In our last blog and video, Justin and I compared the popular Vanguard and iShares asset allocation ETFs, both of which are options in our model portfolios. But although these two fund families get all the attention, BMO offers a trio of asset allocation ETFs that deserve your consideration as well. So here’s our long overdue review of these portfolios.
In much of what follows, we’re going to hold up BMO’s asset allocation ETFs against their iShares counterparts, since the two families have a lot in common and provide a useful apples-to-apples comparison.
BMO’s asset allocation ETFs appeared in February 2019, about two months after those of iShares, and about a year after Vanguard pioneered the one-ETF portfolio in Canada. Rather than running the gamut from ultra-conservative to hyper-aggressive, BMO’s family covers only the middle ground, with three balanced portfolios of 40%, 60% and 80% equities. That makes sense, given that the latter two are the most popular with investors.
| Asset Mix | BMO Asset Allocation ETF |
|---|---|
| 40% equities / 60% bonds | BMO Conservative ETF (ZCON) |
| 60% equities / 40% bonds | BMO Balanced ETF (ZBAL) |
| 80% equities / 20% bonds | BMO Growth ETF (ZGRO) |
Like the iShares portfolios, each BMO fund includes several underlying ETFs that in turn hold thousands of global stocks, as well as Canadian and US bonds. BMO’s fees are also competitive, with MERs of 0.20%. (Remember, with all asset allocation ETFs, the fees of the underlying holdings are rebated, so the published MER is all you pay. There is no double-dipping.)
All right, let’s take a deep dive into how the BMO asset allocation ETFs are constructed.
Equities
As you might expect, the BMO portfolios include equity ETFs covering Canada and the US, as well as international developed and emerging markets.
Like iShares, BMO allocates 25% of its equity mix to Canadian stocks, and another 25% to international developed markets. However, the two fund providers differ in their allocation to US and emerging markets. US stocks make up between 40% and 41.25% in BMO’s portfolios, compared with the 45% slice in the iShares ETFs. Emerging markets stocks round out the rest: BMO allocates between 8.75% to 10%, while iShares includes just 5%.
There’s another important difference between the BMO and iShares equity portfolios. If you’re familiar with BMO’s lineup, you’ll know their flagship US equity ETF tracks the S&P 500, which includes only large-cap stocks, and their international equity ETFs track MSCI indexes that include large and mid-cap stocks only. iShares, by comparison, offers “total market” ETFs that include thousands of additional small-cap stocks. These differences naturally show up in the BMO and iShares asset allocation ETFs, too.
We tend to prefer total market indexes and we’d agree the S&P 500, in particular, is not an ideal benchmark (its constituents are not just the 500 largest stocks in the US: they’re chosen by a committee based on some idiosyncratic rules). But for what it’s worth, the presence or absence of small-cap stocks in these indexes had virtually zero effect on performance over the last 25 years.
Remember that in cap-weighted indexes larger stocks dominate: a few huge companies can have significantly more impact than thousands of smaller ones. The companies in the S&P 500 make up about 80% of the US market, for example, while the other 3,200 or combine for just 20%. Small-cap stocks have even less impact in international and emerging markets.
As a result, from 1995 through 2019, both the BMO and iShares equity portfolios would have enjoyed virtually identical results: an annualized return of 8.2% with a standard deviation—a measure of volatility—of 11.7%. (Justin ran this comparison using index data, with the same allocations as the BMO and iShares ETFs, rebalanced quarterly.)
Fixed income
The BMO asset allocation ETFs have the most Canadian content on the bond side: they target 90% domestic bonds. The lion’s share is carried by BMO Aggregate Bond Index ETF (ZAG), which tracks the broad Canadian bond market, including government and corporate bonds of all maturities. However, BMO also adds a helping of the BMO Government Bond Index ETF (ZGB), so it has a slightly greater tilt toward government bonds than the iShares portfolios.
