The ongoing popularity of asset allocation ETFs is undoubtedly a good thing—maybe even revolutionary. Canadians have enthusiastically embraced the one-ticket portfolios from Vanguard and iShares in particular—VGRO alone has $1.7 billion in assets. (BMO’s smaller family of one-ETF portfolios is also excellent.) Never one to miss jumping on a bandwagon, other fund providers have recently launched their own one-fund solutions, including the TD One-Click ETF Portfolios, which appeared last August.
TD has always had an uneasy relationship with indexing. On one hand, their excellent e-Series mutual funds now have a 20-year history, which is an eternity for an index fund in Canada. They remain the cheapest index mutual funds available to DIY investors, which is why they’re still part of my model portfolios. But TD seems to maintain these funds only reluctantly. They are never advertised, and until 2019 they were available only to TD clients—and even then, you often had to jump through flaming hoops to purchase them.
It would have been easy for TD to combine the core e-Series funds into a low-cost balanced portfolio long before asset allocation ETFs arrived on the scene. But they never did. They came close in 2017, launching a family of five Managed ETF Portfolios including, for example, the TD Managed Balanced Growth ETF Portfolio. Despite the confusing name, these were actually mutual funds, not ETFs, but they used TD’s index ETFs as their underlying holdings. The press release called them “a new suite of all-in-one index solutions,” which sounded promising.
Unfortunately, as I pointed out at the time, they are not cheap, with MERs of about 0.78%. Worse, the prospectus gave the managers leeway to alter the asset allocation “depending on the outlook for the markets.” It turned out to be even worse: in 2020, the Managed ETF funds dropped all pretense of being index solutions and added a large dollop of actively managed ETFs to the mix.
I mention all of this to provide some context for a discussion of TD’s new trio of One-Click ETF Portfolios. Like other asset allocation ETFs, they offer investors an opportunity to build a globally diversified portfolio at low cost (the management fee is 0.25%) with a single product. But a close look reveals they’re far more active than their counterparts from Vanguard, iShares and BMO.
|Benchmark Asset Mix
|One-Click ETF Portfolio
|30% equities / 70% bonds
|TD One-Click Conservative ETF Portfolio (TOCC)
|60% equities / 40% bonds
|TD One-Click Moderate ETF Portfolio (TOCM)
|90% equities / 10% bonds
|TD One-Click Aggressive ETF Portfolio (TOCA)
The building blocks
At first glance, the One-Click ETF Portfolios are similar to other asset allocation ETFs in terms of structure and overall asset mix. They include several underlying ETFs covering Canadian, US and international stocks, though one notable difference is that the TD portfolios include no emerging markets. There’s also a mix of Canadian and US bonds.
The main building blocks are the same four ETFs that make up the underlying holdings in the e-Series funds:
|TD Canadian Equity Index ETF (TTP)
|TD U.S. Equity Index ETF (TPU)
|TD International Equity Index ETF (TPE)
|TD Canadian Aggregate Bond Index ETF (TDB)
So far, so good. But remember when we said TD has never fully embraced indexing? Well, unlike the Vanguard, iShares and BMO asset allocation ETFs, the One-Click Portfolios include more than just traditional index funds. A lot more, actually. While the marketing material claims that about 75% of the portfolios are built from “low cost, broad market index ETFs,” we take issue with that.
One of the largest holdings on the equity side is the TD Global Technology Leaders index ETF (TEC), which technically tracks an index, but it’s certainly not a broad-market ETF: it’s a concentrated bet on the global technology sector, with large holdings in Apple, Microsoft, Amazon, Facebook, Tesla and Alphabet.
You also get a helping of the TD Q Global Multifactor ETF (TQGM), which “utilizes a quantitative multi-variate stock selection strategy combined with an optimized portfolio construction process,” whatever that means.
And there’s more: the TD Q Global Dividend ETF (TQGD), the TD Q U.S. Small-Mid-Cap Equity ETF (TDQSM) and the TD Q Canadian Low Volatility ETF (TCLV). I haven’t seen this many Q’s since Peter Griffin was on Wheel of Fortune.
