The new asset allocation ETFs launched by Vanguard and iShares in 2018 have made it easier than ever for investors to build a low-cost balanced portfolio. If you want a globally diversified mix of 80% stocks and 20% bonds, for example, the Vanguard Growth ETF Portfolio (VGRO) will deliver that with a single trade. Want a more traditional balance of 60% stocks and 40% bonds? The iShares Core Balanced ETF Portfolio (XBAL) will do all the heavy lifting.
Of course, one-fund portfolios won’t fit the needs of all investors. Say, for example, your financial plan calls for an asset allocation of 50% stocks and 50% fixed income. None of the Vanguard or iShares asset allocation ETFs has this mix, so you’ll need to look for a different solution.
Let’s consider some ways you can combine asset allocation ETFs and other products without completely sacrificing simplicity.
Customize your asset mix with a bond ETF
The first wave of asset allocation ETFs was made up of all-in-one portfolios of stocks and bonds. But these were followed by the Vanguard All-Equity ETF Portfolio (VEQT), which uses the same mix of Canadian, US, international and emerging markets stocks as in the all-in-one ETFs. It just strips out the bond component.
While this fund is ideal for a very aggressive investor who wants a 100% stock portfolio, VEQT can also be combined with a bond ETF to achieve any asset mix that isn’t available in a single-ETF solution. For example, if your target asset mix is 50/50, you can simply hold equal amounts of VEQT and any broad-market bond ETF. You can also combine 70% in VEQT and 30% in bond ETF if your target asset mix is half way between the balanced and growth versions of the asset allocation ETFs (which hold 60% and 80% stocks, respectively).
If you’re investing in a non-registered account, you can also use VEQT in conjunction with the BMO Discount Bond ETF (ZDB), which is likely to be more tax-efficient than the traditional bond funds held in the all-one-ETFs.
Of course, the trade-off here is that you will still need to rebalance your portfolio from time to time. One important feature of the single-ETF option is that they rebalance the stock and bond components automatically, and you’re giving that up. But I think we can all agree that rebalancing a two-fund portfolio isn’t going to kill too many brain cells.
Add a GIC ladder
For conservative investors in particular, another option is to combine the Vanguard All-Equity ETF Portfolio (VEQT) and a bond ETF with a ladder of GICs. For example, if your target asset allocation is 60% fixed income, you could hold 45% in GICs with the other 15% in a bond ETF. Then VEQT can make up the entire equity portion.
This has a few advantages. First, because GICs do not have management fees, they can further reduce the cost of the portfolio, especially when compared with an option such as VCNS, which is 60% bonds. Second, GICs have higher yields than government bonds of the same maturity. And finally, they are likely to be more tax-efficient than bond funds in a non-registered account.
Just be aware of the key drawbacks with GICs. They are not liquid, which means you cannot sell them before their maturity date, so you need to be comfortable locking up your money for one to five years. GICs are also less than ideal for investors who are regularly adding new money, since you can’t buy them in small amounts without creating an unwieldy portfolio.
Moreover, if there is a sharp downturn in equities and your only holdings are a single equity ETF and a GIC ladder, there is no opportunity to rebalance until the next GIC matures. That’s why you need to include a bond ETF (or high-interest savings account) as part of your fixed income allocation to add flexibility.
Don’t take it too far
One word of caution here: while the new Vanguard and iShares asset allocation ETFs can be combined with other products, there is a danger of going overboard. Remember, the goal of these ETFs is to make portfolios simpler, not more complicated. If these ETFs are just going to be a small part of a portfolio with a dozen or more moving parts, don’t bother with them at all.
If you want the easiest solution, then just choose one of the asset allocation ETFs and hold it in all of your accounts. And if you want a little bit of customization, you can use one of the strategies I’ve outlined above. But if you’re one to obsess over your precise allocation to emerging market equities, or if your goal is to save every basis point in taxes, then a customized portfolio of individual ETFs is more appropriate, though it always comes at the cost of more complexity.
are the new EFTs offered by Desjardins (specifically, the 0.25% CA and the 0.25% US ones) a good choice for someone who has a small amount to invest and already has an account with them? thanks
https://markets.businessinsider.com/news/stocks/desjardins-launches-a-suite-of-six-ri-low-co2-exchange-traded-funds-1027570260
@Gaetane: The brokerage where you hold your accounts should have no influence on the ETFs you use: ETFs from any provider can be purchased from any brokerage.
