Just about everyone was happy to wave goodbye to 2020. By the spring it was shaping up to be the worst year for markets since 2008: when the market touched bottom on March 23, Canadian, U.S. and international equities were all showing huge losses. From peak to trough, Canadian equities had declined more 37%, and foreign markets saw losses between 26% and 29%.
Even the safety net had gaping holes: Canadian bond ETFs saw peak-to-trough price drops of about 14%, which no one had ever seen before.
Then, almost as quickly as the markets fell, they roared back more swiftly than anyone expected. For example, the Vanguard Growth ETF Portfolio (VGRO) declined more than 25% in 40 ugly days during February and March, then had fully recovered just 196 days later. The whiplash was enough to make you want a neck brace to go with your face mask.
Last year was also the first in which my model portfolios consisted of asset allocation ETFs from Vanguard and iShares. Below I’ve presented a summary of the 2020 results for the individual equity and fixed income components in these products. Then we look at the overall return of the all-in-one asset allocation ETFs, as well as the returns of the two-ETF portfolios in my models.
For a deep-dive into the performance of the asset allocation ETFs in 2020, watch Justin’s video recap of one of the weirdest years investors have experienced in recent memory:
Equities
Canadian equity ETFs, which fell hardest in the spring of 2020, managed to finish the year on solid ground:
| Vanguard FTSE Canada All Cap Index ETF (VCN) | 4.8% |
| iShares Core S&P/TSX Capped Composite Index ETF (XIC) | 5.6% |
The 0.80% difference in returns between these two ETFs was a surprise: it arose because VCN started the year tracking the FTSE Canada All Cap Index, which had a quirky methodology that adjusted the weighting of some companies, rather than simply using their market cap. In June, the Vanguard ETF switched its benchmark to the FTSE Canada All Cap Domestic Index, which better represents the broad Canadian equity market. The returns of VCN and XIC should be more similar going forward.
U.S. equity ETFs continued their dominance in 2020. The ETFs tracking this market performed almost in lockstep:
| Vanguard U.S. Total Market Index ETF (VUN) | 18.2% |
| iShares Core S&P Total U.S. Stock Market ETF (ITOT) | 18.1% (in CAD) |
International equities—in both developed and emerging markets—also delivered tidy returns in 2020. As we’ve talked about in previous blogs and videos, comparing the individual components of the Vanguard and iShares ETFs in these asset classes is confusing, because the two index providers disagree about South Korea: the Vanguard FTSE Developed All Cap ex North America Index ETF (VIU) tracks an index of developed countries that includes Korea, while the iShares Core MSCI EAFE IMI Index ETF (XEF) excludes Korea, as MSCI classifies it as an emerging market.
As it happens, this was a big deal in 2020, as Korean stocks returned over 43% in Canadian dollar terms. This provided a boost to VIU relative to XEF. Of course, opposite was true for their counterparts in emerging markets, with the iShares index getting the edge:
So, how did all of these equity categories perform when combined in the Vanguard and iShares asset allocation ETFs? Here’s how the two all-equity funds performed in 2020:
| Vanguard All-Equity ETF Portfolio (VEQT) | 11.3% |
| iShares Core Equity ETF Portfolio (XEQT) | 11.7% |
Fixed income
It was the best of times, it was the worst of times for bonds in 2020. Concerns about liquidity in fixed income markets led to bond ETFs seeing huge price declines during the COVID crisis in March. But this problem cleared up quickly and bonds went on to post their best calendar year since 2014.
The yield to maturity of broad-market Canadian bond ETFs started the year at 2.3% and then plummeted to around 1.2% by year-end. Remember, a decline in yield increases bond prices, so the result was a surprising total return for the Vanguard and iShares flagship ETFs:
| Vanguard Canadian Aggregate Bond Index ETF (VAB) | 8.6% |
| iShares Core Canadian Universe Bond Index ETF (XBB) | 8.6% |
If you’re using my two-fund model portfolios with bond allocations of 70%, 50% or 30%, then one of the above two ETFs makes up all of your fixed income holdings. However, if you’re using one of the all-in-one ETF portfolios, then you’ll also have some other bond asset classes in the mix.
