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:
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)Â | 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.
@Nathan Brady: Remember that asset allocation ETFs are doing the rebalancing for you, so when the market crashes they’re selling bonds and buying stocks, probably with more discup0line that individual investors will do on their own. So I don’t see any value in trying to that yourself.
In retirement, you can always add another bond ETF, GICs, or cash to make the portfolio more conservative. You won’t need to liquidate your whole portfolio at once to switch to adjust your asset allocation.
Thank-you for all your great posts. I’ve heard many times that VGRO or similar is good for small-ish portfolios. I am considering putting my whole portfolio into something like VGRO. At what size of portfolio does it make sense to not go with something like VGRO and why? Or is that not even a concern? Thank-you
@thib: I would have no hesitation using asset allocation ETFs for even a seven-figure portfolio. The reduction in fees and taxes you might achieve from unbundling VGRO (i.e. buying the underlying holdings individually) would not be worth the additional complexity, transaction costs, and most important, the potential for mistakes (e.g. failure to rebalance).
A globally diversified portfolio that requires no maintenance and charges 0.25% annually. Embrace the simplicity, don’t resist it.
Thanks for this article; I’ve read your stuff for years and appreciate it. I have about $200k to invest (I’m 34 yrs old, so lots of time to let investiments grow) and I’m looking at VGRO and XGRO. I’ve decided to go with XGRO because it has a 0.20 MER vs 0.25 MER for VGRO. However, I noticed from your article that XGRO is more heavily weighted towards US markets. Over time any differences between XGRO and VGRO preformance should even out, I hope, but would you recommend doing a 50:50 investment split between XGRO:VGRO just in case XGRO and VGRO end up performing quite differently over time? Over the last 5 years, there’s almost a 10% performance difference between the two ETFs. I’m wondering if the increased VGRO MER fee woud take away any potential benefit to doing this? What’s your opinion?
Thanks.
Hi,
This article is very helpful. Thank you. I am planning to start self directed RESP for my kid (7 years old). As per the suggested model, I wanted to start with VGRO, But wondering how should I re-balance it after few years. Should I invest in VGRO for first 3-4 years and then sell everything and invest in VBAL? Or should I keep buying VGRO, VBAL and VCNS in different proportion over the years? Can you can give me a rough RESP strategy with ETFs, it will be very helpful.
Thanks
@Raj: This should help:
https://www.theglobeandmail.com/investing/globe-advisor/advisor-etfs/article-three-strategies-to-build-an-resp-nest-egg/
Thanks. When I tried to access the link, it says “To access this article, you must be a Financial Advisor.”
Hi, Thank you for this very usefull site!
One quick question:
I have had the 50%XAW-25%VCN-25%ZAG portfolio for years and I have switched to VGRO recently (18 months?). I have been my own enemy very often (trying to time the market) and I have done it again recently. I have 1 million in non registered account, it is not invested anymore. (TFSA and RRSP are 100% VEQT, 100k each). I have a defined benefit pension fund and I dont think I will ever need my money other than giving it to my kids when I die. I’am 40, house is paid.
The question: Is it better to place it all in all at once or differ the purchases over a certain period, (a year? 100K per month?). I am thinking buying VGRO again and deleting the app from my phone…
What do you think?
Thank you again, very interesting information!
Dan
@Raj: Sorry, I forgot that this was on the Globe Advisor site. Here’s the relevant section:
@Dan: This is a tough question, and I think the answer is, “Do whatever you think will get you back into the market with a long-term strategy.” An asset allocation ETF would definitely help you avoid the “do I buy bonds or stocks” question. And using dollar cost averaging makes sense too, as long as every monthly contribution doesn’t turn into a market timing exercise. And, yes, delete the app. :)
I am so annoyed that vanguard does NOT allow automatic investments every month whereas XEQT DOES! I really like VEQT but the auto investment makes my life so much easier! Will vanguard ever allow that?
@Shajedul: I heard Questrade has an API so if you want to learn some programming, you could program your autoinvest algorithm.
Thanks for your website, it’s very helpful. I have 7 figures in cash to invest, I am 62 retired and I was going to put it all in XBAL but the end of the 40 year bull market in bonds has me spooked. What do you think, is 60/40 dead for now? The alternative I am looking at is 90% XEQT and 10% high interest saving account to act as a buffer to be drawn from in bear markets and corrections. I would love to hear your opinions on these options.