The remaining 10% of the fixed income allocation goes to US bonds: specifically, mid-term (five to 10 years to maturity), investment-grade corporates, hedged to the Canadian dollar. iShares, by comparison, has twice as much in US bonds, and these are split evenly between government and corporate issues.
The BMO bond portfolios have an average maturity of 10.7 years and a duration of 8.3 years, compared with 9.6 and 7.4 years, respectively, for the iShares ETFs. This means the BMO funds will be more sensitive to changes in interest rates, and therefore slightly more volatile. However, the greater share of government bonds also decreases the credit risk.
BMO Asset Allocation ETFs: Overall equity and fixed income mix
| Asset class | Underlying ETF | ZCON | ZBAL | ZGRO |
|---|---|---|---|---|
| Canadian equities | ZCN | 10% | 15% | 20% |
| US equities | ZSP | 16% | 25% | 33% |
| International equities | ZEA | 10% | 15% | 20% |
| Emerging markets equities | ZEM | 4% | 5% | 7% |
| Canadian broad market bonds | ZAG | 42% | 28% | 14% |
| Canadian government bonds | ZGB | 12% | 8% | 4% |
| US mid-term corporate bonds | ZMU | 6% | 4% | 2% |
Source: BMO ETFs
Rebalancing strategies
Let’s wrap up by looking at how the BMO asset allocation ETFs maintain their long-term targets.
BMO plans to review their portfolios quarterly and rebalance any holding that has drifted by 2.5 percentage points from its target weight. For example, the BMO Balanced ETF (ZBAL) has a long-term target of 15% for Canadian equities, so it will rebalance if this asset class increases to 17.5% or falls to 12.5%
As we saw in our last post, iShares plans to rebalance anytime an asset class drifts off target by a relative 10%. In other words, if the target is 15%, the manager would rebalance if the asset class grew to 16.5% or fell to 13.5%.
However, in practice, BMO will use new cash flows to top up any underweight asset classes, and this should reduce the need to rebalance by selling its underlying holdings. This is good news for investors who hold these funds in non-registered accounts, since selling holdings with gains could be taxable to the ETF’s unitholders.
By now you’ve probably figured out that the BMO asset allocation ETFs would be an excellent choice for index investors seeking a globally balanced portfolio in a single fund. Over the long term, they should be expected to deliver very similar performance to their Vanguard and iShares counterparts, as the strategies are largely the same.
I’m often asked why I haven’t included the BMO asset allocation ETFs in my model portfolios. It’s certainly not because they’re inferior products: it’s simply that BMO’s family of funds is less complete, with no 100% equity option (the equivalent of VEQT or XEQT) that can be combined with a bond fund to customize your asset mix. But if you prefer BMO’s strategies and your target matches one of their three available options, it would be hard to go wrong with these well designed, well diversified one-fund solutions.
Whoa, came here to re-read the last blog article and there’s a new one on the same subject which I now have to brain!
It looks like TD also joined the fray in August with their new “TD One-Click ETF Portfolios”. Though the MERs and underlying indexes seem good, it looks like they give a 25% “active management” percentage to each. (A little disappointing.)
I won’t know how much to trust that sort of tinkering until you examine them and hopefully post here at some later date. For now, I’m gonna stick to XGRO.
Cheers for the new year and thanks for helping me build an amazing portfolio since I found this site in 2012! I’d really hate to think where my money would be at right now if it wasn’t for CCP.
7 or 8 years now on the couch with Mr potato, and over this period averaging 8 to 9 percent returns in a 80/20 equity/bond couch potato portfolio. Thanks for all the tips and nice to see the blog back!
Hi, Thanks a lot for the review of BMO family. I have read about Horizons as well. Can you review them?
Thanks for the positive comments.
@Tahir and Ed: I do plan to look at the alternatives to the iShares, Vanguard and BMO asset allocation ETFs in the future. But the message is probably not going to be a surprise. Most of them are actively managed (at least in part) and are incompatible with the plain-vanilla indexing strategy I’ve advocated for years.