The new Desjardins ETFs track a “low carbon” index, so they may be appropriate if that is your priority, but they will likely perform quite differently from traditional index funds.
Hi @Dan:
I am a fairly new investor and have gained some knowledge through your blog. I initially started with Wealthsimple’s 60/40 portfolio (RRSP), and I have recently started investing in VGRO and ZAG (70/30 | TFSA) through Questrade. I am 35 now and would like my overall investment to be in the 70/30 category; I know it’s not at the moment. I invest bi-weekly, about 500 into these accounts and add some to my savings account for emergency funds, holidays ,etc. My goal at the moment is to buy a house within next two years as well as to continue saving for my retirement. I know that my split is not exactly 70/30. What would you suggest I do?
My annual income before tax comes to 70,000 plus bonuses, and my wife works part-time but she will be going back to school this fall. We are quite careful with where we spend money, but I also have other commitments towards my family, hence some of my earnings goes towards family maintenance as well.
Appreciate your blogs, recommendations, and tips!
Ashby
@Ashby: I cannot make recommendations for your specific situation. Hope you understand.
Hi @Dan,
I would like to move my registered savings funds (TFSA and RSP) to VGRO. I cashed out of the stock market last year and my holdings are currently in a HISA at Simplii (TFSA) and in TDB 8150 at TDDI (RSP). The TFSA is maxed and the RSP is mid six figures.
Is there a best day/time of the week for one to buy VGRO in TDDI TFSA and RSP accounts?
In addition, I have a RDSP at TDDI, which is also currently holding TDB 8150. Is there any reason why i would not want to switch my RDSP holdings to VGRO as well?
I note that my RSP is maxed out and I will not be able to contribute further as I am off work on LTD. I have already made my maximum contributions to my TFSA so I will likely be making only one yearly maximum contribution going forward. Accordingly, my trades will be limited in number and not a factor for those accounts.
Finally, for a non-registered savings account, while I have been able to take advantage of excellent HISA rates at Simplii, Tangerine, and EQ Bank, instead of constantly shuffling funds between HISAs at various financial institutions to get the best rate, is there an ETF or combination of ETFs you would recommend for a short-term investment (1-5 years) with medium risk? I would like these funds to be fairly liquid for a potential real estate purchase. This account is currently in the mid 6 figures.
Thank you in advance for your information.
Hello @Dan, my wife and I are 30 years old and we are planning to try and have our first child. We would like to setup our TFSA to prepare savings for this project. We thought a mix of 70% bonds and 30% stocks would let us accumulate our savings and maybe increase them a little bit. In your post you suggested to split one third of the portfolio in XGRO and two thirds in a bond ETF. I must admit I have no idea which bond ETF to buy. There are so many. Could you help us?
@Alex: I generally recommend broad-market bond index funds, which hold high-quality government and corporate bonds of all maturities. The most popular are VAB (Vanguard), XBB (iShares) and ZAG (BMO), and there is no meaningful difference between them.
This post is already somewhat out of date, and I plan to revise it, because Vanguard has just released an all-equity fund that makes the math much easier: https://www.vanguardcanada.ca/advisors/adv/en/product.html#/fundDetail/etf/portId=9692/assetCode=balanced/?overview
Now an investor who wants a 70/30 portfolio can just allocate 70% to VEQT and 30% to a bond fund. Super-simple two-fund portfolio.
I like the new one-stop ETFs and am considering converting my CP portfolio. However, one area I have not seen addressed is whether a strictly one ETF portfolio makes sense for someone retired and is thus in the decumulation phase.
Let me elaborate. With a CP portfolio, when the market is down one would normally sell primarily fixed income assets in order to rebalance. Selling equities would only be done if the fixed income sale did not generate the required cash (on a monthly or quarterly basis). This results in one not unnecessarily “selling low” w.r.t. equities. Similarly, when the market is up one would normally sell primarily equity assets.
