Your Complete Guide to Index Investing with Dan Bortolotti

Vanguard’s One-Fund Solution

2018-05-29T22:14:22+00:00February 5th, 2018|Categories: ETFs, New products|Tags: |236 Comments

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 59% of the fixed income in each fund is allocated to the Vanguard Canadian Aggregate Bond Index ETF (VAB), with another 18% to the Vanguard U.S. Aggregate Bond (VBU), and about 23% 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.

 

236 Comments

  1. Brian May 29, 2018 at 9:58 am

    Hi Dan,

    Trying to help my parents out in investing in something safe as they are nearing retirement in about 8 years or so. Since I’m no expert, would you recommend VBAL or VCNS for them in the TFSA account? Lets say we throw in the full $55K in TFSA all at once since buying multiple times will incur more fees.

    I was about to have them on the CCP Balanced/Cautious portfolio but this 1 fund solution caught my eye.

    Thanks,
    Brian

  2. Canadian Couch Potato May 29, 2018 at 10:22 am

    @Brian: I can’t make recommendations like this for individuals. The Vanguard ETFs are excellent products, but I can’t know whether they’re appropriate for your parents’ situation.

  3. Kevin May 30, 2018 at 3:22 pm

    Hi Dan,

    Am I correct in assuming that using Questrade and their no fees for buying ETFs would be a perfect way to utilize the one-fund solution for a TFSA or RRSP? That way a monthly contribution would not be an issue so long as I am diligent in making the contributions and trades each month.

    Thanks.

  4. Canadian Couch Potato May 30, 2018 at 3:25 pm

    @Kevin: Yes, I think that’s fair. As long as you are comfortable placing the trades manually every month, a single ETF and no trading commissions is a pretty sweet combination.

  5. chuck May 31, 2018 at 1:19 am

    how exactly do i buy the vgro … long term investing… set it and forget it…

    i opened a questrade account…

    i need to fill in the following:

    quantity
    order type
    limit price
    duration

  6. S Arun June 11, 2018 at 11:49 am

    Hi Dan,

    I am a dividend investor, and I am very comfortable owning individual stocks for my personal portfolio.

    But, my brothers and some of my friends are scare to participate in stocks markets and they think it is pure gambling. They put their saving into GICs and ultra-low rate accounts and surely losing money for inflation.

    All of them have so many years to retire. I suggest them to buy Vanguard broad market ETFs using Questrade (no commission fees for ETF purchases), but they are still scare to dead with stock market. How to engage them to participate?

    Thanks

  7. Nicholas Nicoloff June 15, 2018 at 12:24 pm

    Hi Dan,

    Is it beneficial to have more than one of these Vanguard all in one ETFs? For example investing x dollars in the VGROW and y dollars in VBAL?

  8. Canadian Couch Potato June 15, 2018 at 1:38 pm

    @Nicholas: In theory, you could use a combination of the two to adjust your asset allocation so it is somewhere between the two. But I wouldn’t recommend this: it seems unnecessarily complicated. If anything, it would be cheaper and easier to use VGRO plus a bond fund to make it a little more conservative.

  9. Cam June 16, 2018 at 9:28 am

    Hi Dan. Your column advises against using these asset allocation ETFs for taxable accounts due to their payment of dividends, which I get.

    However, the pre-balanced nature of the funds means you will never have to balance the fund yourself, an exercise which can trigger significant capital gains in a non-registered account. How do you best balance these two unpalatable alternatives?

    Thanks.

  10. Canadian Couch Potato June 16, 2018 at 9:59 am

    @Cam: Remember that, in theory anyway, asset allocation ETFs will likely have to sell some underlying holdings and buy others when doing their own rebalancing, so they can realize gains and pass them along to their investors. Granted, in practice this is not likely to be a major issue, as the ETFs will likely rebalance constantly using cash inflows and probably will not distribute a lot of taxable gains (though time will tell if this is true).

    IF you choose to use individual ETFs in your non-registered account, you might end up realizing more capital gains, but I don’t think there is any reason to presume this will be the case. You have control over when and how much you sell, you can rebalance with cash inflows, you can do tax-loss selling, you can do most of your rebalancing in your RRSP and TFSA, etc. So I don’t think the one-ETF solution is inherently more tax-efficient.

  11. Leah June 19, 2018 at 12:11 am

    Hi Dan,

    I am a new couch potato investor! I am in my early 30’s and have about 65k to invest in my TFSA. I am leaning towards putting everything into VGRO, which is a great asset mix for me right now…BUT…may not be in 10-15 years (I have already purchased VGRO for my RRSP, which is modest). In my mind, I have told myself that I can just change my asset mix in 10-15 years by doing a quick switch (sell/buy) from VGRO to VBAL. Is this crazy? Is it more worthwhile to use either your model CCP portfolio or Justin Benders model portfolio so that I have the flexibility to change my asset mix by simply adding new money to my bond allocations every few years?

