically, for each $1 of passive income above $50k, the $500k small-business income limit is reduced by $5 (CCPC tax planning for passive income). At $150k passive, the SBD is eliminated (you’d pay the general rate on active income) (CCPC tax planning for passive income). This is a major consideration if your corp still has active business income benefiting from the small biz rate. It essentially discourages corporations from accumulating large passive portfolios that generate over $50k income (which at a 5% yield means ~$1M portfolio could hit that threshold). If your Dragon Portfolio in the corp produces more than $50k of interest/dividends, it could cost you on the active income side. Capital gains don’t count until realized (then they count double their taxable amount, so a $100k realized gain = $50k passive income, hitting the threshold). This encourages deferring gains.

Structuring Dragon in a CCPC:

Given the above, key strategies: emphasize capital gains and defer income recognition.

  • Equities: Favor investments that yield capital gains over dividends. For example, broad market equities mostly appreciate; their dividends (especially foreign) are not great in corp (taxed 50% then partially refunded when you dividend out). If you want Canadian equity exposure, you can hold some Canadian dividend stocks – the corp will pay 38% then refund on payout (effectively you personally get the dividend tax credit outcome). But if you never pay it out, that 38% sits locked until a dividend is paid. Growth stocks or ETFs that reinvest are better – no immediate tax until you sell (and then capital gains treatment). Swap-based ETFs (like Horizons HXS, HXT) can be excellent in a corp: they produce no taxable distributions, so the corp doesn’t have passive income annually from them. You only trigger a gain on sale (which you could time in a low-income year or when winding up the corp, etc.). This defers and converts income into a likely capital gain. So, for the equity 20%, one could use HXT (TSX 60 swap ETF) and HXS (S&P 500 swap ETF) or similar. That way, even foreign dividends are not received, thus no 50% tax yearly. The corp’s stock exposure grows tax-free until realization. This is similar to how RRSP shelters, but using financial engineering. One must mind the counterparty risk and slightly higher fee, but tax saving can outweigh it significantly.

  • Bonds: Interest is worst in corp (50% tax, and only way to get RDTOH back is to pay dividends out, which you might not want to do yearly). If possible, avoid regular bond interest in a corp. If the Dragon calls for 20% bonds, consider using a corporate class bond fund or swap-based bond ETF (HBB). HBB (Horizons Canadian bond) uses a swap to not pay interest, accruing total return. The corp would then only realize gains on selling HBB (which are capital gains). Also, HBB doesn’t add to passive income until sold. Another tactic: Use life insurance policy investments or annuities for fixed income (beyond our scope, but some corp owners use tax-exempt insurance for fixed income-like returns). Given Dragon’s reliance on bonds, perhaps hold some in corp but structure carefully. If not comfortable with swaps, the corp could hold actual RRBs or GICs but accept 50% tax now (not great). It might be better to overweight capital gain assets and underweight bonds in a corp context, or hold the bond allocation in a personal RRSP instead if possible and adjust overall.

  • Gold: Gold bullion held via an ETF (like PHYS) in a corp will not yield income (no passive income until sold). When sold, any gain is a capital gain (50% taxed inside corp, which generates CDA and some RDTOH). This is fairly efficient. So gold is fine to hold in corp from a tax perspective. It won’t grind your SBD unless you sell large chunks regularly. The corp might periodically pay you a capital dividend from its CDA if gold has large unrealized gains realized – a nice tax-free payout. So 20% gold in corp is not problematic.

  • Commodity/Managed Futures: This is tricky. If using a U.S. ETF like DBMF, it will likely distribute something that the corp must book as income (e.g. interest or foreign income). That would be taxed 50%. If using a Canadian alt fund, hopefully it can minimize taxable distributions. Corporate class funds come in handy: some providers offer alternative strategies in a corporate class mutual fund structure, meaning all returns are retained until you redeem, and even then can often be paid as capital dividends or at least capital gains. For instance, if there was a corporate class managed futures fund, it might only distribute capital gains dividends. CCPCs particularly benefit from corporate class because they can switch between funds without triggering gains (not as important for static portfolio) and because corporate class funds can only distribute Canadian dividends or capital gains – both more favorable than interest ([PDF] Corporate class explained | Fidelity Investments). If none available, one might reduce this allocation or attempt to find a less tax-inefficient way (perhaps holding a small position that hopefully doesn’t distribute much until sold).

