Vanguard’s One-Fund Solution

It was one of the great mysteries in the Canadian fund market: why had no one created an ETF version of the balanced index mutual fund?

These days you can find ETFs focusing on just about every sub-sector of the market, and a pile of others with active strategies that make particle physics look easy by comparison. Yet until last week, no one offered an index ETF that included a simple mix of global equities and bonds. That’s shocking when you consider the balanced mutual fund is a staple in the industry, with over $766 billion in assets as of December. That’s more than five times the assets held by all Canadian ETFs combined.

That yawning gap has now been filled with the launch of three new ETFs from Vanguard. The new family of asset allocation ETFs are built using seven other ETFs. The Vanguard Conservative ETF Portfolio (VCNS) holds 40% stocks and 60% bonds, while the Vanguard Balanced ETF Portfolio (VBAL) uses the opposite proportion. The most aggressive version, the Vanguard Growth ETF Portfolio (VGRO), is 80% equities. All three ETFs carry a very competitive management fee of just 0.22%.

The reaction to the launch of these new funds was swift and overwhelmingly positive. Indeed, they’re probably the most important new ETFs to be launched in Canada in the last couple of years. So let’s spend some time considering whether they’re right for your portfolio.

What’s under the hood

Each of the new funds is built from four equity and three bond ETFs: the only difference is the proportion allocated to each. You can find the specific breakdown in the ETFs’ marketing brochure.

Let’s look at the equity component first. The underlying holdings include the Vanguard FTSE Canada All Cap (VCN) and Vanguard U.S. Total Market (VUN) for North America. For overseas stocks, the funds hold the Vanguard FTSE Developed All Cap ex North America (VIU) for western Europe, Japan and Australia, and the Vanguard FTSE Emerging Markets All Cap (VEE) for China, Taiwan, India, Brazil and other developing economies. All of these underlying ETFs use plain-vanilla, cap weighted indexes of large, mid and small-cap stocks.

While my model portfolios assign one-third each to Canadian, US, and international equities, the Vanguard ETFs allocate things a bit differently. In all three ETFs, Canadian stocks make up 30% of the equity allocation, while the US gets about 38% and overseas stocks get the other 32%. The international allocation is then subdivided with 77% in developed markets and 23% in emerging.

On the fixed income side, the new ETFs use a mix of Canadian and foreign bonds. About 58% of the fixed income in each fund is allocated to the Vanguard Canadian Aggregate Bond Index ETF (VAB), with another 27% to the Vanguard U.S. Aggregate Bond (VBU), and about 35% to the Vanguard Global ex-U.S. Aggregate Bond (VBG). These latter two funds use currency hedging, which is essential for foreign bonds.

What to make of Vanguard’s decision to include US and global bonds? As I’ve written before, I’m agnostic on this question: since interest rates in foreign countries do not move in lockstep with those in Canada, a global bond allocation might reduce volatility, but the benefit is modest, and if you’re managing your own portfolio it’s not worth juggling three funds. However, if there’s no additional work or cost involved, then it’s probably just fine to include US and global fixed income.

Kudos to Vanguard for sticking to the core asset classes in these funds, for using traditional cap-weighted indexes, and for setting a long-term asset mix that won’t change based on economic forecasts. They could have tossed in their new factor-based ETFs, or dividend-focused funds, or given the manager a wide berth to tweak the allocations, but they didn’t. That was a wise choice, because trying to improve on this simple model is, in my opinion, the biggest knock against many of the competitors to these new ETFs, including the iShares CorePortfolios (CBD and CBN), which hold REITs, high-yield bonds, preferred shares, and track fundamental indexes. The same criticism can be levelled at many robo-advisors, who can’t resist adding unnecessary asset classes that sound sophisticated but do little more than pile on cost and complexity.