Pls review TD one click portfolios
Hi, great article, as usual.
Good you mentioned that BMO will use new CASH FLOWS to rebalance and included a link to list the advantages. Previous article talked about Vanguard and iShares using cash flows to rebalance too.
Thanks! Wish I’d found this blog many years ago when I first started investing and stuck to your strategy. I’d be a lot wealthier now if I had.
Really appreciate your in depth analysis. I have been thinking along these lines as well and switching my registered accounts to these. However my preference is towards iShares because much higher asset base/longer history/Blackrock experience/lower spread/,narrow rebalancing range. Only drawback i see is the US pieces are not hedged to cdn$
@Kamal: Thanks for the comment. Please note that all three ETF providers avoid hedging currency in the US (and international) equities.
Thanks Dan for this blog and your simple portfolio suggestions. I discovered CCP 6 years back and have stuck to one portfolio ETF : XGRO in both my RRSP and TFSA based on my risk tolerance. I know XGRO isn’t ideal within TFSA because of the additional withholding tax. But I like the simplicity and I’m probably loosing few basis points because of that. But as you had suggested in some of your earlier blogs, it is not that big of a deal.
Dan thanks for the blog
I am 61 and just retired
My wife is 56 and still working
We just left high fee mutual funds and
put 200 k each in questrade
In veqt would like some income in 6 to 12 months
Any suggestions welcome
Thank you
Scott
Thanks Dan for this blog. I have been investing with your model portfolio the past 3 years in my TSFA and loving it. Now I have money in my corporation I want to invest . Is any one of the Asset Allocation ETF’s more tax efficient for being held in a corporation?
My investment guy thought that because the Vanguard balanced portfolio ETF was paying about 75% of it distributions in interest and 25% capital gains that it was not as favorable as his IA Loomis Global Allocation Fund recommendation which pays out a greater percentage in capital gains but has a larger MER of 1.05%. Thoughts?
@Scott hawkins: I don’t know your situation, of course, but VEQT is 100% stocks and likely inappropriate for someone in retirement or close to it, unless you have other more conservative assets. VEQT is also not designed for income investors, as it pays only one annual distribution.
@Scott: I haven’t looked at the IA fund you’ve mentioned, but I don’t think it makes any sense to choose a fund based on the percentage of the distributions that are capital gains. This will certainly change from year to year, so it tells you nothing about future tax-efficiency. Remember, too, that you cannot compare two funds with significantly different asset allocations. VBAL is 40% bonds, while the IA fund seems to hold a low percentage of fixed income, and may therefore carry additional risk.
The Vanguard, iShares and BMO asset allocation ETFs are all similar in terms of tax-efficiency. They are not optimal, but that’s not what they’re designed for. They are still a good choice in a corporate account if your goal is broad diversification, low cost and ease of management.
Thanks for the insights. Would love your thoughts on the TD OneClick portfolio solutions, Conservative, Moderate, Aggressive:
https://www.td.com/ca/en/asset-management/funds/solutions/etfs/FundCard/TD%20One-Click%20Conservative%20ETF%20Portfolio/?fundId=7149
https://www.td.com/ca/en/asset-management/funds/solutions/etfs/FundCard/TD%20One-Click%20Moderate%20ETF%20Portfolio/?fundId=7150
https://www.td.com/ca/en/asset-management/funds/solutions/etfs/FundCard/TD%20One-Click%20Aggressive%20ETF%20Portfolio/?fundId=7151
@ Ed, where do you see the 25% “active management” percentage to each of these?
For what it’s worth, TD’s ETFs are commission free.
