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.
Thanks Dan for this recap. I converted all my stocks to your Vanguard all in one portfolios in December. I’m hoping for a 5 to 7% return for 2022.
If anyone is interested in simulating their portfolio scenario with historical returns of the Vanguard ETFs in Dan’s models, check out indexgoose.com. Dan mentioned it in a recent PWL newsletter.
Dan, thank you for the info, I have a large holding of XAW and it seems to have had a good year, what was the return for 2021?
@Steve: The returns for any specific ETF is always available on the fund’s webpage.
Thank you for your dedication and hard work, Dan.. You can done Canadian investors a wonderful service. I own the individual ETFs of the Vanguard and iShares portfolios across several accounts. I sold my stocks years ago and went with ETFs and I haven’t looked back.
Thanks Dan. I really enjoyed your new “Reboot” book and took it to heart. Converted most everything to the Vanguard Asset Application ETFs.
Unfortunately, must of my purchases were late in the year (post Reboot, so to say) and thus I missed most of the gains. To my surprise VEQT literally did nothing in 4q21. And because of this my conservative and balanced purchases are negative over the last quarter. I’m not worried though…I believe in the evidence.
Please keep it up.
Lovely to see a new post here. I have listened to ALL of your podcasts and greatly appreciate the instruction. I’ve been an index investor for years now (with Vanguard in the US) but have learned a great deal from hearing you. Kudos and thank you.
First thank you for this, appreciated as usual. Also a long overdue greater acknowledgement of gratitude for all the work you have done on this blog over the years. What a huge positive difference it has made to our retirement that we are currently enjoying. It was a game changer many years ago for me.
@Jerald: Thanks for the comment. I think you understand this, but one quarter’s worth of performance is absolutely meaningless. Remember that index fund, by definition, will always lose money whenever the markets decline, and that is much more frequently than most of us would like. Sometimes those losses can go one for two years or more. This only works if you’re in for the very long term. Hang in there!
Dan, thanks for all you’ve done in sharing your knowledge on passive investing. It’s changed my life, and has transformed me from an ignorant, ineffective, paralyzed, anxious couch potato into an informed, confident, successful couch potato. I’ve retired, and I can sleep at night, and I’m not buffeted by every stray bit of news, whether it be a boom or a bust. And that’s a day to day change in my life. I consider it a big deal. Thanks again!!
Many thanks to all the commenters for the kind words. Keep this up and I might even post more than one article every six months. :)
Thank you for posting the Benchmark. I have started in Late Nov and of course mine will be very different from the benchmark. Hoping to see what I did next year ;)
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Been waiting since December 31 for this post, so happy you’re still doing it, thanks! I also shared it with my index-curious MIL who I’m teaching about big bank MERs.
The hardest part is rebalancing now into bonds. I’ve also been thinking of but holding off getting into Korea, but it looks like my XEF/VEE combo is winning still.
(CCP follower, but not an all in one convert quite yet)
Any update for the e-series returns for 2021?
I started investing for the first time last year with the e-Series, I’d be really interested to hear your analysis of those.
I’ll be posting the e-Series portfolio returns later this month.
Thanks for all that you do for us, Dan. You are a blessing for sure.
You mentioned on another blog post reply recently that your long term annual return expectation for planning purposes for equities is 6.5% … what is it for fixed income? Just wondering what i should plan for going forward based on a mix of fixed income and equities. Thanks!
@Franco: A reasonable expectation for the return on fixed income is the yield to maturity of a broad-market bond ETF. These days that’s around 2.1%. (Lots more info on this idea in my book.)
Dan I too listen to every podcast and follow – great work and much appreciated. I would love to see more content on how to implement withdrawal strategies and generate income from these portfolios when we shift to decumulation mode. I am not talking about what is a SWR but rather how investors manage these model portfolios and draw the income. I have heard it mentioned just sell shares as needed. But managing asset allocation in the phases of retirement and doing this across Taxable, RRSP, TFSA for a family or couple is another matter. Good idea for a future post? There are many systems mentioned but not sure I have seen you cover this in detail? Or have I forgotten?
Hi Dan. somebody mentioned that you have a podcast.
can you tell me how to find it
thanks
stevecfd57@gmail.com
Thank you Dan for the update and congratulations on the book. I have to thank you for replying to a post on the blog earlier in the year that helped give me the confidence to move ahead with a Canadian Couch Potato certified portfolio. (50/50 VBAL/VGRO).
Very pleased with the results, love buying my ETFs on payday and I have certainly shared the wisdom with family, friends and colleagues.
Would love to follow regular updates to podcast/blog but appreciate you’ve got a full plate. Thanks for sharing and doing what you do.
Yield to maturity is not net of MER, I believe. So to get a more true picture of ROI, you need to subtract MER from YTM.