However, with a 1Stop ETF, when the market is down one would end up selling both fixed income and equity assets in the proportion of the fund. I.e., one would end up “selling low” w.r.t. equities.
As such, it seems to be that ideally one would need 2 ETFs – one all equity and one all fixed income. That way there’s no danger of excessive selling of equities when the market takes a turn for the worse.
Not sure if I explained that well, but would really appreciate hearing your thoughts on this, Dan. Am I correct in my thinking, or am I missing something?
@Jim R: I understand the concern, but remember that if equities decline in value, the ETF itself will be selling fixed income to “buy low,” since it is obligated to maintain its target asset allocation. The situation would be similar to you holding two ETFs (one for equities and one for fixed income) and rebalancing frequently. And in fact, the ETF would likely be more tax efficient than you would be, because it would have greater cash flows that would make it less necessary to sell securities when rebalancing.
It probably still makes sense to hold some cash and/or GICs for short-term needs when you are in the decumulation stage, but I would not necessarily rule out using a one-ETF portfolio for the stock and bond portion.
The Vanguard VBAL is charging a small amount of MER, but it holds a number of other funds. Those have their own MER. Is the actual MER then the accumulation of the underlying funds added (double dipping) , or when internal purchase the underlying funds don’t charge anything. .
Would be interesting to know.
Peter
@Peter: There is never double-dipping on fees in these ETFs. You pay only the stated management fee: the fees of the underlying funds are rebated.
Hello Dan, Thank you again for the service you provide for Canadian DIY investors. You really help take some of the fear out of a new and uncertain experience. I am investing for me and my wife who are teachers with defined benefit pensions and we hope to retire in seven years or so. We have maxed out our RRSP and TFSA accounts and have no debt. I now need to start investing in a taxable account. Since we are about to turn 50, I have been buying VBAL for the RRSP and because of the DB pension I’ve been slightly more aggressive in the TFSA with VGRO for approximately 30/70 fixed and equities split. I’m thinking of doing the same split for the taxable.
The issue/question I have is as follows. I’d like too keep things as simple as possible, so I was thinking of using VEQT and a bond ETF like ZAG or ZBD. But when I use your CCP Rebalancing Table and split the 70% equities into 23% CDN, 23% US, 18% Int, 6% Emerg, then run through a few years of contribution inputs, I find that my invested US portion creeps up to about 28% and the others are, naturally, too low.
So am I splitting hairs, and can I just accept this higher US exposure without too much worry? Or is it more sensible to abandon the simple plan and buy specific ETFs (like CPP or CPM suggest) for each equity category?
Sincere thanks for any advice you are comfortable providing.
@David: Thanks for the comment. My general advice has always been to break the equity portion of a portfolio into roughly equal amounts if you are holding individual funds. The asset allocation ETFs from Vanguard don’t do that, as you’ve noted. But this is fine, and I certainly would not move away from one-fund solutions for this reason. There’s no magic formula, and Vanguard’s target is perfectly reasonable.
Going a step further, I would encourage you not to set different asset class targets for different accounts unless you have a very specific reason for doing so. If all of your accounts are designed to fund your retirement, then it’s best to think of them as a single large portfolio with one overall target. Indeed, that’s one of the reasons a spreadsheet like this is needed.
https://canadiancouchpotato.com/2012/03/12/ask-the-spud-investing-with-multiple-accounts/
I want to buy some laddered GIC-s. Is there an ETF which contains laddered GIC-s or I have to buy my own ladder (say 1-5 years).
Thanks.
@Peter: There is no ETF that holds GICs: you would need to build your own.
I have transferred my RESP from Scotiabank to Questrade. I have over $33,000 sitting as cash currently as I am not 100% sure on what ETF’s to purchase. My RESP currently is for 2 kids aged 6 and 4. Previously with Scotiabank I had 100% invested in index funds (100% equity). I am not sure if I should go with VGRO (80/20 Equity ratio) or XAW, VCN and ZAG portfolio you have shown as an option which would give me (90/10 Equity Ratio) or I can even change it to reflect 80/20 Ratio to match VGRO. What is the benefit and con of each option. Is there any fees with buying or selling the ETF with Questrade for re balancing purposes?
