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.
Hi Dan,
I have been partaking in some tax loss selling with my 3 fund Couch Potato Portfolio in my Canadian Professional Corporation.
Would holding VGRO in a CCPC be something you would ever recommend to your clients? Perhaps with some laddered GICs for instance?
Hi Dan,
How would you advise an RDSP be structured? I have the maximum in of $200,000 and I am on year 3 of taking the mandated withdrawal. It’s very difficult to find recommendations re: RDSP, and if I do come across any, it for the accumulation phase. I would appreciate any feedback you might have. Thank you and a very Happy New Year to you!
Good article Dan. This information is helpful for many people who need/want one of the new asset allocation ETF’s from Vanguard or iShares. I would follow the methodology you laid out if I wasn’t already invested in BMO, Vanguard and iShares ETF’s.
Happy New Year!
Hi Dan,
I have followed the CCP portfolio for my RRSP so far. If I want to make my life easier and get rid of rebalancing, would it be wise to change all my portfolio to one of the equivalent EFT solutions offered by Vanguard or iShare?
Thank you
Hi Dan,
I like the idea of these one-stop-shopping funds, but I’m wondering if I have to use a different strategy. With a significant government pension, it seems I already have all the fixed income I need. It’s bombproof, backed by the taxpayer (sorry to all who don’t have one!). It would seem the correct strategy is to invest 100% in equities since the pension is already such a large part of my retirement plan.
Even with early retirement a very short 5 years away, after firing my financial advisor it seems I should purchase all the equity components of VGRO individually, and avoid purchasing the FI components of VGRO. If I try estimate the present value for the pension, that would put me at 50% equities and 50% FI. Seems no sense in buying more FI when the pension alone is enough for survival.
Does this make sense? Avoid the convenience of VGRO in order to maximize equities outside of my pension, since my pension is already the best kind of FI imaginable?
Thanks, and Happy New Year.
@Miwo: There’s nothing specifically wrong with holding VGRO in a corporate account, although we don’t do it with our clients. Remember that any ability to harvest losses or gains would be very limited in the future if you use a one-ETF portfolio, however.
@Shannon Dean: This is a big question that I cannot answer for you: it depends on your individual circumstances and should probably be determined the help of a financial planner.
@Reza: This is a personal decision: if you are finding your current portfolio difficult to manage then, yes, it would be worth considering using one of these single-fund portfolios.
@Paul: This is a good question that depends on how much risk you’re comfortable with. I approach the question this way: with a secure pension, you have the ability to take more risk with your personal savings, so if you are comfortable with 100% equities, then that may be a reasonable strategy. But very few people can handle that volatility, especially in retirement. Moreover, you can make the opposite argument: that with a secure pension you have no real need to take risk with your personal investments, so it would be reasonable for you to hold a balanced (or even conservative) portfolio for a smoother ride. In the end, this is about what makes you most comfortable.
Good article. I would also argue that these one-stop shop ETFs are not a good choice for those who are living off their portfolio. I have 30% in fixed income and if there is a prolonged market downturn, I intend to use this until equities recover (5%/yr x 6 yr max. downturn). If I have to sell these, I have to sell both the fixed income and equity components.
I had an interesting day with my last tax loss selling. It was last Xmas Eve.
I hit my bands for selling my ETFs (VCN & VXC). I entered my trades as you suggested with 2 cents below the bid price. Those sold immediately.
The problem was that when I tried to get back into the market with my XAW, The prices were at times 9 cents between the bid-ask. I was unable to get into the market with 2 cents above the ask price.
Since I was only trying to tax loss sell, I did not want to try timing the market. Thus I eventually had to enter a market order which bought my entire XAW at a much higher percentage than the sell price for my VXC. Usually I notice there is about a 0.5% difference between the prices of XAW & VXC. My XAW was bought about 1.6% difference higher in price.
Do you think it was because I preformed this trade on Xmas Eve and perhaps there was less liquidity in the markets that day? I avoid the first and last half hour of trading day as many of you advise but was definitely caught in the whipsaw of the market for that trade.
Any further suggestions for how I might perform this better next time?