On the fixed income side, some of the bond exposure comes from index funds, but here again the portfolios are much more active than traditional asset allocation ETFs. There are up to five actively managed bond ETFs in the mix, including three that hold high-yield bonds, which carry far more risk than the investment-grade bonds you’ll find in the Vanguard, iShares and BMO funds.
And to top it all off, there are US bonds with no currency hedging, which means you’ll be exposed to the exchange rate between the US and Canadian dollars. Remember, bonds are supposed to reduce the volatility in your portfolio, but adding unhedged foreign bonds is more likely to increase it.
As you would expect, TD is marketing these actively managed components as an improvement on traditional indexing: “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.”
This is consistent with what TD has done with the Managed ETF portfolios discussed earlier. It’s clear they’re trying to differentiate their One-Click ETF Portfolios from the competition by moving away from indexing and touting the skill of their portfolio managers.
A weight problem
Now that we’ve reviewed the underlying holdings of the One-Click ETF Portfolios, let’s consider how they’re assembled. Here’s how the TD website broke down each fund by asset class in late January:
Source: TD Asset Management as of January 29, 2021
A few things jump out here. The first is the inconsistency among the three funds. In the Vanguard and iShares asset allocation ETFs, the relative weighting of Canadian and foreign equities are the same across the whole family. For example, in all five iShares funds, Canadian stocks make up 25% of the equity allocation, while US stocks are allotted 45%, and international and emerging market stocks get the other 30%.
By contrast, the relative proportions differ among the three TD funds. Notice that TOCC has much less in Canadian stocks than international stocks (8% versus 12.9%), while TOCA as more (27.6% Canadian equities and only 25.2% international). In TOCC and TOCM about three-quarters of the bonds are Canadian, while in TOCA none of them are.
It’s one thing to tout the skill of the fund managers, but it’s hard to understand why they would apply their convictions differently. Why overweight an asset class in one fund and underweight it in another? One would expect these portfolios to be the same in all respects except the overall mix of stocks and bonds.
A shifting asset mix
We’re not done yet. The Vanguard, iShares and BMO asset allocation ETFs have specific long-term targets for stocks and bonds and clear rules for how often they will rebalance back to those targets. If you buy VBAL, for example, you can be confident the ETF will always stay very close to its target of 60% stocks and 40% bonds.
Not so with the One-Click ETF Portfolios. TD’s literature specifically says the asset weightings “may change due to market movements and portfolio manager discretion,” and that the fund “may also hold a significant portion of its assets in cash-equivalent instruments when the portfolio adviser believes it is prudent to do so.”
You can already see these portfolios deviating from their targets. TOCM, which has the same 60/40 benchmark allocation as VBAL, currently has less than 32% in bonds. Similarly, TOCC has a benchmark of 70% bonds, but its current allocation is just over 60%. And TOCA, with a benchmark of 10% bonds, has only half that much.
This strategy (called tactical asset allocation) is common in active funds, but it has a similar track record to other forms of active management: it has intuitive appeal, works some of the time, but usually fails to deliver better risk-adjusted returns than a boring old index portfolio that rebalances automatically whenever an asset class deviates by more than a few percentage points.
The bottom line
Let’s take a step back and remember why the Vanguard, iShares and BMO asset allocation ETFs are such excellent products. Yes, they’re well diversified, cheap and convenient. But their other key benefit is that they’re built entirely from index funds.
The TD One-Click ETF Portfolios, by contrast, employ two layers of active management, with non-indexed holdings and tactical asset allocation. They may well deliver outperformance over some periods, and if you believe in a so-called core-and-satellite strategy that combines passive and active components, then these TD ETFs are a low-cost and well diversified way to achieve that.
However, if you’re looking for plain-vanilla index funds— which are all I have ever included in my model portfolios—then the One-Click ETF Portfolios from TD simply don’t fit that description.