  12. Stefan June 19, 2018 at 2:00 am

    Hi Dan,

    Love your site and the information you provide! Thank you! I just recently started investing and chose to go with the Vanguard VGRO one fund solution. In your post you wrote that VGRO consists of seven underlying funds (which is also shown in the linked Vanguard brochure), however on the Vanguard website it says that VGRO has only three underlying Vanguard funds as of close 30 May 2018: https://www.vanguardcanada.ca/advisors/adv/en/product.html#/fundDetail/etf/portId=9579/assetCode=balanced/?overview

    1) PercentageVanguard FTSE Canada All Cap Index ETF 60.0%
    2) Vanguard Canadian Aggregate Bond Index ETF28.5%
    3) Vanguard Global ex-US Aggregate Bond ETF CAD Hedged11.5%

    Do you know what is going on?

    Thank you!
    Stefan

  13. Canadian Couch Potato June 19, 2018 at 8:26 am

    @Stefan: Thanks for the comment. The information about the holdings in the Vanguard Asset Allocation ETFs has been incorrect on their website for some time. They are aware of the issue and I hope they will fix it soon. In the meantime, the holdings of each fund are disclosed in the monthly fact sheets. Here are links to the most recent versions:

    VGRO: https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12396
    VBAL: https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12397
    VCNS: https://www.vanguardcanada.ca/individual/mvc/loadImage?country=can&docId=12394

  14. Canadian Couch Potato June 19, 2018 at 8:29 am

    @Leah: There is nothing at all wrong with using one of the Vanguard Asset Allocation ETFs for a number of years and then switching to a more conservative one later in life. Indeed, by that time there will no doubt be other products available, so there is no need to plan that far ahead. If using one of these ETFs motivates you to save and invest regularly, go for it.

  15. Kris June 21, 2018 at 10:02 am

    I am new to ETF investing and just trying to wrap my head around the top holdings data for VGRO. It allocates most of its funds, 30.4%, to US market but it’s top 5 holdings are Canadian companies such as RBC, TD, and Suncor with Apple being #6. How is it possible Canadian companies are the top holdings if it has most of the fund allocated to US market? Is the information on the Vanguard site inaccurate?

  16. Canadian Couch Potato June 21, 2018 at 10:06 am

    @Kris: The Vanguard site is inaccurate. Please see my response to Stefan, below.

  17. SD June 29, 2018 at 11:37 am

    Hi Dan, do you have any recommended funds/portfolios (index mutual fund or ETFs) for taxable accounts?

    Thanks!

  18. Canadian Couch Potato June 30, 2018 at 12:50 pm

    @SD: The only funds that are not ideal for taxable accounts would be the bond funds. More tax-efficient options would be GICs or specialty ETFs such as ZDB, BXF or HBB.

  19. SD July 3, 2018 at 11:25 am

    Thanks for your reply. I actually came across your article here: https://www.moneysense.ca/columns/why-gics-beat-bond-etfs-in-taxable-accounts/

    Perhaps I shall do GICs instead of bond ETFs then, or a mix of both.

  20. David July 6, 2018 at 9:40 pm

    I am 49, well 50 in November. I have had a fairly successful business for 15 years that I am now winding down, not necessarily by choice. I will have to work for another 10 or so years but boo hoo. You can’t win them all where would you put them. Point is the same brain that gave the opportunity to start the business is the same brain that I guesstimate has cost me hundreds of thousands in losses, pain, shame anguish, guilt, you get the picture. People miss the point is that investing for most people is emotional, for me it always has been. VGRO is a perfect solution for me. I buy one fund, pay very little in fees reinvest the distributions and wait. I put 50% of my $450000.00 (total value of RRSP into VGRO. The balance is in the average top 10 holding of all the big banks Canadian dividend funds. Example BMO dividend fund. I am guesstimating a yield of 2.75-3.75% and average growth 10-15 years of 7.50-9.50% average which if I use the rule of 72 assumes my money will double twice or so in the next 15 years, which could be as much as $1.8 Million. I love stocks, I love markets, I love the “juice”, which is exactly why I should not manage my own money.

    Just my 2 cents

  21. Jason July 15, 2018 at 2:44 pm

    Hi Dan,
    Thanks for the generous work you’re doing here.
    Do you have a sense of an approximate ballpark figure for the annual returns for these three new ETFs? I know the data isn’t available yet, but perhaps extrapolation from similarly allocated prortfolios could shed light?

  22. Canadian Couch Potato July 17, 2018 at 10:51 am

    @Jason: The ETFs are barely six months old, so the returns are really quite meaningless at this point. But you can get monthly returns on any ETF from Morningstar if you are interested. For the three-month period ending July 17, they report 5.12% for VGRO and 1.44% for VCNS. For some reason they have no report for VBAL.