@Adam: See the brochure linked below: “Added Value from Active Ingredients: Not all ETFs are created equal, and what makes the TD One-Click ETF Portfolios unique is the allocation to approximately 25% Active & Quant ETFs. Typically, all-in-one ETFs have 100% passive ingredients, meaning with TD you get more professional management.”
https://www.td.com/ca/en/asset-management/documents/investor/PDF/TD-One-Click-ETFs-Brochure-EN.pdf
My understanding is that the TD ETFs are commission-free if you use TD’s GoalAssist platform. But they don’t have special status anywhere else. Even at TD Direct Investing they carry the same commission as any other ETF.
Hello,
Would using BMO ETFs be a good way to “shop local” compared to iShares and Vanguard?
Love the Blog!
@Sébastien: If you feel a patriotic duty to support the big banks, sure. I would argue, though, that the Canadian arm of Vanguard and iShares are relatively independent of their American parents.
Hi,
Nice post. It’s always informative.
I have about 50k to invest for about 2 years for a. condo down payment. Should I go for something like VBAL? Also my TFSA is maxed out already. I ll probably need to put in non register account.
Love your site since 2014.
@Johnny: Thanks for the comment. Money needed for a down payment in two years should be held in a savings account or short-term GIC. VBAL is not appropriate for such a short time horizon.
Dan, great blog (and podcast) thanks for everything.
In response to Sebastien, you can also consider ownership. Vanguard is owned by its customers and was started by John Bogle the father of index investing.
While I have iShares sure to no commission at qtrade, I would have preferred Vanguard due to this
Do we need to consider including some gold ETF in portfolio
Hi Dan,
Been following and enjoying your blog for a year now. What is the appropriate time horizon for 20K TFSA investment in VBAL? 10yrs? 5yrs?
Would investing a 20K downpayment in a bond fund (TDB909) for 5yrs be more appropriate instead?
Why did my TD Int’l e-series December dividend not payout yet, since all the other funds have?
@Neil: If you will need all of the funds within five years (e.g. for a down payment) I would not recommend wither stocks or bonds. This is short-term savings, not an investment, so savings accounts and GICs are the only options unless you are comfortable with the risk of losing principal.
I can’t help but think that CCP will underperform on the equity side most years versus just an unhedged S&P index fund. When CAD is strong relative to USD it hurts things like XAW. When CAD is weak relative to USD it likely means poor Canadian economy and things like VCN will then underperform. Tailwinds in either scenario. 100% unhedged S&P on the equity side is the way to go
Hi, would you consider adding BMO ETFs to your model portfolios? I’d like to compare their 40/60/80% equities performance against iShares and Vanguard. Thanks in advance, this site is great!
@Charlie: Thanks for the comment. As explained in the post, I have no plans to add the BMO funds to the model portfolios because the fund family is less complete, but they are perfectly good choices. Their performance is likely to be very similar to their competitors, since their underlying holdings and strategies are comparable. What is it about the BMO funds that make them more attractive to you than the their Vanguard and iShares counterparts?
Hey Dan I am wondering why not use a $ZGQ global msci world index etf ? Why is canadian home bias so important in asset allocation like $VEQT ?
THX
Hi Dan, I’m 34, saving for retirement with one of the older CCP models. I have around $160k sitting in 60% XAW, 30% VCN, 10% ZAG. Is it worth it to sell and switch to this new model? Also, what is the rationale for having 20% bonds in the most aggressive model? Why not 10% or 0% for long time horizons?
@CCP: I liked how the BMO funds had slightly more Emerging Markets exposure than iShares and a little less US making it a bit more diversified. And their bond exposure is more heavily weighted to Canadian bonds (not sure if that’s a good thing or perhaps too overweighted). But like you said, their performance seems to be the same despite these differences. What made them more attractive to me is their distributions. I noticed the yield is slightly higher than iShares at present (2.5% vs 2%) but not sure if that’s something we can always count on going forward.
Hi, Looking to invest some of my severance pay into an ETF or Ets’s. I heard vanguard is good. I won’t need the money for some time. I am new to investing but have a TD Waterhouse account. Any suggestions.