@Massoud: Because the asset mix in an RESP will change over time (it should get more conservative as your children get older) an easy way to do this would be to use an asset allocation ETF and a bond ETF (or even a high interest savings account). You can then simply shift more money to bonds/cash over time while still keeping the portfolio simple with just two moving parts.
Questrade charges commissions to sell ETFs (but not to buy) so you want to keep trading to a minimum.
I use a 5-year ladder of cashable GICs from Outlook Financial for the bond portion of my investment portfolio as well as a separate GIC ladder for my emergency fund. You can withdraw a partial amount from any GIC as long as you maintain a minimum balance of $1,000, and only the withdrawn amount is subject to an early withdrawal rate. You can also cash in the entire GIC early, in which case the early withdrawal rate would apply to the full amount of the GIC.
Last year, I needed to make a withdrawal from my emergency fund. It was great to be able to cash in only the portion I needed, from the lowest-yielding GIC in the ladder, instead of cashing in the entire GIC. I could follow the same strategy for rebalancing my investment portfolio, if necessary.
Dan, do you think the use of cashable GICs eliminates the need for a bond fund or could including a bond fund still be useful?
@Linda: There are two major differences between GICs and bonds in a portfolio. The first is that bonds are liquid, while traditional GICs are not. Cashable GICs solve that problem. You will pay a little extra for cashable GICs (i.e. their yields will be lower) but this may be a good trade-off. So mixing traditional and cashable GICs can be work well. The Oaken policy you describe sounds very favourable.
But the other major difference between GICs and bonds is that the latter will go up in value when interest rates fall, whereas GICs will not. Over the last 12 months or so, for example, broad-market bond index funds returned about 7%. Interest rates are generally more likely to decline when equities do poorly, so in that sense bonds can provide additional diversification.
All of which is to say that you don’t necessarily need bonds, but some combination of bonds and GICs (cashable or otherwise) is often a good idea.
(For the record, I would tend to consider an emergency fund separate from your investment portfolio, not part of your fixed income allocation.)
Excellent points about the bond fund. After careful consideration, I think it makes more sense for me to stick with GICs since the majority of my investments are in taxable accounts. (TFSAs are taken up with my emergency fund – which is indeed separate from the fixed income portion of my portfolio – and due to a variety of factors, RRSPs don’t make sense for me.) Thanks for the blog posts that helped me figure that out, by the way!
On a side note, I didn’t pay more for the cashable GICs I bought. The yields were actually higher than any offerings from the major banks. I’ve often found that to be true of the Manitoba credit unions. One caveat is that the Manitoba credit unions are not CDIC-insured but are instead nsured through their own provincial deposit insurance plan. I’m comfortable with that but some investors might not be.
Thanks for your super-informative, Canadian-centric blog! It’s made a huge difference to this DIY investor.
Obviously you can’t guarantee what the market will do, but is it reasonable to expect veqt to outperform vgro due to the likely trend up of interest rates in the next 20-30 years? Basically the only downside I’ve heard to veqt is that investors have a greater chance of panic selling because of the greater market fluctuations with 100% stock allocation. But this is not a concern for me. For someone with a “strong stomach” and a 20-30 year horizon does it make more sense for me to hold veqt than vgro? (I currently hold vgro now)
What is the difference between ME and MER?
As of 1 Aug, 2019 iShares Core Balanced (XBAL) shows a ME of 0.18% and a MER of “*Effective December 11, 2018 the ETF’s management fee was reduced from 0.25% to 0.18% and its fee structure was changed. As of December 31, 2018 the Management Expense Ratio of the fund was 0.76%.”
(https://www.blackrock.com/ca/individual/en/products/239449/ishares-balanced-income-coreportfoliotm-fund)
The Vangard Balanced ETF Portfolio (VBAL) showes a ME of 0.22% and an MER of 0.25%.