The appeal of one-fund portfolios

A couple of years ago, my model ETF portfolio evolved to includes just three funds instead of five, as the launch of new “ex-Canada” equity ETFs allowed investors to get US, international and emerging markets in a single fund. These new Vanguard asset allocation ETFs makes life even simpler by rolling the whole portfolio into a single fund. That should reduce the number of trades you need to make, and remove the need to rebalance. (The fund literature is not specific about how often this will occur.)

There are other advantages to a one-fund solution as well. When your portfolio includes a different fund for each asset class, it’s easy to dwell on the individual parts rather than the whole. (“My portfolio returned 8% last year, but Canadian stocks didn’t do as well as international. Maybe this year I should put less in Canada.”) With a one-fund portfolio, you’re less likely to fall prey to these distractions and stay focused on the long term.

The new Vanguard ETFs are also much cheaper than other one-stop solutions, such as the Tangerine Investment Funds and robo-advisors. The obvious disadvantage of ETFs is that you usually pay a commission to buy and sell them, whereas index mutual funds and most robo-advisors don’t have trading costs. But if you’re now able to use only one ETF per account, you may still come out ahead even if you’re paying $10 per trade.

Consider the Tangerine funds, which are simple, convenient and well diversified, but carry a relatively high fee of 1.07%. A $50,000 holding in one of the Tangerine funds would carry an annual fee of $535. If we tack on a couple of basis points for taxes, the new Vanguard ETFs should have an MER of about 0.24%, giving that $50,000 holding an annual fee of just $120. Even if you spend another $10 per month on commissions your all-in cost would still be less than half as much as the Tangerine option.

The new balanced ETFs offer a similar cost advantage over robo-advisors, most of whom add an additional 0.50% fee to the cost of the underlying ETFs. One of the primary advantages of robo-advisors over do-it-yourself options is the automatic rebalancing, but now that this feature is built in to the Vanguard ETFs, the value offered by a robo-advisor is somewhat less than it used to be.

Not so fast

Since the ETFs were announced on February 1, my inbox has been bursting with emails from readers who want to know whether these funds have revolutionizing index investing in Canada. Many seem to think virtually every other option—Tangerine, the TD e-Series funds, robo-advisors, and even portfolios of individual ETFs—have become obsolete overnight.

Now there’s no doubt the Vanguard asset allocation ETFs will have broad appeal for investors who want to keep things simple without paying more for convenience. But before you liquidate your portfolio and go all-in with a brand new ETF, make sure you consider the big picture.

One of the key benefits of mutual fund options such as Tangerine and TD’s e-Series is that they allow you to set up pre-authorized contributions, and these get invested automatically. (This is also true for robo-advisors, though they use ETFs rather than mutual funds.) Don’t underestimate the importance of disciplined savings and systematic investing. If you use an asset allocation ETF instead, you’ll need to make a trade every time you add money to your accounts. Even with a one-fund portfolio, you can easily fall into the trap of wondering whether this is the “right time” to buy.

The point here is that if you are successfully using one of these other options and you’re not enthusiastic about buying ETFs, don’t feel pressured to switch.

And while a one-ETF solution is a great choice for investors who hold all of their investments in TFSAs and RRSPs, those with larger portfolios may want more flexibility. Traditional bond funds, for example, are a poor choice in taxable accounts, and all of the new Vanguard ETFs include a significant amount of fixed income. If you have a large non-registered account you’ll want to consider using individual ETFs for each asset class for more tax-efficiency.

These new Vanguard asset allocation ETFs are a welcome addition to the marketplace, and if you’re looking for an easy way to get started with ETFs, you just found it. But always remember that investing is about process, not products. Cheap and easy solutions certainly help, but in the end it’s up to you to stay focused on saving, investing with discipline, and tuning out the noise.


108 Responses to Vanguard’s One-Fund Solution

  1. Canadian Couch Potato February 21, 2018 at 1:58 pm #

    @Jon: If your investing through TD Direct (and can therefore hold e-Series funds and ETFs in the same accounts) then I think this hybrid approach can work with a larger portfolio. But it is not worth it for $15K. Assuming the ETF is about 0.25% cheaper than your e-Series portfolio, your MER savings would amount to $37.50 annually, and at least $10 of that would be lost with one annual trading commission. I’m not sure I would do that for such a small amount of savings.

