Your Complete Guide to Index Investing with Dan Bortolotti

Podcast 20: One-Stop ETF Shopping

2018-11-10T19:04:58+00:00November 10th, 2018|Categories: Behavioral Finance, Podcast|Tags: |18 Comments

I’ve always tried to stress that successful investing is about the right process, not the right products. But good products certainly help. In the latest episode of the podcast, my guest is Todd Schlanger of Vanguard Canada, who was one of the architects behind the firm’s asset allocation ETFs, launched earlier this year to great fanfare in the DIY investing community.

These globally diversified “funds of funds” are available in three versions: the Growth ETF Portfolio (VGRO) has a target of 80% stocks and 20% bonds, while the Balanced ETF Portfolio (VBAL) holds 60% stocks and the Conservative ETF Portfolio (VCNS) is 40% stocks. In each case, the underlying holdings are seven other Vanguard ETFs.

In our interview, Todd discusses the thought process behind the construction of these new funds. We discuss the decisions to include global bonds, to overweight Canada (home bias), to use currency hedging for the bonds but not the stocks, and how frequently the funds are rebalanced.

A few times in the discussion we mention a white paper that Todd recently co-wrote on this subject: the title is Vanguard asset allocation ETFs:  A simple yet sophisticated approach to portfolio construction.

Changing course

In the Bad Investment Advice segment, I question whether DIY investors can improve their skills by taking courses, either online or in classrooms. I’m all for self-study, but I argue that you need to be selective about investing courses, because there’s a significant risk that all you’ll learn are bad habits.

For example, the Canadian Securities Course is intended for investment advisors, but there’s a version for the general public, too. While there’s lots of useful material in the course, it’s inevitably biased towards active management and product sales, because these are bread and butter of the industry. Any DIY investor who takes courses like this is likely to come away with the impression that successful investing is stock picking, clever trading and making forecasts.

One online course that focuses on the right subjects is Practical Index Investing for Canadians, created by John Robertson, author of The Value of Simple and my guest on an earlier podcast. The course contains absolutely no material on segregated funds or how to buy put options.

In addition to learning practical knowledge and skills—such as how bonds work, and how to measure your rate of return—I think one of the best ways to become a better investor is to learn about the behavioural biases we all face when making financial decisions. Here are a few of my favourite books of the subject:

Your Money and Your Brain, by Jason Zweig. Why are we supremely confident about our investing skills despite evidence to the contrary? Why are we so inept at assessing risk? One of the best financial journalists in the biz takes readers on a tour through our lizard brains and explains why they’re ill-equipped to manage money.

Why Smart People Make Big Money Mistakes, by Gary Belsky and Thomas Gilovich. The best way to avoid mental accounting, anchoring and the endowment effect is to recognize these “cognitive biases” we all share. This is an entertaining and anecdotal guide to the most common pitfalls we face when making financial decisions.

Thinking in Bets, by Annie Duke. I can’t resist a book that includes insights into both investing and poker, both of which involve working with incomplete information and mastering your emotions. Duke is a champion poker player and a business consultant who specializes in decision-making research. This book is one of the best arguments for why you can’t judge decisions by their outcomes.

Finance for Normal People, by Meir Statman. Professor Statman is one of the key researchers in behavioural finance, and in this book he explains how we approach investing not simply for utilitarian reasons (to grow our wealth), but also for expressive and emotional reasons.

Thinking Fast and Slow, by Daniel Kahneman. Not an investing book per se, but a must-read-twice for anyone who wants to better understand how humans make decisions, by the Nobel-winning psychologist.


  1. Jon November 12, 2018 at 11:19 pm

    A fantastic podcast as always! Two questions: do you have a link for the study Todd discusses where balanced funds outperform the majority of pension/endowment funds even up to $1B. I gather many people may not have $1B themselves but some larger wealth management firms may have more than that in investable assets.

    Also when you did your previous post (or maybe it was Justin) on 1/3 being optimal for home country bias, does that apply to people from other countries? (ie someone from Germany having 1/3 in German stocks). I imagine it would be hard to differentiate whether the time frame chosen for the study might have just been a lucky sample.

  2. Canadian Couch Potato November 13, 2018 at 10:08 am

    @Jon: Glad you liked the podcast! The findings Todd refers to regarding pension and endowment funds is on page 12 of the white paper linked above. The source is the NACUBO-Commonfund Study of Endowments.

    That finding (that most large institutional funds underperform an index benchmark) is not that surprising. Beating the market does not necessarily become easier when you have more assets: in some ways it’s harder, because your good ideas may not be scalable to hundreds of millions of dollars. And pension and endowment funds often face the same behavioral hurdles that individuals do: they can be too focused on quarterly results and frequently fire asset managers who underperform over short periods rather than having a longer-term focus.

    As for the home bias, this would be country-specific, and period-specific as well. I don’t think one can conclude that the same would be true in Germany or in any other specific country. As Todd mentions in the interview, the home bias decision is part science and part art. There is no optimal allocation that can be known in advance, and some of the decision involves behaviour and perceived risk, which is variable.