The iShares Core Canadian Short Term Corporate Bond Index ETF (XSH), which make up 15% of the fixed income in the iShares portfolios, delivered 6.2% in 2020.
The Vanguard U.S. Aggregate Bond Index ETF (VBU) returned 7.2%, while the U.S. bond ETFs held by the iShares portfolios (GOVT and USIG) combined to returned between 8% and 9% in Canadian dollars.
Finally, the Vanguard Global ex-U.S. Aggregate Bond Index ETF (VBG), which invests in foreign bonds outside of the U.S., managed just 3.9% during 2020.
Overall, then, the addition of these bond asset classes lowered the fixed income returns for the Vanguard and iShares all-in-one ETFs, compared with simply using VAB or XBB. If we take the weighted average of each ETF’s return, we can estimate a return of 7.2% for the Vanguard fixed income portfolios and approximately 8.2% for the iShares versions.
All together now
All right, it’s time to end the suspense and reveal the 2020 returns for each of the Vanguard and iShares asset allocation ETFs, as well as the two-ETF portfolios that combine a bond ETF and an all-equity fund. For a fairer comparison, the two-ETF portfolios are assumed to have been rebalanced monthly.
| Asset allocation | Vanguard ETFs | Return | iShares ETFs | Return |
|---|---|---|---|---|
| 80% bonds / 20% equities | VCIP | 8.35% | XINC | 9.35% |
| 70% bonds / 30% equities | VAB + VEQT | 9.73% | XBB + XEQT | 9.84% |
| 60% bonds / 40% equities | VCNS | 9.37% | XCNS | 10.33% |
| 50% bonds / 50% equities | VAB + VEQT | 10.35% | XBB + XEQT | 10.53% |
| 40% bonds / 60% equities | VBAL | 10.20% | XBAL | 10.58% |
| 30% bonds / 70% equities | VAB + VEQT | 10.82% | XBB + XEQT | 11.10% |
| 20% bonds / 80% equities | VGRO | 10.81% | XGRO | 11.42% |
Source: Vanguard, BlackRock, DFA Returns 2.0
As always, we need to be careful about drawing conclusions from short-term results.
First, the two-ETF portfolios saw relatively better performance than the one-fund options last year, simply because all-Canadian bond indexes outpaced more globally diversified fixed income portfolios last year. That won’t always be the case.
Moreover, the main reason iShares portfolios outperformed is their significantly larger allocation to US equities, the top performer in 2020. In any year when US markets lag Canada and international markets, the Vanguard portfolios are likely to have the edge. Over the long term, the differences are likely to be very small.
There’s another factor to consider as you ponder the events of last year. Many investors opt to build their own diversified portfolios using multiple ETFs rather than embracing the simplicity of the asset allocation funds. While this decision saved few a few basis points in MER last year, it would also have required you to do some major rebalancing—twice.
The first opportunity was in March, when you would have been selling bonds and buying stocks when it looked like the world might end. If you had the stomach to do that, you may have had to rebalance in the other direction, selling stocks to buy more bonds late in the year, following the amazing recovery.
Neither of those decisions was easy. However, if you were using an all-in-one ETF, this was all done for you, and you would have endured a tumultuous year with a return between 8.4% and 11.4%, with zero work, no matter what your asset allocation. It’s another reminder that successful investing isn’t about scratching and clawing for every basis point in fees and taxes. It’s about getting the big decisions right and avoiding crippling mistakes.
@Savannah.: It’s impossible to know what went wrong without knowing the specific details. Your start date was not December 31 of the previous year, so that’s the first culprit. Unless you use the exact same start and end dates performance numbers can’t be compared. Also, you might not have included VEQT’s year-end distribution, which was quite large.