This is why I am asking about just using VGRO in my CCPC. If there is the risk of this slippage on an ongoing basis, I should just use these asset allocation funds instead.
Please advise if I am doing this all wrong as well. Thank you in advance Dan.
Honestly, I think all of this is “taking it too far”. If you’re not going to use a one-fund portfolio *as* a one-fund portfolio, you just shouldn’t use one. These are for people who don’t want to worry about balancing multiple ETFs. Once you’re balancing 2 of them, you might as well be balancing 3 or more. The temptation to change allocation based on feelings is still there whether it’s Canadian and international ETFs, or a VGRO, bonds and cash. If you have 2 ETFs and understand that you should sell one when it’s high or buy when it’s low, you can easily use the same logic with more than 2. It doesn’t need to be absolutely precise. The couple with $400,000 is essentially spending $250 just to avoid having one more ETF.
Happy new year and thanks for all the info. I especially love the podcast.
I have set up an RESP for my newborn and would like to implement a strategy you recommended in an old blog article: start with an all-equity portfolio for the first 10 years or so, then add bonds and annually increase the proportion of bonds until you end up with an all-bonds portfolio at the end of 18 years. To that end – do you know of any single ETF made up of 100% stocks that includes the World and Canada? I want the simplicity of holding a single ETF, if possible, rather than holding, say, XAW plus VCN and having to balance them.
Thanks in advance.
@KG: Thanks for the comment. There is no ETF that is 100% equities with an overweight to Canada. (There is XWD from iShares, but it holds only the market weight in Canada (about 3% or 4%) and no emerging markets.) But, really, I think a fund like VGRO or XGRO is ideal in an RESP. Remember that for the first few years an RESP is likely to be very small, so you’re really not giving up much by going “only” 80% equities instead of 100%.
Interesting question by @KG. This got me thinking…. Dan, are you aware of any plans of introducing “target date funds” to the Canadian market? I think a solution like that would be appropriate for both RESP and RRSP. How popular/well-received have these been in the US? Admittedly, there is usually a delay with respect to the US in terms of financial products…
@Mike: Target-date funds are quite popular in Canada, but only in employer-sponsored plans. Vanguard Canada offers them, for example:
https://www.vanguardcanada.ca/institutional/articles/vanguard-news/news-from-vanguard/vg-two-new-target-retirement-funds.htm
But as far as I know the only ones available to DIY investors are RBC’s Target Education Funds, which are designed for RESPs:
http://funds.rbcgam.com/investment-solutions/portfolio-solutions/rbc-target-education-funds.html
@Miwo: It’s impossible to know exactly what would have caused the bid-ask spread to get so wide on the day you made your trades. Low trading volume should not have made much of a difference if the market makers were doing their job. The fact that markets closed early on Dec 24 might have had something to do with it. And I’m not sure using VGRO or XGRO would solve the problem, as there are days when these funds seem to deviate more than expected, too. There are definitely days when the market prices seem to diverge from the NAV:
https://canadiancouchpotato.com/2013/03/13/two-ways-to-measure-an-etfs-performance/
https://canadiancouchpotato.com/2013/03/18/the-etfs-price-is-right-except-when-its-not/
Hi Dan,
As it is for many, I’m sure, the turning over of a New Year has reminded me of the importance to get my finances in order. I’m relatively new to investing, and have maybe $5k in various stocks that I don’t really pay any attention to (because my parents bought them for me eons ago), and $25k sitting idly in an RRSP waiting for me to make a plan about where to put it. I’m married, in my mid-30s with no children and no debt. Reading through your website, along with the MMM website, I feel like so much of these recommendations are for folk with significantly more money than me, not to mention knowledge about investing. I don’t have any! Can you please tell me your top three steps/recommendations/tips for a young(ish) female dipping her toes into the investing world for the first time?
Thank you!!
