Well, another year is in the books and it’s time to review how investors fared if they used one of my model portfolios during 2021. Overall, the past year was very different from 2020: we didn’t experience any gut-wrenching market declines, for one. Moreover, while stocks and bonds both delivered excellent returns in 2020, they diverged widely in 2021.
This was the second year in which my model portfolios included one-ticket asset allocation ETFs from Vanguard and iShares, as well as options for combining two ETFs (one for stocks and one for bonds). So we’ll start by looking at the individual components of these portfolios, and then we’ll review how they fared when you fitted them all together.
Equities
Canadian equities rebounded from a mediocre showing in 2020 to post their strongest returns since 2009:
| Vanguard FTSE Canada All Cap Index ETF (VCN) | 25.65% |
| iShares Core S&P/TSX Capped Composite Index ETF (XIC) | 25.06% |
Source: Vanguard, BlackRock
U.S. equities also turned in another outstanding year in 2021, matching the returns on Canadian stocks almost exactly. The returns were driven entirely by the stocks themselves, and not by currency appreciation: the US dollar ended 2021 half a penny lower than where it started. The return of ITOT below is in Canadian dollars, but it’s only slightly lower than the ETF’s return in its local currency.
| Vanguard U.S. Total Market Index ETF (VUN) | 24.47% |
| iShares Core S&P Total U.S. Stock Market ETF (ITOT) in CAD | 25.10% |
Source: Vanguard, BlackRock, Bank of Canada
International equities were the laggards in 2021: overseas developed markets didn’t keep up with North American stocks, and emerging markets just spun their wheels and went nowhere.
Remember, you need to be careful when comparing the Vanguard and iShares ETFs in these asset classes. The two index providers treat South Korea differently: Vanguard treats it as a developed country and iShares includes it as an emerging market.
Source: Vanguard, BlackRock, Bank of Canada
When we combine Canadian, US, and international stocks in the all-equity ETFs from Vanguard and iShares, the returns were virtually identical:
| Vanguard All-Equity ETF Portfolio (VEQT) | 19.66% |
| iShares Core Equity ETF Portfolio (XEQT) | 19.57% |
Source: Vanguard, BlackRock
Fixed income
It was a much different story for bonds in 2021. Interest rates rose significantly during the year: for example, the yield on five-year Government of Canada bonds went from 0.41% at the end of 2020 to 1.56% by November 2021 before heading back down slightly. As a result, broad-market bond ETFs had their worst year since 1994.
If you’re using one of the two-fund model portfolios, all your bond exposure came from one of these ETFs tracking the broad Canadian market:
| Vanguard Canadian Aggregate Bond Index ETF (VAB) | –2.85% |
| iShares Core Canadian Universe Bond Index ETF (XBB) | –2.65% |
Source: Vanguard, BlackRock
If you’re using an all-in-one ETF portfolio, then you also had exposure to other fixed income asset classes, including foreign bonds and (in the iShares portfolios) short-term corporate bonds. But there was no help to be found:
Source: Vanguard, BlackRock, Bank of Canada
Balanced portfolios
You’ve probably figured out that in 2021, you were rewarded for taking risk: the more you allocated to equities, the better your performance. Here are the annual returns for the balanced asset allocation ETFs, as well as the combined performance for the portfolios that combine a bond ETF with an all-equity ETF.
Note that in the table below, we’ve assumed the two-ETF portfolios were not rebalanced during the year. By comparison, the asset-allocation ETFs are likely to remain closer to their targets year-round.
| Asset allocation | Vanguard ETFs | Return | iShares ETFs | Return |
|---|---|---|---|---|
| 80% bonds / 20% equities | VCIP | 1.46% | XINC | 1.97% |
| 70% bonds / 30% equities | VAB + VEQT | 3.90% | XBB + XEQT | 4.02% |
| 60% bonds / 40% equities | VCNS | 5.80% | XCNS | 6.57% |
| 50% bonds / 50% equities | VAB + VEQT | 8.41% | XBB + XEQT | 8.46% |
| 40% bonds / 60% equities | VBAL | 10.29% | XBAL | 11.06% |
| 30% bonds / 70% equities | VAB + VEQT | 12.91% | XBB + XEQT | 12.90% |
| 20% bonds / 80% equities | VGRO | 14.97% | XGRO | 15.17% |
Source: Vanguard, BlackRock
The small differences in performance between the Vanguard and iShares portfolio can be safely ignored, as the portfolios have slightly different asset mixes. For example, although VBAL and XBAL both hold 40% bonds and 60% stocks, the fixed income and equity components vary slightly, so short-term variation is to be expected. Over the longer term, these are likely to be trivial.