Thank you for sharing information about the BMO ETFs. I’ve been following the couch potato method for a couple years with ETFs through Wealthsimple. I still have some mutual funds with BMO previously purchased. Do you see an advantage to stay with BMO and moving these to their ETFs or rather consider Vanguard/iShares ETFs (through Wealthsimple)?
@Marie: I can’t make a specific recommendation for you. In general, if you are comfortable with your ETF portfolio then it likely makes sense to get away from more expensive mutual funds and consolidate your accounts.
Any future look at Horizon HBAL/HGRO etc as alternatives given different tax structure?
@Al: Working on it now, hoping to have it completed soon.
My wife and I are in the same tax bracket and both have non-registered investment accounts, mine with RBC and hers with BMO. I have XGRO in my account and we opted for ZGRO in hers just for “diversification” in case Blackrock goes out of business, ha ha. I was just comparing the size of the funds and noticed that VGRO is $1900M, XGRO is $726M, and ZGRO is only $79M. I assume that ZGRO is smaller because it is younger. Are there any concerns about ZGRO being younger/smaller? Any advantages or disadvantages? Thanks.
@Dan too: BMO was a bit late to the party, but the smaller size of the fund is not an issue. Remember that ZGRO is a “fund of funds” and many of its underlying holdings are huge, so you are unlikely to see any issues with liquidity.
Hello again. In the last month I have made purchases of both XGRO and ZGRO (different accounts as explained above). One thing I have noticed about ZGRO is that often there are few if any price points on its price chart. Today for example it opened at 36.15 and closed at 36.14 and there were no price points on its chart. XGRO on the other hand looks just like a stock with many price changes throughout the day. Why the difference? Is it because there are so few trades of ZGRO throughout the day because it is less popular? Even if this is the case, should not the share price change with the underlying funds? I am buying and holding for many years so it doesn’t really matter much but it is a little disconcerting that ZGRO doesn’t behave like the other ETF’s.
BTW, I have been listening to your podcasts and they are like gold! Best thing since slice bread! Thank you!
@Dan too: It’s possible that the price chart you’re is just inaccurate or misleading. ZGRO definitely has less trading volume than its iShares and Vanguard counterparts, but as you note, its NAV and market price will change according to the value of the underlying holdings, even if it goes days without trading. This can be a minor issue if you are trading the ETF regularly, but if you’re holding it for the long term it should not have any meaningful impact.
Similar short-term issues can come up when looking at comparable index funds. For example, XIC and ZCN track the same index, so you would expect them to move in lockstep. But in any given day they might not, for a variety of reasons. Over any meaningful period, however, their performance is likely to be almost identical.
Glad you’re enjoying the podcast.
Just an FYI: I got an email this week from BMO saying they now offer free ETF trades on about 80 ETFs.
@Dan too: This is great news. I was very pleased to see that several asset allocation ETFs (including Vanguard’s and iShares’ as well as BMO’s own) are on the list of commission-free ETFs:
https://www.bmoinvestorline.com/selfDirected/pdfs/no_commission_fee_etfs_en.pdf
Hi there, just wondering about your take on ZWC. It’s a high dividend etf from BMO. The cash flow would be nice, but am wondering why it’s not included in your portfolios online.
Thanks for you time.
@Dan: ZWC uses a very specific strategy (covered calls) that I don’t recommend. The model portfolios include only total-market, plain vanilla index funds without embedded strategies.
Hello, we are both 64 and have 70, 000 to put in a TFSA …which would you suggest as a conservative strategy and another a little more income generating one?
Thanks so much
@Alex: One of the model portfolios should be appropriate for your TFSAs, but unfortunately I can’t make a specific recommendation.
Do you still consider BMO Asset Allocation ETF’s as comparable to Vanguard/iShares but for the lack of an All-Equity offering? Any key differences to be aware of between the Growth ETF of the three? Thank you.
@Michael: There have been no major changes since this blog and video appeared, so the differences outlined above should allow you to compare the options.