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:
Asset class | Index ETF |
---|---|
Canadian equities | TD Canadian Equity Index ETF (TTP) |
US equities | TD U.S. Equity Index ETF (TPU) |
International equities | TD International Equity Index ETF (TPE) |
Canadian bonds | 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:
Asset class | TOCC | TOCM | TOCA |
---|---|---|---|
Canadian equities | 8% | 18% | 27.6% |
US equities | 15.7% | 28.8% | 41.7% |
International equities | 12.9% | 19.5% | 25.2% |
Canadian bonds | 47.0% | 23.2% | 0% |
Foreign bonds | 13.7% | 8.6% | 4.4% |
Other | 2.7% | 1.9% | 1.1% |
100% | 100% | 100% |
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.
I am assuming from all of this, that you still wouldn’t recommend moving from the TD eSeries, if that is what an investor already has in place? I am retired, if that makes any difference at all. I am quite comfortable with the eSeries and I haven’t found that they ever need much rebalancing.
Dan, thanks a lot for these insights. Do you find that the TD Index ETFs that you mention (TTP, TPU, TPE, TDB) are suitable for a Couch Potato portfolio? If I calculated correctly, their MERs would slightly beat an equivalent portfolio from Vanguard or iShares. I’m just wondering if the underlying holdings for the TD Index ETFs are aligned with a true indexing strategy or deviate as well like these one-click ETFs or if there are any other concerns?
Nice product review. Very helpful
Excellent site for understanding ETF and the debate between active vs passive.
https://www.spglobal.com/spdji/en/research-insights/spiva/
Hi guys,
I’m new to this game and want to put some money away for retirement. I checked volume and price of these products. 1 they are not moving in big volume and price are pretty flat. How do i make money? Suppose i invest 50k and unit is 15 dollars and i get 3000 units x .55 cents dividend so apx ill make 1900 a year, is that right?
TD has become more problematic from a trade execution standpoint. Just make sure you use limits on all your trades and watch out for the frozen screen due to excessive traffic. They just cancelled their Senior Quant Analyst Dutton’s Quant based portfolios. No one has bothered to explain the reason. I plan on moving on after many years as a client. Chris Dutton where are you?
@Brenda and Bobby: The TD e-Series funds and their underlying ETFs (TTP, TPU, TPE, TDB) are traditional, low-cost index funds and perfectly compatible with the Couch Potato strategy.
Jack Bogle is spinning in his grave! This is exactly what he warned about- the marketing types taking over. I think he’d bust a gut laughing over TQGM. Or maybe he’d be outraged. Probably both.
Thank you for providing such an elaborate review of TD’s one-click ETF portfolios. Tangerine recently launched their own Global ETF Portfolios (Balanced, Balanced Growth, Equity Growth). Any chance you can provide a similar comprehensive review and how they fair against the TD, Vanguard, and iShares asset allocation ETFs? I have been with Tangerine (formerly ING) for a long-time and am fairly new to investing. With your blogs and information, I am becoming more informed. I am debating on switching my mutual funds to ETFs and/or switching from Tangerine entirely to an online broker (eg, Questrade). Thank you kindly.
@Imy: I am indeed planning to write about the new Tangerine portfolios. For now it’s enough to point out that they are not ETFs: they are mutual funds that use ETFs for their underlying holdings. If you decide you would like to use ETFs, you would need to open an account at a brokerage (such as Questrade).
Mackenzie has also jumped in that all-in-one space with their MGRW, MCON and MBAL.
Great review. However one comment. You mention that over the long term passive is usually better than active. But isn’t that usually due to the higher fees on active, which makes it less attractive over the long term? If so, then if TD is offering these at passive-like prices, couldn’t that be considered valuable?
Overall great video and very informative.
@Tom Robert: Fair point, and that’s what I was trying to get at in the second-last paragraph. But it’s important to remember that active can fail for reasons other than costs: poor stock picking, incorrect forecasts, concentrating in sectors that underperform, and so on. Cheap active is better than expensive active, but I’d take cheap passive over both.
Should We go with TD index ETF (TTP, TPE, TPU, TDB) OR Index e-series fund ?? Why??
Hi, thanks for this information. I stared listening to your podcast. Im currently with TD with $$,$$$. I currently have mutual funds which was set up to me before but knowing more Im switching to TD DI and wanted to get VGRO and TEC.TO to start. Whats do you think of this ETF as a starting point?
Should I just stick to VGRO only vs getting more ETFs? I was also debating getting TOCA vs VGRO.
Planning to buy and hold, No active trading, eventually will make another etf purchase in the next 6 months, keeping a total of 3 ETFs inside TD DI, but not sure yet what ETF to get that will not overlap.
What do you think of this strategy?
This will be in my TFSA, possibly keeping the money within 10-15 years.
@Zy: If you decide that an asset allocation ETF such as VGRO is appropriate them you don’t need to add anything else. That’s the goal of these ETFs: they include everything you need in a single fund.
RBC Direct Investing announced that starting March 14, 2022 they’ll start charging 1% fee on any buy or switch orders of any mutual funds. That pretty much destroys the couch potato portfolios at RBC. Others are joining them as well (CIBC will be charging $6.95 per mutual fund transaction I believe). Terrible news for people using TD eseries at these banks.