Finally, a reminder that these returns might differ significantly from your own, even if you tried to emulate the model portfolios. Your personal rate of return would have been influenced by the timing of any contributions or withdrawals, trading commissions, the reinvestment of distributions, the amount of uninvested cash in your account, and whether you also had a side hustle. Consider these model portfolio returns a benchmark rather than a reflection of your own performance.
@Dan, It’s great to see some activity on the site! I’ve been a follower of your CCP strategy for over 5 years. I switched to asset allocation etfs during the covid drop to further simplify my investing journey and save on trading fees.
I always have been on TD DI. I like the platform but recently their fees have started to bother me. Other big banks have started offering commission-free etfs; but TD seems to have no plan to remain competitive. Is now the time best to leave the platform for WealthSimple Trade? Are there any hidden fees or drawbacks using WST? I have a six-figure portfolio spread across three accounts.
OMG new articles! And there’s a book too!!! Just purchased on Amazon. Can’t wait to read it!
Thank you Dan for continuing to support investors. When you first started, there were basically no other resources on index investing available online. Now they are ubiquitous, yet yours (and now Justin’s too) continue to stand out as the best, clearest, most advanced but accessible site out there. I’ve recommended it to dozens of people.
I miss the April Fools columns. The reactions to the early ones when people didn’t expect it yet were great.
Thanks Dan for continuing to provide great information to all of us DIY investors. I made further simplification to my portfolio this year using the all in one solution from Vanguard, and tonight made the purchase of your new book off of Amazon. Looking forward to the read.
@melwin: I don’t have any first-hand experience with Wealthsimple Trade, and I’m generally agnostic about brokerages. I will say that Wealthsimple Trade is not a brokerage, but a trading app, and it is not really designed for long-term buy-and-hold investors. Now that there are many online brokerages offering zero-commission ETF trades, it seems to me that one of these is likely to offer more services at no additional cost.
@Dan D and Mark M: Thanks for the supportive words, and hope you enjoy the book!
I am a little frustrated with a GIC, and am thinking of placing the amount into RBC iShares EFT’s. Would it be wiser to keep a yearly EFT portfolio, or create a 5 year portfolio? Is is true that the Federal government will be targeting EFT’s? While doing my research, I noticed that some of these EFT’s invest in weapons, coal, and tobacco. Hahaha. It seems like weird places to be making the most with your investments. RBC has just created a “responsible” eft portfolio, but it is new and I am not sure about the confidence of this portfolio. Unfortunately the GIC is in a LIRA. What are my options? Any ideas? I am just newly retired. I appreciate any input. Thank you.
Thanks Dan, always nice to compare my own performance with the values you publish here. I got ~12.7% vs. 12.9% with a 30/70 allocation. Apart from timing, commissions, re-investment, and idle cash, is there anything in my ETF holdings that would cause a difference? I have VCN, XUU, XEF, XEC, and ZAG. Should be fairly similar to XBB+XEQT correct? (XBB and ZAG had almost identical 2021 returns). Thanks again for everything you have done for Canadian investors Dan.
Hi Dan,
Do you believe the thesis of VGRO and etc, where there is a bonds portion to the portfolio still holds? What I’m hearing from a lot of people is that mixing bonds in the portfolio is a thing of the past and no longer applicable. What is your take on that? Has anything changed?
@Gurad: The role of bonds in a balanced portfolio is to reduce volatility and to limit losses during a bear market. That has not changed. If you are comfortable with a portfolio of 100% stocks, that’s fine. But most people who make that argument have not lived through a brutal bear market like 2000–02 (three consecutive years of negative returns on stocks) or 2008–09 (a 50% loss in about in about six months). Just make sure you are comfortable with the amount of risk you take.
RE: I don’t have any first-hand experience with Wealthsimple Trade, and I’m generally agnostic about brokerages. I will say the Wealthsimple Trade is not a brokerage, but a trading app, and it is not really designed for long-term buy-and-hold investors. Now that there are many online brokerages offering zero-commission ETF trades, it seems to me that one of these is likely to offer more services at no additional cost.
I recently started reading the blog and listening to the podcast and was empowered by your the great discussions and information to cut out the high fees of my actively managed mutual funds in my RRSP with a big bank. I am in the process of transferring my savings to an RRSP with WS Trade, with the intention of putting it all on VGRO with a 30 year time horizon. Can you elaborate on why you say WS Trade isn’t designed for long-term buy-and-hold investors? That is totally my intention, so I’m curious to know if I’ve overlooked something serious in this process. Thanks!
@Rob L: My point here was that many traditional brokerages now offer the same no-commission feature that Wealthsimple Trade offers, plus a more complete suite of services. Trading apps are, by there very nature, designed to make frequent trading on your phone very convenient. That’s not really aligned with what a buy-and-hold investor should be doing.