  • Long Volatility: TAIL in corp will pay interest (taxed 50%). Also any gains from puts likely come as income (maybe capital gain, uncertain). Alternatively, the corp could itself engage in buying index put options for hedging – any payoff would be a capital gain (if structured right) or a business hedging gain (but likely capital since it’s investment). If the put expires, capital loss (which can only offset capital gains, not other income – but corp could carry it forward for future gains). This could be okay if done sparingly. Another approach: allocate this portion to something like Horizons HHF (if it existed – that was a fund-of-funds that included a tail hedge) in swap form, but not sure one exists now. Or use a forward agreement with a bank to get tail exposure – not accessible for average investor. Realistically, many CCPC investors might skip a direct tail hedge because the tax drag is high and instead rely on a heavy bond/cash allocation (but that changes risk). However, if a crash comes, the corp would have losses in equities that could be tax-useful (capital losses to carry back 3 years or forward indefinitely to offset prior/future gains). A tail hedge that pays off might give capital gains to offset those losses but losses can already offset gains; the main benefit of tail hedge is providing liquidity at the right time, not tax. So if willing to accept the cost, keep it small or use strategies to minimize taxable income (e.g. use European puts that expire only in crash scenario – if they expire, realize a capital loss, which can offset other investment gains the corp might have from before).

Summary (CCPC): To implement Dragon in a corporation:

  • Emphasize tax-efficient instruments: swap-based ETFs for equity and bonds, or corporate class funds, to minimize annual passive income. This avoids the punitive ~50% immediate tax and the $50k passive income grind issue.

  • Focus on capital gains: Gold and equity growth provide deferred gains that can be distributed via CDA eventually (tax-free).

  • Be mindful of passive income >$50k: If the portfolio is large, design it so that much of the return is unrealized or in forms (capital gains/dividends) that when realized can be managed. For example, if your 20% bond piece was fully swap-based, it produces no current income; equity swap ETFs produce none; gold none; tail hedge minimal until a crash then a big gain (one year might exceed $50k, but at least you get a big win).

  • Also consider the timing of distributions: If your corp doesn’t need to pay you out until retirement, you can allow RDTOH to accumulate and then pay yourself dividends in retirement to recover some taxes when your personal rate might be lower. The small business deduction grind is more pressing if the corp still has active business. If it’s just a holding company now, then you don’t care about SBD (no active income to shield), you just care about absolute tax efficiency. In that case, you essentially have a pseudo-family-office structure and you definitely want to use every trick (corporate class, swaps, life insurance, etc.) to minimize that annual 50% lock-up.

One more note: Investment management fees in a CCPC are deductible against investment income. So if you pay an advisor or certain fund fees, the corp can deduct them (limited for individual investors because MERs in ETFs are embedded). But something to note for tax planning.

In conclusion, holding a Dragon Portfolio in a CCPC is feasible, but to optimize:

  • Use structures that eliminate yearly taxable income (swap ETFs like HXT, HXS, HBB, or mutual fund corps).

  • If using plain ETFs, be prepared for the corp paying high tax upfront and plan to extract RDTOH by paying dividends to yourself periodically.

  • Remember to pay out capital dividends from CDA whenever available (tax free to you, rewarding you for realizing gains).

  • Complex strategies aside, often a mix of corporate and personal accounts is used: e.g., keep bond and tail hedge in your RRSP (where it’s most efficient) and equity/gold in the corp where they incur less tax. The combined household portfolio can still mimic Dragon’s allocation.

Managing Currency Risk Across the Portfolio

Finally, we address currency risk management for a Canadian investor running this multi-asset portfolio. With global assets, you’ll have exposures in USD and other currencies. Should you hedge everything back to CAD, partially hedge, or remain unhedged? There is no one-size-fits-all answer, but here are guidelines:

1. Understand Your Currency Exposures: In a fully implemented Dragon Portfolio, the equity portion (if global) introduces USD, EUR, etc.; the bond portion might be domestic or U.S.; gold is effectively USD exposure; the managed futures might involve USD; and the long vol is likely USD-centric. If you did nothing, you might find, for example, that ~50% of your total portfolio value is effectively in USD assets (especially in Portfolio B case). This means if CAD suddenly strengthens, your portfolio (in CAD terms) could drop even if the underlying investments were flat in their local currency. Conversely, if CAD weakens, your CAD returns get a boost.

2. Pros of Hedging: Hedging means using forward contracts or currency-hedged fund classes to eliminate foreign exchange movements. The primary benefit is reduced short-term volatility in your home currency. If you have fixed liabilities or goals in CAD (retirement spending, etc.), hedging can provide more certainty in the portfolio’s CAD value. For example, if the USD were to decline 20% over a couple years (perhaps due to U.S. debt issues or a resurgence in oil pushing CAD up), an unhedged portfolio would lose value relative to a hedged one by that currency amount. Hedging removes that concern. It essentially lets each asset class do its job without currency noise. This can be especially relevant for the bond portion – since bonds are meant to be stable, you wouldn’t want a currency move to turn a +5% bond year into a –5% CAD year.

Hedging also makes performance easier to evaluate relative to Canadian benchmarks or targets, since you’re not inadvertently over/underperforming due to currency swings.