  2. Karl February 21, 2018 at 9:19 pm #

    I have a response that probably betrays how little I know about executing trades efficiently.

    I have my daughter’s RESP in iShares’ CBN, through Questrade,with no “buy” fees, so I don’t have to pay $10 every time I make a $300 monthly RESP contribution. I have also been seeking to replicate a globally-balanced portfolio in my own significantly larger RSP and LIRA accounts but have too many ETFs, making rebalancing a pain – and VGRO looks like the least complicated answer in both cases. What’s wrong with CBN? Not much that I can see but its fees are higher than VGRO and its holdings more complicated.

    So I would like to sell up other holdings and move in to VGRO. But when I look to sell the CBN, the bid-ask spread is a whopping 4% or thereabouts, so the cost would eclipse several years’ worth of savings on management fees. My question is whether there is a way to minimize the selling and acquisition cost incurred by the spread when moving between relatively lightly-held ETFs like CBN and VGRO?

  3. David February 22, 2018 at 10:01 pm #

    I’m a newer investor and looking to start getting serious about investing. I have about $6000 in TFSA and RRSPs between my wife and I in London Life Quadrus Mutual Funds. I was thinking about switching to Questrade and just using the VGRO and maybe purchasing a little bit of stocks. Would it be much of a hassle to do regular deposits and continue to buy the ETF as I go? Questrade has pre-authorized deposits, but would I be dinged anything by manually buying the ETF?


  4. Canadian Couch Potato February 23, 2018 at 1:34 pm #

    @Karl: It’s hard to imagine a bid-ask spread that wide. Even a spread of 5 cents is only about 0.25% (which is still pretty large). Could your Questrade quotes be inaccurate? In any case, the spread is that high, you would be getting dinged every month when making new purchases: an even better reason to avoid CBN.

    CBN was the best available balanced ETF in its day, but the Vanguard options are cheaper and cleaner (i.e. fewer exotic asset classes).

  5. Jim O February 23, 2018 at 1:46 pm #

    I have quickly scanned the other replies (wow – lots of replies!) – and I have not seen the following mentioned, but if it has been mentioned I apologize.

    It seems to me there is a way to lower the fee even more – everyone should use VGRO and forget about the other two funds.

    You can use laddered GIC’s (or individual bonds if you like) along with VGRO – to lower the overall fee.

    For instance, If you want 40% stocks, put half of your money in VGRO and half in laddered GIC’s – you have just cut the MER in half to .11%

    If you want 60% stocks, put 75% of your monty in VGRO and 25% in laddered GICs – you have cut the MER to .165%

    If you want 20% stocks, put 25% of your money in VGRO and 75% in laddered GIC’s – you have cut the MER to .055%

    I know it is NOT exactly a one fund solution, but it does bring the overall MER way down, depending on how much money you want in stocks.

  6. Canadian Couch Potato February 23, 2018 at 4:33 pm #

    @Jim: This is fine as far as it goes, but it does defeat the purpose of a one-fund solution. You also have very limited opportunity to rebalance, because you cannot sell the GICs to purchase equities if necessary.

  7. GregJP February 23, 2018 at 4:43 pm #

    If your money is non-registered, why invest in GICs when high-interest savings accounts exist? You won’t get more than the 2.3% that EQ Bank gives unless you go very long, and it is 100% liquid.

    I agree with Jim that coupling VGRO with a H/I savings account or GICs(in registered accounts) is a great way to tailor your asset allocation. You could still rebalance manually since Vanguard doesn’t offer, for example, a 70/30 stock/bond allocation.

  8. Aslam February 24, 2018 at 8:17 am #

    TD eseries funds does not have any fund covering emerging markets. How do add emerging markets in my TD eseries portfolio? Or any low cost emerging markets mutual fund.

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