@Paul: Bond yields are low, but that doesn’t mean that human beings have suddenly become far more risk tolerant than they were in the past. Very few investors have the stomach to hold a portfolio of 90% equities, especially those in retirement. You would need to be comfortable enduring a losses of at least 40%, which is about what you would have lost in 2008-09.
For a retiree, I would generally want to see three to five years of cash flow in guaranteed investments such as GICs and cash. Then the rest can be in a balanced portfolio, which doesn’t need to be 60/40, but probably should not be 100% equities.
@Paul….We have approx 1.5M in our RRSPs with about 80% in VBAL….I am concerned about all the Talk re inflation and am concerned about the potential drag bonds will have on a 60/40 ETF such as VBAL….. I do have 2 yrs of retirement income in Cash/GIC’s and I plan to retire end of 2021…..I have been thinking about Changing from VBAL to VGRO given the 80/20 split and less reliance on Bonds….I also have a 800K Cottage paid for which I plan to sell in about 15 yrs……Appreciate your thoughts re changing to VGRO
Dan,
I feel the market is overvalued and have started liquidating my equities and moving more into bonds. Besides the usuals – VAB, ZAG and XBB, what about Pimco Monthly Income Fund. This has a nice yield but I can’t find information as to the quality of its holdings. Any comments are greatly appreciated.
@Angelo: You’re asking me to comment on your strategy to time the market and using actively managed funds, which is the polar opposite of the staregy I recommend. You can probably guess what my answer will be. :)
Hello Dan,
I have a Corporate Holdco and use VGRO. Spoke with a financial advisor recently who insisted that this not a good idea and one should never DIY a corporate account.
But all he recommended was that I think of whole life insurance!?
I am confused but aside from the premium bonds, and worries about the small business deductions with distributions what else am I missing?
Is he correct? Do you tell your clients to never use VGRO in their corporate holdco?
I will consider it if I am totally missing something here and VGRO is not appropriate.
But right now I don’t see why I can’t hold VGRO in my corporate account.
Whatever extra taxes I pay may be offset by limiting mistakes I make if I make it more complicated.
That’ was my original thought.
I hold VGRO in all my accounts. It’s been very easy since I made the change.
@Stephanie: I don’t have the whole context for the discussion, of course, but it makes no sense to reject the idea of using an asset allocation ETF in a corporate account. And while it’s true that corporate accounts are more difficult to manage for DIY investors, an advisor obviously has a vested interested in saying you should hire him rather than doing it yourself. (That said, I do highly recommend using an accountant to file the corporation’s T2!)
You have touched on a couple of the important ideas here. As you acknowledge, VGRO is not the absolute cheapest and most tax-efficient investment available. But it’s still an excellent choice for DIY investor, as it is very inexpensive, well diversified and low-maintenance. As you note, adding more complexity is likely to backfire.
RE: the small business deduction, this is only an issue if your investment income exceeds $50,000 annually. Given that VGRO’s yield is about 1.8%, you would need $2.8 million before this was a problem. You also mention that your corp is holdco: a holdco, by definition, does not benefit from the small business deduction, so this may be a complete non-issue.
As for whole life insurance, well, I’m going to go out on a limb and guess that the advisor recommending that is also the one selling it. It can be appropriate in some rare situations, but the advice almost always comes from a salesperson with conflict of interest: the commissions on these products are huge. And saying you should buy whole life insurance instead of asset allocation ETF is like saying you should buy shoes rather than a hat. They are completely different products for completely different goals.
If you’re comfortable managing your own portfolio, don’t let someone try to talk you out of it.
I have rdsp from bmo which is 60 40 and has giving me a 5.6 return .It has grown to about 79000 ,im 54 now and can’t withdrawal till 59.I been educating myself and would seem like vgro might be a better option over the next 10 years ,I don’t need to be greedy and would withdraw funds on a minimal monthly withdrawal. Also I’ve been fortunate through work to amass 24k in rrsp with 700 monthly addition with thought of going to veqt over the 60 40 mutual fund
Hello Dan,
I’m looking for a ETF solution for my cash US account, something simple and tax friendly. Any of this one ticket ETF are available in US $ ? ( like VGRO, XBAL, HBAL, etc) . What to choose ?
Thank you !