SS
Hi Dan,
I have been using the couch potato strategy for my kids RESPs and it has worked well so far. I sold most of my equities this past summer as everything was at an all time high and bought more bonds. I now have 85% bonds and 15% equity in the portfolio. Since I just contributed more money into the RESP for 2019, I am wondering if you have recommendations on what to buy this year? It would be a long term hold, probably 7-10 years. More equities probably makes sense to better balance the portfolio, but with the markets having corrected over the last 4 months, I’m wondering if buying more XAW or VXC makes sense? It could be looked at as a good buying opportunity or do you think there is a further correction coming?
I realize that this is a tough question to answer. I prefer a conservative approach for their portfolio, and try to keep 70% bonds in there at all time.
Thanks
@Ivan: My recommendation is to have a long-term target for your asset allocation and to stick to it with discipline. Once you start trying to forecast the market you’ve lost sight of the strategy.
How are the withholding taxes on these two funds?
@Daryl: In a TFSA or a non-registered account the effect of foreign withholding taxes is generally the same as with other Canadian-listed ETFs. In an RRSP, there is an extra layer of withholding taxes on US and emerging markets equities compared with holding US-listed ETFs directly. But again, these ETFs are not designed for optimal tax-efficiency, they’re designed for convenience.
Hi Dan,
Thank you for this very interesting analysis. I’m investing a six figures lump sum in a LIRA account, and thinking a all-in-one ETF might not me the answer because of the foreign withholding taxes. My Question : why is there such a strong Canadian equities component in your (and others) model RRSP portfolio? Canada represent a small portion of world markets (less than 4% I think) so why giving our country’s economy such a heavy exposure? Is it related to currency i.e. investing everything in XAW for exemple exposes one to currency fluctuation on top of normal market fluctuations? Thanks!
@Nicolas: These should help explain the home bias:
https://canadiancouchpotato.com/2012/05/22/ask-the-spud-does-home-bias-ever-make-sense/
https://www.moneysense.ca/columns/bias-towards-canadian-stocks/
Note that both Vanguard and iShares came to similar conclusions when designing their all-in-one ETFs.
Thank you Dan! Much appreciated. Happy investing.
Best,
Nicolas
hi Dan!
Do you recommend using questrade for buying ETF’s for TFSA in Canada?
@Roy: I don’t endorse any specific brokerage, but certainly Questrade’s zero-commission offer makes it attractive for ETF investors.
Hi Dan!
Do you think that with the advent of the All-in-one ETF’s, as well as the low cost options offered by a number of robo-advisors, that some of your model portfolio options may need to be refreshed or replaced? Specifically the Tangerine and TD eSeries options. The Tangerine option is definitely on the high end of fees now, while the TD eSeries option still needs to be rebalanced v.s. a robo with a similar fee that would not.
Please do not take this as a criticism, it is not. Just looking for your thoughts on the developing landscape. I love your work and am looking forward to see what your 2019 model portfolios look like!
@Mark: It’s a fair question, and certainly robo-advisors have become another possible option, though I don’t think they render the Tangerine or e-Series options obsolete as model portfolios.
Tangerine is slightly more expensive than most robos (which often come in at about 0.70% including the underlying fund fees), but the difference is usually very small in dollar terms when you consider that this option is primarily for people just starting out. Moreover, I like the simplicity of the Tangerine portfolios compared with the more exotic options offered by most robos.
The e-Series funds are cheaper than robos, though you are right, you do need to rebalance them manually.
Finally, in the context of model portfolios, it’s not helpful for me to suggest robo-advisors generically: I would need to be comfortable endorsing one or two specific ones, and I am not ready to do that.
Hope this helps.
As I hold my couch potato portfolios for longer periods of time I am gradually becoming instinctively aware that rebalancing need not be an exact science, and indeed may not even need to be done at all, because it is based upon an asset allocations ratio that one has arbitrarily decided on that is more or less within one’s comfort zone.
In relation to that idea, I have been managing my son’s TFSA for years as he spends a lot of time out of the country, and quite frankly he says he does not want to bother with the day to day details, which is a reasonable approach. Given that he doesn’t even want to look at the portfolio values, even annually (he understands very well the long term implications — why look at it if I’m not going to be changing anything? — and he is in it for the decades-long time scale) would it be reasonable to assume his comfort level is very high with a a very high equity-rich mix (it actually appears to be very high, period), and that, as the expected appreciation over the long haul is highest for equities, it would be reasonable over the years to top up only the well diversified equities mix annually from the annual cash contributions?