  23. boutchitos July 24, 2018 at 11:50 pm

    Hi Dan,

    Any advice on how to switch from an over-complicated portfolio (12 ETFs, holding CAD and USD, Total market and small-cap, based on gone fishin’ portfolio…) to this new one-fund strategy. It’s quite appealing to me.

    I had over 300K $, should I sell everything and buy in one operation? Would it be wise to do so? I’m mostly thinking to fees like bid-ask spread and also big swing in market between my 2 operations. I don’t want to jeopardize 20 years of saving with a stupid move.

    Kind regards

  24. Canadian Couch Potato July 25, 2018 at 11:58 am

    @boutchitos: As you can appreciate, I cannot give you advice about what or when to sell. But some general comments: the costs due to bid-ask spreads should be quite manageable. Even if you conservatively assume 0.10%, or 2 cents on a $20 ETF, that’s $300 on the whole portfolio. And of course, the spread will be roughly the same whether you make a big move all at once or do it gradually.

    As for a big market move harming you, this should not be a problem either as long as you are keeping your asset allocation roughly the same. If you plan your trades, you should be able to transition from the old portfolio to the new within an hour.

  25. Darren July 26, 2018 at 10:30 am

    Hi Dan…I have been loosely following your model portfolio advice for a number of years. At one point, your model portfolio recommended VAB. Over the time Ive held this ETF (cash margin account) it has dropped over 5%. Do you have an opinion on rebalancing this ETF into something different?

    Thanks

  26. boutchitos July 26, 2018 at 5:13 pm

    Dan, you are so valuable :)

    “And of course, the spread will be roughly the same whether you make a big move all at once or do it gradually.”

    I wish I had thought about this myself :)

  27. boutchitos July 26, 2018 at 9:56 pm

    I’m faced with a challenge (to switch from over complicated portfolio to one-fund solution; see my posts before). I had 35% of my portfolio in USD. “Northern Gambit”-ing this money back in CAD will take too long.

    I had not find equivalent one-fund solution from Vanguard USA. But, there is multi-assets ETFs at BlackRock USA (AOR, AOM, AOA, AOK). I will buy an equivalent ETF there to match with my one-fund solution at Vanguard Canada.

    Then, I will Gambit back my USD money to CAD, a small chunk at a time, may be 10% each time. This will account for 3.5% of my portfolio outside the market each time. I can live with this.

    This is the best I come up with. Any opinions on this strategy?

  28. jo July 31, 2018 at 4:13 pm

    Hi Dan

    thanks for everything! is it more tax benefical to have VGRO in a TFSA or RRSP? given VGRO is more stock heavy, I imagine it would be better in a TFSA as the capital gains/dividends wont be taxed? or am i missing something?

    thanks

  29. Canadian Couch Potato August 1, 2018 at 8:05 am

    @jo: Thanks for the comment. There is no straightforward answer to your question: it depends on what you are holding elsewhere in the portfolio. If you have both an RRSP and a TFSA, then there is nothing at all wrong with using a fund like VGRO in both.

  30. mark August 9, 2018 at 8:46 am

    Hello Dan, I was looking at the VGRO ETF price on google finance ~ $25.25 CAD. I went into my investment account to see what the market bid prices were and they were ~ $29.90 CAD. Is this price gap due to hedging on some of the ETFs within the fund? thanks

  31. Canadian Couch Potato August 10, 2018 at 7:25 am

    @mark: My guess is that there was simply an error here: either Google or your brokerage was showing the wrong price.

  32. Anna August 18, 2018 at 9:45 am

    Hi Dan! I’m looking to put 10k as starting amount and then add more money over time to my TFSA. I will buy VGRO. My question is how to buy it. I have 2 options; either open a Questrade or a TD brokage account. Which way is best?

  33. Canadian Couch Potato August 18, 2018 at 3:46 pm

    @Anna: If you never plan on buying anything other than ETFs, then Questrade probably has the edge. TD Direct would be preferable if you want more options, such as GICs and TD e-Series funds.

  34. Carole Pépin September 12, 2018 at 9:43 pm

    J’avais précédemment lu sur le portefeuille Vangard(VGRO).Comme je voulais investir dans un REEE, il faut que je trouve un fournisseur qui propose la subvention provinciale (IQEE). Je croyais que Q trade pouvait l’offrir mais sont basé en C.B. et n’offre pas ce service. Pour ceux qui ont investit dans ce fond (VGRO) au Québec, pouvez-vous me donner le nom de certains fournisseurs
    de ce FNB ? Merci à l’avance

  35. Canadian Couch Potato September 13, 2018 at 7:39 am

    @Carole: Here is a list of brokerages that offer the QESI. Only a few of these allow self-directed investors to buy ETFS, but these include BMO InvestorLine, National Bank Direct and Questrade:

    https://www.revenuquebec.ca/en/citizens/tax-credits/quebec-education-savings-incentive/list-of-resp-providers/

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