    Here’s Vanguard’s infographic on home bias:

  3. James November 13, 2018 at 12:11 pm

    Loved the podcast. Very informative.
    I am hoping to help my grown kids set up a simple investing program in their registered accounts and was looking for a target date fund. I can’t seem to find a fund offered in Canada with low cost management fees. If I can’t find one with low fees similar to what is available in the US., maybe these funds would be the best bet.
    Any thoughts on this? I appreciate your comments.

  4. Canadian Couch Potato November 13, 2018 at 12:16 pm

    @James: In Canada, low-cost target date funds are common only in employer-sponsored plans. Those available to individual investors tend to be poor choices. I would suggest they look at balanced funds with static asset allocations and then simply revisit this every five years or so.

  5. Joe November 14, 2018 at 5:01 pm

    Interesting products! I would like to know: Do the fees on these Asset Allocation ETFs include the fees of the underlying funds, or are they in addition to the fees of the underlying funds?

  6. Canadian Couch Potato November 14, 2018 at 8:57 pm

    @Joe: The MER of the asset allocation ETFs includes the cost of the underlying funds: there is never any double-dipping on fees.

  7. Kyle November 14, 2018 at 11:12 pm

    Another great podcast! This one really resonated with me as I discovered these three fund (specifically VGRO) a few months back and have been debating between moving my funds from WealthSimple over to my Questrade account.

    I do have a question for you though. Given that VGRO is extremely diversified by nature, do you see any issues with having my RRSP, TFSA and RESP hold only VGRO in them? I’m 31 and my twins are 1, so I have no need for this money in the immediate future and will be regularly contributing to the accounts.

    Thanks for all the great content you put out!!

  8. Ale November 14, 2018 at 11:44 pm

    Again an outstanding podcast and I really loved the white paper.
    Quick question
    –VGRO ETF has a management fee of 0.22%, nor MER
    –where VCN, VXC have management fee and MER. Ex: VCN has a management fee of 0.05% and an MER of 0.06%. So please correct me if I’m wrong:
    MER=management fees + operating fees

  9. Canadian Couch Potato November 15, 2018 at 8:46 am

    @Kyle: The real question here is, “Is it appropriate for me to use an asset allocation of 80% stocks and 20% bonds for both retirement and education expenses?” If it is, then there is nothing wrong with using a single ETF in all these accounts. Adding more holdings just gives the illusion of more diversification.

  10. Canadian Couch Potato November 15, 2018 at 8:49 am

    @Ale: MER is a backward-looking number: it tells you what the fund’s expenses (generally management fee + taxes) were over the previous 12 months. That’s why new funds like VGRO don’t have one yet. They will publish the MER once the fund has a full year under its belt. Expect it to be about 10% higher than the management fee (that is, 0.22% becomes about 0.24%).

  11. christina November 17, 2018 at 2:00 pm

    Wouldn’t purists say reducing the canadian allocation over time is a form of active management?

  12. Christina November 17, 2018 at 4:45 pm

    I just noticed they don’t stick to market capitalization for the international allocation either. No doubt this american company will continue to increase their american bias but i guess time will tell. Hopefully ishares or bmo will introduce something.

  13. Tim November 17, 2018 at 4:50 pm

    Hi Dan, I found your comments on investing courses very interesting, as I am looking into taking the CSC for interest’s sake. I recall a conversation I had several years ago with a person studying for a financial planning certification exam and she commented that if one was unsure what the right answer to a question was, the most-likely correct guess was the option that would be the most profitable for the management company.

    Also, thank you for adding pagination to the blog posts page so that one can go back in time through every blog post. On page 63 is the very first post!

  14. Eszter November 19, 2018 at 7:08 pm

    Really liked it, thank you!! And the book suggestions are much appreciated.

  15. Daniel November 22, 2018 at 1:47 pm

    So glad to have this podcast publishing new content again! Thank you for the book recommendations!

  16. Dno McPherson November 25, 2018 at 3:21 pm

    To Tim Nov 17, 2018: I took CSC course in 2004 with passing grades and diploma. My time spent and $450 in course content was questionable. Do not waste your money. I felt sorry for bank employee’s who failed test at that time.
    Keep strong, and follow your instincts. It’s your money involved.
    Don M.

  17. David B. November 26, 2018 at 12:00 pm

    Thanks for this amazing podcast. It have answered some question i had about rebalancing by buying. This is what i was doing with my spreadsheet that i use that tell me what i need to buy to keep thing in balance. With that, i might not have to rebalance for a while until the new purchase won’t be enough to rebalance the whole thing.

    Also, very good info on when repaying the mortage vs investing.

  18. Mia December 13, 2018 at 9:50 pm

    What are your thoughts about XGRO etc? The iShare equivalent of VGRO and VBAL. Is there a reason to choose one over the other? Functionally? In terms of the breakdown of underlying holdings? Cost? What about being able to buy and sell them for free using QTrade?

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