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 than 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:
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:
|Vanguard FTSE Developed All Cap ex North America Index ETF (VIU)||8.1%|
|iShares Core MSCI EAFE IMI Index ETF (XEF)||6.5%|
|Vanguard FTSE Emerging Markets All Cap Index ETF (VEE)||12.4%|
|iShares Core MSCI Emerging Markets ETF (IEMG)||15.5% (in CAD)|
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%|
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.
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.