3. Cons of Hedging: Hedging isn’t free – forward contracts have a cost (the interest rate differential plus a small fee). Since Canadian rates often differ from U.S./global, the cost can be a drag or sometimes a benefit (e.g., if Canadian interest rates are lower than U.S., hedging USD→CAD has a cost). Over long periods, hedging costs and tracking error can erode returns. More importantly, as discussed, the Canadian dollar tends to be pro-cyclical – it rises in good times and falls in bad times (Hedging Your Bets With Currency-Hedged ETFs: O Canada | PWL Capital: Bender Bender & Bortolotti). By not hedging, you allow...the Canadian dollar’s natural procyclicality to work in your favor. When global markets fall, CAD tends to fall and safe-haven currencies (like USD, JPY) rise, cushioning unhedged foreign assets. When markets rise, CAD often strengthens (reducing unhedged returns), but during those times your equities are up strongly anyway. The net effect: unhedged foreign currencies smooth out your ride – “highs are not as high, and lows are not as low,” lowering overall risk. Empirical studies show that for Canadian investors, hedging foreign equity actually increased volatility in about 52% of rolling 10-year periods (1970–2019), and on average hedging made volatility worse. Essentially, by hedging you’re selling the safer currencies and buying more CAD, which can leave you more exposed if a crisis hits.

4. Partial Hedging – a Balanced Approach: Instead of an all-or-nothing stance, many Canadian investors opt to hedge some but not all of their foreign exposure. For example, one might hedge the fixed-income fully (to ensure bonds provide stable CAD returns) and keep equities and gold unhedged (reaping the diversification of USD/JPY). Or hedge, say, 50% of the equity exposure – this can be achieved by mixing hedged and unhedged ETF units (several fund families offer both). Partial hedging can reduce extreme currency outcomes while preserving some benefit of currency diversification. It’s a form of compromise: you won’t be completely protected from a CAD surge, but you also won’t lose all the cushion of a USD rise in a crash.

5. When to Consider Hedging More: If you have a short time horizon or specific CAD liabilities, you might lean more towards hedging. For instance, someone nearing retirement who plans to spend in CAD in the next few years might not want a big drop in their portfolio due to a sudden CAD rally. Also, if the USD/CAD rate seems historically high or low, some investors tactically adjust hedging (though this is essentially a currency bet).

6. When to Remain Unhedged: If your horizon is long and you view your portfolio globally, you may accept currency fluctuations as just another source of diversification. Over the long run, currency movements tend to mean-revert, and hedging costs may detract from returns. Additionally, as discussed, keeping USD exposure can be an implicit hedge against global shocks for Canadians. Many “all-weather” investors therefore choose to remain largely unhedged for stocks, gold, and alternative strategies, recognizing that the Canadian dollar’s ups and downs can offset some market risk.

Bottom Line (Currency Management): It is not usually advisable to hedge 100% of your foreign currency exposure – that can increase risk and add cost. A partial hedging strategy is often ideal: for example, use CAD-hedged funds for your bond sleeve and perhaps a portion of equities, but leave a good chunk of equities/ gold/alternatives unhedged. This way, your core safety assets (bonds) are stable in CAD, and your growth and diversifiers carry some USD exposure to protect in downturns. An investor who is very risk-averse to currency might hedge a higher fraction (especially of equity) as they approach short-term goals, whereas a long-term growth investor might remain mostly unhedged for maximum diversification benefit. The key is to periodically review your overall USD/CAD exposure: if you find, for instance, that your portfolio is heavily tilted to USD (say 60-70%+ in USD assets as in Portfolio B), you could introduce some hedged ETFs to bring that down to a level you’re comfortable with. Conversely, if you followed Portfolio A (mostly CAD-denominated and hedged funds), you may intentionally keep one or two assets unhedged (like gold or a U.S. equity fund) to ensure you have some USD if CAD were to weaken.

In summary, currency risk can be managed but not eliminated – and it shouldn’t be viewed in isolation. The Dragon Portfolio’s strength is in combining asset classes that thrive in different environments. Some of those environments (deflationary busts, market crashes) historically coincide with a stronger USD and weaker CAD, so having unhedged USD assets actually complements the strategy. On the other hand, an investor with all their obligations in CAD might hedge portions to sleep better at night. Striking a balance – not hedging all, but not leaving yourself 100% at the mercy of currency swings if that worries you – is a prudent approach. Make use of hedged ETF classes thoughtfully, and remember that over time the added diversification from foreign currencies has often benefited Canadian investors by lowering overall portfolio volatility.

Conclusion: A Canadian-tailored Dragon Portfolio remains a powerful, diversified strategy. By selecting the right mix of Canadian and U.S. ETFs for each asset class, minding currency choices, and placing assets in the optimal accounts, Canadian investors can capture the Dragon’s resilience. The portfolio aims to protect and grow wealth through all seasons – inflation, deflation, booms, busts – by blending equities, long bonds, gold, trend-following, and long volatility. With careful implementation (and attention to tax and currency details unique to Canada), the Dragon Portfolio can be a robust blueprint for Canadian investors seeking “success in all markets.”

David Wiitala
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