Individual ETFs do have the advantage of tax loss harvesting since we would be able to sell the particular ETF that is causing losses.
With VGRO and XGRO, I guess tax loss harvesting is still possible but only during significant market downturn – the investor can sell XGRO and replace it with VGRO and vice versa.
Reiterating that it won’t be as efficient as Tax loss harvesting in individual ETFs but still possible.
What do you think?
@Dheepak: You’re right that balanced ETFs like this are not ideal for tax-loss harvesting. Remember, they are not designed for tax optimization, they’re designed for convenience.
Thanks for the confirmation! A bit out of topic, but does Tax loss harvesting actually create a gain, other than deferring the tax on declared losses to a later year?
I guess the only way of looking at it is that I can use the deferred tax to fuel further investments which can create additional growth, but we could be talking about a $1000 tax deferred a year.
Also, any idea on how efficient these Asset-allocation funds are when it comes to Tax-efficiency on Dividend distribution?
Thanks!
@Dheepak: You’re right that tax-loss harvesting doesn’t making taxes disappear, it simply defers them, though there is a lot of value in that. Moreover, if you have gains from past years you can carry back harvested losses to offset these and you may be able to recover taxes already paid.
As for the distributions on the asset allocation funds, in a taxable account they are the same as if you held the underlying funds directly: your T3 slip will break them down as Canadian dividends, foreign dividends and interest.
Are there USD versions of these? Perhaps AOA and AOR from iShares (the Vanguard equivalents in the US seem to be mutual funds so can’t purchase those)? If you want to hold some US dollars in your RRSP using this asset allocation approach, would these serve a similar purpose?
@David: I would not recommend using US asset allocation ETFs. They include US bonds that are not hedged to CAD (foreign bond exposure should be hedged) and of course there is no overweight to Canada as there is with the Canadian ETFs. If you want to hold US dollars in an RRSP then consider a US-listed equity ETF (something like VT holds all countries) and adjust the rest of the portfolio accordingly.
Thanks Dan. I am currently using VTI and VXUS for the US and International part of my RRSP CCP portfolio (using VCN and ZAG for rest) so will leave as is. Part of my assets are in US stock (part of compensation from company I work for) that I have been slowly moving over to my RRSP and want to keep the currency in USD for retirement use eventually. Thanks.
Hi Dan,
What are your thoughts on how the Vanguard and iShares all in one products compare to HBAL or HCON? The Horizons products seem ideal for non-registered investing (such as in a corporation).
@Harold: These ETFs are very tax-efficient, but I don’t like the asset mix at all: HBAL includes a large allocation to the NASDAQ 100, for example, which is a poorly diversified index that makes no sense as an investment benchmark. It also includes unhedged US bonds and no emerging markets. If you want to use swap-based ETFs in a corp, I would recommend using the individual funds (HBB, HXT, HXS, HSDM) and setting more sensible asset targets.
Can you hazard a guess as to what Horizons was possibly thinking when they added the NASDAQ component to HBAL? (Maybe this is just a bad question that has no good answer — how could anyone try to explain or justify someone else’s bad decisions).
@Oldie: Could it have something to do with the fact that the tech-heavy NASDAQ has delivered huge returns in recent years? Just saying. :)
Thanks for your reply to my question, Dan.
As a follow up – how much should market cap and trading volume affect decision making with ETFs? Does a small market cap matter if one is taking a couch potato approach?
I just made a colossal mistake!! Yesterday I contributed cash to my TFSA, sold some existing stock and with the resulting cash balance bought a “One Fund” ETF as has been described in these pages. This morning, as I was wandering about in my early-morning just-awakening stupor, I suddenly realized I had bought HBAL instead of XBAL which is what I had originally intended to buy!! No doubt my thinking about the folly of HBAL component choices, and the further thinking on CCP’s comment, above, contributed to my mental misdirection, sort of like like driving to a destination you had been thinking intensely about, rather than actually to the place you had set out from your house to go to…but a stupid mistake, nevertheless. I fixed it right away today, only costing me the price of 2 trades. (I suppose the small overnight value loss I incurred is offset by the fact that I immediately bought approximately the same value amount of a stock that roughly tracks the same parameters, but that is better than I deserved for my stupid inattention.)