Hi Dan, that makes sense. Thanks for coming back to the thread to make this clarification. I do really enjoy the WS interface, so I’ll just be sure not to fall into the trading trap.
I’m still making my way through the CCP podcasts and I have questions answered every episode. It really is a tremendous resource. Thanks for everything!
Hi Dan,
Will you update the big picture of returns of each model portfolios simulated for 1 year, 5 years, 20 years, etc. ?
Thanks!
@Charles: No, I will no longer be updating the historical returns for the model ETF portfolios.
Hello Dan,
In the last few months, the bond portion of my portfolio has dropped by 9% (60% of my savings are in ZAG). I understand it is probably due to interest rates increases projected at 1.25% in 2022, which the market has already adjusted to.
Many analysts think that the bank of Canada will increase by another 1% in 2023.
Is it correct to believe that the bond portion of my portfolio will be hit with another 8-9% drop in 2023, it the rates do increase by another 1% in 2023?
This will mean up to 18% drop in bond value in 2 years if the rates to increase by 1% in 2022 and another 1% in 2023 (not counting the interests payout for the bonds)?
Thanks!
@Sébastien: Thanks for the comment. It has certainly been a challenging time to be a bond investor. As you note, the increase in interest rates has caused a sharp drop in bond prices: the largest in many years, in fact. If rates continue to increase, there could indeed be further declines in the short term. But we need to see the big picture here.
First, while we often talk about “interest rates” as though they were all the same, there are actually many different rates, and they don’t move in lockstep. Central banks can set very short-term interest rates, but they have little control over the yield on, say, five- or 10-year bonds. It is not unusual for short-term rates to rise while longer-term rates fall. Here’s an example:
https://canadiancouchpotato.com/2018/07/19/bonds-behaving-badly/
The point here is that it is unlikely that all interest rates will move up a full percentage point and cause bond funds to fall in value by another 8% or 9%. Possible, but not likely.
More important, remember the trade-off here. Bond funds fall in price because rates rise, which means that the expected return on the funds must be higher. Today, for example, funds like ZAG have a yield to maturity of about 2.7%, which is significantly higher than we’ve seen in recent years. If rates rose another point and the yield on the ETF increased to 3.7%, then it would take less time for the fund to recover those losses.
It’s helpful to keep in mind that bond funds will always break even eventually unless the underlying bonds default. If you buy a 10-year bond today and rates rise tomorrow, your bond will fall in price in the short term. But it will pay interest every year and mature at face value, so you are guaranteed a positive return. The same principle applies with a bond fund, though it’s less obvious. ZAG has a duration of about 8 years, so as long as you hold the fund for at least that long there is no realistic scenario where it can deliver a negative total return. This article is old, but the idea hasn’t changed:
https://canadiancouchpotato.com/2011/07/07/holding-your-bond-fund-for-the-duration/
So the lesson here is that bonds, like stocks, are a long-term investment that can lose value over shorter periods, which can be frustrating. If you have 60% of your portfolio in bond ETFs, you might want to consider holding a portion in GICs. These offer price stability and comparable yields, though you do sacrifice liquidity. A mix of both is often a good way to balance the risks.
Thanks for the detailed reply! It is certainly comforting. I will examine the possibility of switching a portion of my “safe” investments to GIC’s as I don’t need the liquidity in the short term…
Hi Dan, I’ve just noticed that both XBAL and VBAL show betas of around 1.2. Could you explain why these betas are tracking above 1 and what benchmarks they are using as a base index that they’re tracked against? Thanks for all your help!
@Doug: “Beta” is only a useful measure for a specific market, such as US stocks, or Canadian stocks. It doesn’t have any meaning in relation to a fund that holds multiple asset classes like XBAL or VBAL. Where does the 1.2 figure come from?
Hi Dan …
Long time reader … First time caller.
Are you aware of any site / app that I can use that will give me the Total Return of stocks and ETFs?
It would be a big help when making investing decisions to see the Dividend Amount, Dividend %, Monthly / quarterly, Total Return, and the MER if this was for ETFs.
One area where this would be helpful is when you look at ETFs like ZEB vs. ZWB Where the higher dividend might be negated by a lower share price.
thanks, in advance for your help with this question.
Thanks so much for the reply Dan. That makes sense, I’ll ignore it. The beta figures I’m referring to on XBAL and VBAL are just on the default stock widget on my iPhone. The data indicates as supplied by Yahoo finance.
@Dan: Is ZDB (discount bond) still a recommended bond ETF when the rates are going up? I want to get rid off HBB while it’s in red territory, and curious to know if I should replace it with ZDB or XBB or something else.