I got a lucky with a huge wind fall in my TFSA (no, it wasn’t GME!). I bet on a penny stock and it came up big. Long story short: my entire portfolio will be tax sheltered for the foreseeable future. Since my bonds will be sheltered, is there a better / best bond ETF to choose? XBB? ZAG? ZDB? ZGB? VAB? So many letters!
I’m worried about an imminent market crash. Are any of these bond ETFs safe or more liquid than the others?
@Nessie: ZDB is definitely the wrong choice for a TFSA: it is specifically designed for taxable accounts.
VAB, ZAG and XBB are essentially interchangeable. The risk level and liquidity should be essentially the same. They all hold a mix of government and corporate bonds of all maturities.
ZGB hold government bonds only. These should be considered safer in the event of a market crash, compared with corporate bonds. But as you would expect, they also have lower yields.
ZGB
Fantastic overview. Thanks for outlining the work required to conduct asset allocation work, made much easier by these asset allocation ETFs. VEE took off in 2020!
For years my TFSA has under-performed my RRSP. Despire adhering to the same indexing methodologies. I chocked up the differences each year to currency, considering I perform Norbert’s Gambit and buy VTI/VXUS. However this year, I noticed my TFSA return was 9.7% which is on par with a 70/30 bond to stock portfolio. But I hold 100% equities, divided between VCN and XAW. How am I so far off the 11.3 or 11.7% returns offered by VEQT/XEQT. Where is my tracking error?
Thank you for this super overview. I’m looking for an Asset allocation ETF for my US $ not registered account. I have ~300k US cash in this account and I prefer not to convert in CAD .
I m looking for an conservative / balanced Asset allocation ETF (US$) , if possible , without distribution, in order to avoid taxes before selling.
Can you please help with some suggestions? Thank you
Hello – and first off, thank you! I’ve been following your site for 3 years now and the methods you outlined have been beneficial for both my investments and mental health (i.e. not checking my portfolio all the time, as I was before index investing)
I wanted to ask, is it ever worth considering a 90/10 equities and bonds portfolio, or, is the 10% of bonds simply not “enough” of the portfolio to warrant including bonds in the portfolio in the first place? If such a portfolio does have such a place, would it be structured like your other two model portfolios from 2020 with simply different allocations ?
Thanks!
Jade
@Jade Patton: If you wanted to hold 90% equities and 10% bonds you could do that with the same two ETFs in my model portfolios (VEQT/XEQT plus VAB/XBB). But for most people I wouldn’t recommend more than 80% equities, which has the additional benefit of allowing you to use just one fund (VGRO/XGRO).
@Dana: I’m afraid there is no single product that meets that description.
I know from a previous post that you are not keen on TDB908 the eseries fund following the Nasdaq Index, but I substitited it for the ITL fund with good results. And people have remarked on the difficulty in setting up a TD TFSA or other vehicle, I did not find this to be the account but I do find making a switch to be very slow,
Hi Dan,
As always thank you for your advice! I am switching over my 3 ETF couch potato portfolio to the newer one fund ETF. Given that one can only sell a whole share, I am left with less than 1 share left in each of my 3 ETFs. Can you please advise what I should do with this? Is there a better way to ensure that I am able to sell all of the shares in the ZAG/XAW/VCN?
@Fred: Sorry, I’m not sure I understand. What do you mean by ” I am left with less than 1 share left in each of my 3 ETFs”? As you note, it’s not possible to have a holding that is less than a full share.
I was thinking though all in one etf like vgro, etc are nice. Would it better to least separate the stocks and bonds into separate. For example, use an all in one ETF that does 100% stocks and one 100% and make your own stock/bond allocation.
That way a) easy to redistribute into what is lagging… Market crashes, still bonds, buy stocks.
And b) in retirement, if you want to from 20% to 30% to 40% bonds, you wouldn’t have to sell everything and rebuy everything to change to more conversative portfolio.