The Cockroach Portfolio: A Defensive 5-ETF Combo That Survives Anything (Canadian Investor Edition)
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In 2014, I tried killing a cockroach in my crappy student dorm during undergrad. I was surprised—and slightly disgusted—by how resilient the thing was.
That’s actually where I first learned about the concept of anti-fragility—the idea that some things don’t just survive stress and volatility but actually get stronger from it. Sorry, Nassim Taleb, I never actually read The Black Swan.
Anyway, this one incident gave me the inspiration for what I call “The Cockroach Portfolio”—a five-ETF combo that absolutely smokes both the S&P 500 and the 60/40 portfolio on a risk-adjusted basis.
Unlike many so-called defensive strategies, this portfolio doesn’t rely on expensive hedges with negative carry like put options or VIX futures. There’s no need to constantly bleed capital for protection—this allocation naturally mitigates downside risk through diversification across uncorrelated assets.
Here’s a look at each individual component, why I selected it, and how it all works together – tailored for Canadian investors with ETFs from BMO Global Asset Management.
The 60% stock allocation
The 60% stock component uses the same sector ETFs as the U.S. SPDR funds that investors know and love—except BMO has now brought them over for Canadians.
These ETFs trade in Canadian dollars and have a slightly higher 0.21% management fee, but otherwise, they provide the same sector exposure. The allocation is split three ways, 20% each into:
- BMO SPDR Consumer Staples Select Sector Index ETF (ZXLP)
- BMO SPDR Utilities Select Sector Index ETF (ZXLU)
- BMO SPDR Health Care Select Sector Index ETF (ZXLV)
Each of these draws from the S&P 500, so you still benefit from the index’s earnings quality, liquidity, and size screen. But the reason for picking these specific sectors is simple: they’re the most defensive.
Historically, during market downturns, recessions, and crashes, these sectors have had lower drawdowns than the broader market and, on average, lower volatility.
Health care, utilities, and consumer staples have structurally inelastic demand. People always need healthcare, no matter the economy. They always need electricity, water, and gas. They always need essentials like soap, toothpaste, and food. These businesses aren’t discretionary—they make money even when the economy slows down.
Beta confirms this. The exact Canadian ETF beta values aren’t available yet, but they should be similar to their U.S. counterparts: 0.64 for XLV, 0.57 for XLP, and 0.74 for XLU. Since the S&P 500 has a beta of 1.0, these ETFs should move less than the overall market, meaning smaller swings up and down.
That’s exactly the point. The goal isn’t chasing massive upside but avoiding the deep, prolonged losses that take years to recover from.
The 20% bond allocation
The 20% bond component is simple: BMO Mid-Term US Treasury Bond Index ETF (ZTM) with a 0.23% management expense ratio. Bonds are here for one reason—diversification.
They have a low to negative correlation with stocks, meaning they tend to zig when equities zag. While stock returns are driven by earnings and market sentiment, bond returns depend on credit quality and interest rates. That makes them a different risk-return driver, helping smooth out volatility.
Why ZTM? It offers straightforward exposure to U.S. Treasuries with intermediate maturities tracking the Bloomberg U.S. Treasury 5–10 Year Bond Index. I’m not looking to time interest rates or express a view on the yield curve—I just want Treasuries as a safety play.
ZTM sits in a Goldilocks zone with a 6.2-year duration and currently offers a 4.49% yield to maturity—the expected total return if the ETF holds all its bonds to maturity.
Why Treasury bonds specifically? I don’t want credit risk in this portfolio. Corporate bonds don’t provide the same flight-to-safety benefit during downturns, so I’m sticking with Treasuries. Unless the U.S. government defaults (highly unlikely), Treasury bonds are as safe as it gets.
The 20% gold allocation
The last 20% of the portfolio is going into the shiny, heavy metal that Roman legionaries were paid with and that you can now buy at Costco—gold.
I know the usual arguments: it produces no cash flow, it’s all speculation, and so on. I don’t care. What matters is that gold has low correlation to both stocks and bonds, making it a third diversifier in those rare but painful moments when both asset classes fall together—like in 2022.
Gold also has structural characteristics that make it a great safe-haven asset. It can’t be debased like fiat currency, is hoarded by central banks, and has a long history as a store of value.
The problem with holding gold in a portfolio is that physical metal is hard to rebalance. Storage, dealer spreads, and security are all a hassle. That’s why I’m going with an ETF instead.
I like BMO Gold Bullion ETF (ZGLD). It has a 0.23% MER and holds long-term, unencumbered gold bullion in 400-troy-ounce international bar sizes. The physical gold is stored in a local BMO vault and is audited periodically, offering a simple and secure way to own gold without the logistics headache.
Putting it together
This portfolio is very easy to manage. Just buy each of these five ETFs at 20% each, rebalance quarterly, and reinvest all dividends. That’s it.
I know some of you just look at the chart, so don’t glaze over the figures. Yes, in terms of total returns, from 1992-09-28 to 2025-02-06, the Cockroach Portfolio lags behind the S&P 500 (10.63%) and the 60/40 portfolio (8.36%), with an 8.28% CAGR.
But on a risk-adjusted basis, it smokes both. The Sharpe ratio comes in at 0.65, well ahead of the S&P 500 at 0.51 and 60/40 at 0.57. Volatility was significantly lower, with an annualized 9.21% standard deviation—half that of the S&P 500 (18.32%) and lower than the 60/40 portfolio at 10.92%.
Most remarkable is the maximum drawdown during the height of the 2008 financial crisis. The Cockroach Portfolio lost 22.16%—less than half of the S&P 500’s -55.26% and well below the 60/40 portfolio’s -35.97%.
These backtest results are based on indices and asset prices in USD. The Canadian version will fluctuate based on currency moves and local market conditions, but I don’t have access to a direct backtest for it right now.
Younger investors with high risk tolerance will probably scoff at this. Older investors or those who truly understand risk will appreciate it.