(https://www.vanguardcanada.ca/individual/indv/en/product.html#/fundDetail/etf/portId=9578/assetCode=balanced/?overview)
So if both funds have virtually identical underlying holdings then price would be a deciding factor (understanding trade commissions plays a role too). Sure, on a small portfolio it’s not much of a difference in actual dollars. As the portfolio grows it can mean the difference of about $250 on a $50,000 portfolio. That’s more than I take home for a days work so it’s worth while for me to optimize this.
On one hand XBAL has lower ME but VBAL has lower MER which number should I be looking at?
Thank you,
Jason
@Jason: Thanks for the question. I am assuming by “ME” you mean “management fee.” A fund’s MER consists of its management fee plus a couple of extra basis points for taxes. A good rule of thumb is the that the MER will be 10% higher than the management fee. For example, 0.22% management fee x 10% = an extra 0.022%. That’s pretty close to 0.25%, so the VBAL numbers are just what you’d expect.
The 0.76% figure XBAL and XGRO has been a common misunderstanding since these funds first appeared. Their MERs will not be anywhere close to 0.76%. These two funds (unlike their counterparts from Vanguard and BMO) were not brand new: they evolved from two older ETFs (tickers CBD and CBN) that had much higher fees. Published MERs are backward-looking: they tell you the expenses of the fund over the previous 12 months. So investors holding CBD or CBN did pay an MER of 0.76% last year. But when iShares changed the mandate of these ETFs they lowered the management fee to 0.18%. Using our rule of thumb, I would estimate the full MER will be right around 0.20%. Only after these funds have been live for a full year will the published MER reflect that current investors are paying this much lower cost.
Hi, 100K RRSP, don’t need money for 10yrs., really like Vanguard VEQT but think VBAL would be better choice, as alrready retired.
Any thoughts , Thx. Sidd
The MER for these asset allocation ETF is around 0.2%. They contain other ETFs underlying which also have a free associated. So are we essentially paying 0.2% plus the underlying ETF fees?
Thank you!
@Dheepak: There is no “double-dipping” on fees in these asset allocation ETFs. The fees on the underlying funds are waived and investors pay only the published management fee (typically 0.18% to 0.22%).
Hi Dan, I’m looking to move my RRSP and TFSA funds from the CCP model portfolio allocations to either VGRO or XGRO. I currently am using Questrade and am wondering what the most cost effective way of doing this is? Is it to sell all my holdings at once and simply purchase VGRO or XGRO?
@Ethan: Yes, the most straightforward way to make the switch is to simply liquidate all of your holdings and then immediately purchase your all-in-one ETF across all your accounts. You will incur some commissions to sell the ETFs, but this will likely be well worth it in the long run.
If you are holding ETFs in a taxable account, please note there will be taxable gains/losses upon selling your funds. If you’re investing only in a TFSA and/or RRSP, then this is not an issue.
Hello,
When it comes to the Vanguard asset allocation ETFs would I ever have to worry about the liquidity of this fund? In the future, if I wanted to pull my money out quickly, would I have to worry about (relatively) low trading volumes? For example, when I checked volumes of VTI the volume was ~2.2 million compared to volume for VGRO of ~54 thousand – is this discrepancy in volume concerning?
Learned a lot during the podcast, thanks.
@Mateo: The Vanguard ETFs already have significant trading volume (albeit not as much as VTI), and liquidity is generally not an issue with these ETFs.
Hi,
I have bought VXC, VGRO and just recently, VEQT ETFs. Because I will have a private pension when I retire in another 7 years, I am not too concerned about bonds. Should I keep these three ETFs, or should I roll my VGRO into my VEQT because it is costing me more to own two all-in-ones?
Thanks.
Hi couch potato,
Thanks for helping. I am newbie to investing. I have 10K RESP for my 3 kids. I am also holding 50K TFSA please suggest some longterm ETF or investing tips. Thanks.
In the off-chance in very late 2020 that the following questions might be seen and answered.
VEQT is made of 4 ETFs and the securities these comprise exceed 12,500 some of which pay dividends, some do not and the distribution frequency varyies. VEQT’s distribution is annual though so the fund manager has access (?) to funds not received by the VEQT investor.
Who audits to ensure dividends are appropriately passed on?
Is Vanguard or VEQT required to hold distributions received in a trust account?
