[Spoiler: This was an April Fool’s joke!]

Simple is beautiful, but in investing it ultimately loses its appeal.

Since the beginning of 2018, all three of Canada’s top ETF providers have launched families of asset allocation ETFs, which are “one-ticket solutions” that allow investors to build a globally diversified portfolio with a single trade. But while these products can be useful for novice investors, they just aren’t well suited for those looking for the benefits that come from greater complexity.

Many readers have asked whether I plan on ditching my current model ETF portfolio (which includes three funds) in favour of one of these asset allocation ETFs. The answer is no— at least not anytime soon. However, I would like to encourage readers to explore a different option, which I call the 3BAL Portfolio.

The 3BAL Portfolio is built using three asset allocation ETFs—one each from Vanguard, iShares and BMO. It retains some of the benefits of a one-fund solution without sacrificing the benefits of juggling three moving parts.

It works like this: say you want a traditional balanced portfolio of 60% stocks and 40% bonds. Using the 3BAL formula, you would purchase equal amounts of the following three ETFs:

ETF NameTickerEquitiesBonds
Vanguard Balanced ETF Portfolio VBAL60%40%
iShares Core Balanced ETF PortfolioXBAL60%40%
BMO Balanced ETFZBAL60%40%

Notice that each of these three ETFs has a 60% allocation to stocks. Therefore, combining equal amounts of all three will achieve your target allocation of precisely 60% equities. I don’t normally like to use complicated math, but I think this idea is worth explaining with an equation:

* where z equals the equity allocation of ZBAL; x equals the equity allocation of XBAL; and v equals the equity allocation of VBAL

Triple your pleasure

Not only does the 3BAL strategy allow you to build portfolios with precise asset allocations, it also offers the following benefits compared with simply using a one-fund solution:

Three times the diversification. Hey, no question, all of the asset allocation ETFs are very well diversified on their own. For example, VBAL holds close to 27,000 individual stocks and bonds, while XBAL holds over 15,000, and ZBAL adds another 4,000 or so. By holding all three ETFs, however, you’ll own more than 46,000 individual securities. And because each of the funds holds stocks from about 40 countries, the 3BAL Portfolio allows you to invest in 120 different nations.

Higher returns from rebalancing. One of the key benefits of investing in ETFs is the premium that comes from rebalancing: you can boost your returns by selling whichever asset class has recently gone up (selling high) and using the proceeds to prop up whatever has lagged (buying low). Except one-fund solutions don’t allow you to take advantage of this opportunity. The 3BAL Portfolio offers more flexibility: in any given year, one of these ETFs might deliver double-digit returns, while another could suffer a significant loss. By selling the winner and buying the loser, you can look forward to enhanced returns without any additional risk.

Tax-loss selling opportunities. One-ETF solutions rob you of another benefit of more complex portfolios. Specifically, they offer fewer opportunities for tax loss harvesting, which can allow you to defer capital gains taxes. However, the 3BAL Portfolio puts another arrow in your quiver. During a period when ZBAL falls by 10%, for example, you could sell your holding to book the loss, and then use the proceeds to purchase more XBAL, or VBAL, or both, or vice-versa. If all three happen to fall at the same time (highly unlikely, but possible), you could even liquidate your whole portfolio and then buy it back. But to avoid the superficial loss rule, be careful to buy them back in the opposite order that you sold them.

The 3BAL Portfolio isn’t a magic formula, but it’s about as close as you can get. The only disadvantage is the additional cost: the management fees for VBAL, XBAL and ZBAL are 0.22%, 0.18% and 0.20, respectively. Holding equal amounts of all three means incurring an annual management fee of 0.60%. (Again, apologies for the math, but this is calculated as follows: 0.22% + 0.18% + 0.20% = 0.60%.) But even at triple the cost, that’s a small price to pay for a perfect portfolio.