What are your thoughts on going with an All Equity portfolio such as XEQT/VEQT compared to XGRO/VGRO if you are planning to hold long term and has that risk tolerance? Do bonds make sense for people in their 20s that can stomach a market crash? If someone has a risk tolerance of 100% equity would it still make sense to hold bonds? Wouldn’t it make sense instead of holding bonds to use cash to buy in more during market down turns?
Look forward to your reply.
What are your thoughts on the WealthSimple Portfolios compared to your all in one funds. They include Gold, Bonds and have larger % in emerging markets.
Do you believe they are more of an active manager? Do robo advisors still make sense against these funds?
@Dana: I’m afraid there is no single ETF that fits that description.
@Matt: This may help:
https://www.moneysense.ca/columns/ask-moneysense/should-you-put-all-of-your-investments-in-equity-etfs/
@Gabe: I think roboadvisors can play a role for investors who prefer not to place their own trades and want to set up automatic contribution plans. However, I don’t think any of them add value by offering portfolios that are superior to the asset allocation ETFs from Vanguard, iShares and BMO.
Hello Dan and thank you for your answer and your help. Which are the EFT I can buy in US $ for my US cash taxable account and US RRSP account? I will like a simple solution for these accounts too , Thank you .
Hi Dan,
What are your thoughts on REIT ETFs?
It’s old now (StartLate, Finish Rich, 2005) but David Bach recommended 1/3 REITs, 1/3 Stock and 1/3 Bonds. He mentioned that REITs had outperformed stocks for 25 years.
Thoughts?
@Shauna: I don’t think adding REITs as a separate asset class offers any meaningful diversification to a portfolio, and I certainly don’t think one should expect this asset class to outperform the overall market over the long term. In Canada, especially, REIT ETFs include a very small number of companies that are already in the broader index, so it’s really just doubling up on this sector.
Asset allocation ETFs offer great diversification and simplicity. There will always be a tendency to see them as too simple, and a temptation to add more moving parts (REITs, gold, etc.). In almost all cases this just adds unnecessary complexity and cost for little or no benefit.
Hi Dan,
Quick scenario question, I apologize as I’m sure you have answered before.. I just can’t find the answer in comments or posts. We are in the process of moving into index fund strategy after countless hours of research for our registered accounts.
We were going to hold
TFSA – VCN (100%)
RRSP – XUU (75%), VEE (12.5%), VIU (12.5%)
Would there be any difference in holding VEQT 100% in both accounts? I feel as if the allocation would result in very close to our targets due to our RRSP being larger, and it would make monthly contributions easier as there would be no need for splitting each purchase.
TIA
@Adam: I don’t see any advantage to using four ETFs in this situation. I would certainly use VEQT (or XEQT) in both accounts. There is really no advantage to splitting things up like this, other than the tiny difference in MER.
One of the challenges with an asset location strategy like this is that fails to anticipate rebalancing and future contributions. For example, what happens if you are overweight Canadian equities next time to make a TFSA contribution? You would either need to add a new holding or buy even more Canadian equities. Or what happens if you need to rebalance by selling emerging markets and buying more Canadian equities? You can’t do this if the asset classes are in separate accounts.
This is an easy decision: one fund in each account will make your life much simpler.
I started following your strategy around 2017. At that time, you had 1 option that was basically 3 ETF (VCN, XAW, and ZAG). Since then, you changed some recommandations and asset allocation ETF made their apparition. So far, I have stick to the same formula as 2017. Is there any reason now I should swap some ETF, or even go towards a 1 ETF solution? I’d be curious to have your opinion.
@Pascal: There is no reason to change unless you think your portfolio would be easier to manage with only one ETF rather than three.
My spouse and I have recently invested in some combination of your model portfolios and I was planning to do the same for my corporation. Is there any reason that I should steer clear of the model portfolios for my corporation (ie tax implications)? Or are there other ETF options that would make more sense for the corporation? I do draw dividends from the corporation currently.
@Tracey: There is no reason to avoid the one-ETF portfolios in a corporate account.
My corporation has $500,000. to invest and I do not expect to draw from it for many years. I would like to forget about the $ and just let it grow. I have $ with Wood Grundy but want to do something different.
I have have read about your model portfolio and about robo advisors? Are they mutually exclusive?
What would be best thing for me to do with this money that is tax efficient?
Thanks
@Lois: Yes, my model portfolios and roboadvisors are mutually exclusive. Roboadvisors all have their own model portfolios and don’t usually allow you to build your own from scratch. I can’t advise you on how best to invest your funds, but the model portfolios are appropriate for corporate accounts.