Does a VEQT investor have to be a holder of record at the time of dividend declaration to receive a distribution? If yes, dividends received by VEQT throughout the year would be a windfall would it not relative to those investors who sold their units during the year?
@David Cox: First off, all mutual funds and ETFs receive dividends throughout the year and then pay them out at regular intervals. In most cases, ETFs pay quarterly or semi-annually. Almost all mutual funds pay distributions only once at the end of the year. So VEQT is not at all unique in this respect.
The fund manager will typically just reinvest all dividends as they are paid, the same as they do whenever the fund receives new cash flows from new investors. Then at the end of the year the fund pays out the total amount received during the year.
It’s important to understand (and even many experienced investors never do) that a dividend is not free money. Receiving a dividend does not automatically make the value of the fund go up, because whenever a dividend is paid, the price of a stock (or a fund) falls by a roughly equal amount on the ex-dividend date. This is also why there is no reliable way to arbitrage this by buying immediately before the dividend is paid.
This is a big topic, there are a lot of good articles explaining why “dividend capture” doesn’t work, e.g.:
https://www.investopedia.com/ask/answers/buy-before-dividend-then-sell/
Dan, the whole concept of dividend capture had not even crossed my mind but the practical side of owning an ETF that only pays out a distribution once per year. If I bought VEQT in January and sold in September for whatever reason, I know that dividends would have flowed through to VEQT but not being a record holder on the actual December Record Date, though you did not confirm it, I assume there would be no distribution receipt for some share of the distributions VEQT received during my holding period. In other words, an investor that does not subscribe to a Buy and Hold strategy must recognize forgoing the income such an ETF earned if not held through to the Record Date. It seems the incentive to own a once a year distribution ETF is diminished.
@David: You’re correct that you would not receive any cash distributions from VEQT unless you owned the shares at year end, on the record date. So I think it is fair to say that if you are not a buy-and-hold investor and your goal is cash flow, then VEQT is certainly not an appropriate holdings.
I didn’t mean to suggest that you were specifically thinking about a dividend capture strategy. I was just trying to make the point that from a total return standpoint, there is no inherent disadvantage to an ETF that pays annual distributions only. In your example, if you bought in January and sold in September, the proceeds of your sale would include any dividends paid by the stocks in the fund to that date. These would be reflected in the net asset value of the fund. Nothing is lost.
Hello Dan. Thank you for sharing all the information, I recently discovered the podcast on Spotify and have binged through almost every episode. Keep up the great work!
I’m new to DIY investing but took the plunge after changing careers due to a COVID-related layoff. My 10 year, group RRSP had grown into 6 figures, and after careful consideration, I opted to cut the cord from the mutual fund provider and opened a self-directed Questrade account for EFT long-term buy and hold strategy for retirement savings. I am in my 30s with wife and 2 kids at home, and have decided on a Vanguard asset allocation EFT and initially bought 50% VGRO and 50% VBAL to get to a 70%-30% allocation, which suites our risk profile. Over time we will shift more weight to VBAL. I see now your recommended 70/30 is to go with the VEQT (70%) / VAB (30%).
I realize the MER is slightly higher on VGRO/VBAL, but do you see any fundamental issues with the 50% VGRO/50% VBAL holdings I have purchased for long-term retirement savings strategy?
Thanks again for sharing your knowledge.
@Joel D: Using a 50/50 split of two asset allocation ETFs is a perfectly reasonable alternative to combining an equity ETF and a bond ETF. In fact, my colleague Justin Bender does this in his model portfolios:
https://www.canadianportfoliomanagerblog.com/model-etf-portfolios/
The main difference is that the asset allocation ETFs include non-Canadian bonds. Some years this will work out in your favor and others it won’t, and over the long term it’s not likely to have any meaningful impact.
My wife and I are both retired and plan to start taking income from our rrsp’s starting Jan 2022. We are seriously looking at putting all our tsp money into vrif is this a sound move on our part?
@Richard: I did a series of four posts on VRIF that may help. Here’s #3:
https://canadiancouchpotato.com/2020/10/08/is-vrif-right-for-your-portfolio/