So the lesson learned is that no matter how comfortable one has become in buying and selling stocks on line (whether for actual keeping or for Norbert’s Gambit), you are still dealing with large sums of actual money, so it is essential not only that you have done your homework, but that you are mentally prepared and focussed at the time of trading, rather like you should be when at the wheel of a car.
@Harold: In theory, a new ETF that has not attracted much in the way of assets (which is what I assume you mean by “market cap” in this context) should be just as liquid as a much larger ETF with similar holdings. Same with trading volume: in theory, it should make little difference. In practice, smaller and less frequently traded ETFs do sometimes have wider bid-ask spreads that may make transaction costs a little wider. This is not a major hurdle if you are a buy-and-hold investor who trades frequently, but it is something to be aware of. As always, use limit orders when trading.
Hi Dan, in a recent post to Miwo above, you mentioned:
“Remember that any ability to harvest losses or gains would be very limited in the future if you use a one-ETF portfolio, however.”
Could you please expand on this topic of “harvesting losses/gains” via individual ETF’s, perhaps with a couple examples. I am 40 years young, and have just opened a Questrade TFSA this year, and was about to start buying some XGRO shares, but now am on the fence. Wouldn’t mind learning how to buy and rebalance a few ETF’s, if this strategy is really advantageous throughout retirement.
Thanks in advance,
George
@George: You can search the site for “tax loss” and find several blogs on the topic, including a white paper. Remember that tax-loss harvesting only applies to non-registered accounts: it’s irrelevant in TFSAs and RRSPs.
I’m a follower of the Couch Potato portfolio, using iShares’ asset allocation ETF’s. Up until now, my core portfolio has been invested fully in XGRO (80/20 stocks/fixed income). For context, I’m 25 with a stable $125k income, maxed TFSA and RRSP + sizable amount in non-registered account – time horizon on this money is ~30-40 years until retirement.
I recently received an large lump sum which I am intending on earmarking for a future down payment maybe 10 years down the road. My question is this: for the home down payment money, would it be more advisable to invest in XBAL (60/40) rather than XGRO (80/20) for less volatility at the expense of potential returns? The amount I would be investing would be enough to already fund a down payment on a decent home even today, so outsized returns are not absolutely necessary in order to meet my goals in ~10 years. On the other hand, I don’t want to unnecessarily overweight myself towards fixed income at such a young age, and my risk tolerance in general is high. Welcome any thoughts.
Hey Dan, Iam thinking about buying $5000 of XGRO as you suggested but i noticed the MER is 0.84%. Does this not sound a bit high of a management fee?
Thanks
Dave
@Dave: MER is backward-looking: it tells you the cost of the fund over the previous 12 months. When iShares rebranded CBD and CBN, it lowered the fee dramatically, but this will not be reflected in the published MER until these new funds have a year under their belts. Rest assured that investors in XGRO and XBAL will pay 0.18%.
@CCP does this mean MER’s could change yearly?
D
@Dave: Technically, yes, but in practice this rarely happens. If a fund incurs some expenses that would push the MER higher (such as startup costs in a new ETF), they usually absorb them. In the ETF space, especially, investors are very fee-conscious, and fund providers know they can’t get away with high transaction costs, etc. You should expect the MER on an ETF to be its management fee plus about 10% for taxes. So with XGRO the fee is 0.18% and you can add another 0.018% or so, making the full MER about 0.20%.
Hi Dan, I had a question about the MER. The underlying holdings of XGRO are other ETFs, which all have their own specific MER. How would the final MER be calculated if buying a fund of fund, in this case XGRO? I am wondering what the ‘true’ MER would be after taking into account the 0.18% fee from XGRO and the other MERs of the underlying holdings.
David
@David: The total management fee is 0.18%. The fees on the underlying funds are not counted twice in the “ETFs of ETFs.”