Also, bmo now has a ZSDB (short term discount bond). Would I do better with this one instead?
Thanks for the help!
@melwin: Are you simply doing some tax-loss selling with HBB, or are you looking to change your bond exposure? Assuming you’re tax-loss harvesting, then ZDB is more tax-efficient than XBB, and both have similar interest-rate risk to HBB: in other words, they will both lose value by roughly similar amounts if rates rise. ZDSB, as a short-term bond fund, will behave differently. It will not be affected by changes in interest rates on medium or long-term bonds. So that would represent a significant change in strategy.
@Doug: Data from services like these are frequently wrong when it comes to ETFs, especially Canadian-listed ETFs.
@Herb: The best place to look is on the ETF’s own webpage. For example, for ZEB, just go right to the BMO site:
https://www.bmo.com/gam/ca/investor/products/etfs#
Hi Dan.
First I wanted to say thank you for all your work over the years. All my reading here, your PWL Capital White Papers, Money Sense articles etc gave me the confidence to take over my investing for myself instead of continuing to get meh results from a high priced ‘advisor.’ I figure I can get meh reults on my own for a lot less! (Also, the introduction of the all in one portfolio etfs didn’t hurt as that’s the route I decided on :) ) You’ve been so thorough over the years I didn’t even feel like your new book could possibly add to my current knowledge, so I bought a copy for my younger brother instead to save him some time and hopefully money!
Now I think I should have gotten my own copy after all. I’ve been much more relaxed about the process now, but I did notice something this morning which caused some concern. In the course of a conversation about a differnt etf, I found on TMX money (not sure where they get their numbers) that apparently several (at least) of the Vanguard ETFs have had the number of their outstanding units drastically reduced since the end of February. Almost 20% in some cases. Is this something to be worried about? I know not to fret over trading volumes of fund of funds (again, thanks to you!) but units being taken out of circulation entirely seems very different. TMXs numbers line up with numbers published by other fund providers so…… Really hoping it’s nothing, and I can go back to being relaxed about everything.
Thanks again for all your knowledge over the years and congratulations on the new book!
I’ve heard VEQT and VGRO mentioned a lot in personal finance forums so it is great that they’re approved by your standards. I’ll definitely consider getting some VEQT with my next TFSA deposit. Thanks again!
Thanks for the detailed post! What do you think about carving out an alternative sleeve in the portfolio to try and make it more all-weather. It seems some allocation to alternatives such as gold and managed futures could help smooth out returns when both stocks and bonds are down – which is admittedly rare!
@CCP Curious to hear your thoughts on why you are now recommending a 1 fund portfolio over the 3 fund portfolio given the higher MER on the 1 fund option. I have previously been using your 3 fund strategy of VCN VUN VAB, would you stay the course on 3 fund and keep rebalancing or sell the 3 EFTs and buy VRGO?
@Brandon: In my view, the slightly higher MER of the one-fund portfolios (which is less than 0.10%, or $10 a year on every $10,000 invested) is more than offset by the many benefits, including fewer trades, eliminating the need to rebalance, and greater simplicity. There is also potentially more diversification: for example, a portfolio of VCN + VUN + VAB does not include international or emerging markets stocks, not to mention non-Canadian bonds (VGRO holds a total of seven asset classes).
Hi Dan,
I have been wanting to switch my VAB in my RRSP to VGRO.
Both are down almost the same percentage.
Does this mean that if I switch that I am essentially just buying into a market low?
Do I need to wait for VAB to go up but then likely VGRO will go up as well?
I want to I increase my asset allocation 70% stocks to 75%.
Do I need to wait for VAB to recover before I do this?
I am not sure how to look at this. If I had cash it would be easy but I don’t know how to think about this with VAB also dropping.
@Eddie: The switch you propose is from all bonds (VAB) to a portfolio of only 20% bonds. So it’s impossible to determine the “right time” to do this, except in hindsight. It’s quite possible that bonds will go up and stocks will go down in the short term, which would be ideal for you. But it’s just as likely that the opposite could happen.
If you are confident that the changes you want to make are appropriate, and you’re committed to sticking to your new plan for the long term, then I would not worry about trying to time the market, as this is impossible.
Hi Dan – I love your blog and just got your book. I have been following for years. I have a TD Web Broker account – stupid question, but how do I buy Vanguard? Can I just do it through my Web broker account?
@LIa: Yes, you can buy any ETF using TD Web Broker. If you are unfamiliar with the process, I’d recommend watching some tutorials. Search for “How to buy ETFs on Web Broker” and you’ll find some videos that will be helpful.