Is that correct?
@Jim R: That would be the more conservative choice, yes. For most bond ETFs this should be less than 10 basis points.
Hi, are the portfolio recommendations unchanged? Is any rebalancing suggested? I hold VCN and XAW as well as some stocks which I am considering liquidating and moving into ETF. Thanks.
@Marcia: I will not be making any changes to the ETF model portfolios for 2022.
Hi Dan,
I have been searching for a Low/No fee platform for trading stocks and ETF’s and came across Desjardins Online Brokerage which claims $0 commission on equities and ETF’s. I do not see them on any lists of best brokerages, (only the usual Questrade, Investors edge etc.) Have you had any experience with them or would you be able to advise if they are worth looking into? Any red flags?
@Tushar: In case this can be helpful, I’ve used Desjardins Online Brokerage (Disnat) for many years now and I’ve never had a problem with them (though I should note I only do a few trades a year and any platform would probably have been fine for me). It’s indeed 0$ comission on ETFs. The only red flag I’m aware of is that there are significant annual fees if your accounts are below a certain amount (about 15k$, I think).
@Dan: Like others, I want to thank you for everything you’ve shared on this blog. I’ve learned a lot from it and it has definitely helped me set up my own porfotlio. I also enjoyed the book.
@Dan, thank you so much. do you have any suggestions for US$ porfotlio?
Justin, Dan
Given the top-down situation that we almost for sure going to see interest rates rinsing in the next year or two, is it not very unwise to advise people to invest in anything that has something to do with bonds, just to iron out a little bit of volatility. Should it not be better to rather add dividend aristocrats ETFs like CDZ or even SDY if you want to calm down volatility. With bonds you sure going to throw money into the water, especially when you take into consideration that the lousy coupons on bonds are below inflation. Would be easy enough to circle back to bonds when their prospects looking better in a couple of years from now.
@Gert, I’m sure Dan will have lots to say about this, but I’ll point out one important consideration. It’s just not possible to beat the market in the way that you describe. The future expectations for interest rates are already built into what bonds are currently trading at. If they weren’t, the price of bonds would adjust. If interest rates go up faster than expected, bonds will go down. If they go up slower than expected, bonds will go up. If interest rates unexpectedly go down, then bonds will do very well. Any of these scenarios could happen, but your expected return for any security is still determined by the volatility. Dividend stocks are fine, but they’re more volatile than bonds and that’s why they have higher expected returns.
@Sebastien: Thank you, that is indeed helpful. I also intend to do only a few trades a year. I currently use a brokerage that has $9.99 commission for stocks and ETF’s and was looking for something cheaper. However with just a few trades a year it should not matter I guess. Thanks again.
@Tushar: I’m afraid I have no experience with Desjardins’ platform. Thank you Sebastien, for sharing your knowledge!
@Sherman: It’s hard to make specific recommendations without knowing your overall goals. Specifically, if you live in Canada and your liabilities are in CAD, are you sure you want your assets to be held in USD? And if you do have a reason, then it would be important to consider that when designing a portfolio.
In general, it usually does not make sense to hold unhedged US bonds if you are living and spending in CAD. The bonds would offer little or no diversification benefit during a bear market for stocks (assuming you measure your returns in CAD). For equities, there are many US-denominated options, though I would stay away from the asset allocation ETFs offered by US providers, because of the fixed income issue already mentioned, and because these have only a tiny allocation to Canadian equities.
I’m assuming here that you’re looking for market exposure that is similar to what you would get in my model portfolios. But that might not be the case.
@Gert: Darren has already hit on the main ideas I would share. The idea that “interest rates are certain to rise” has been a constant refrain since 2009. That is certainly the consensus view now, and it might happen. But if we have a sudden market crash (caused by another major COVID wave, or any other crisis), then rates will likely fall, as they usually do in a bear market. That’s why the bonds are there: they are an insurance policy, not a return generator.
Other than the fact that they pay a yield, dividend stocks have almost nothing in common with bonds. They do not offer any protection in a market crash, and indeed, if a recession causes them to cut their dividends these companies can fall even harder than the broad market.
@tushar
https://www.bmoinvestorline.com/selfDirected/pdfs/no_commission_fee_etfs_en.pdf
Free ETF trades (buy and sell, no gimmicks that I’ve noticed) at BMO InvestorLine. Individual stocks still $9.95 though.
Hi Dan,
I would love to see more articles, so just chiming in here. Always happy to read your content! Thanks for all the work you’ve done.
Hi Dan, I have been looking forward to this end-of-year recap.
You mentioned the effects of currency movements. It’s interesting to see that while USD/CAD changed hardly at all in 2021, the Canadian dollar strengthened against many other currencies.
Return of the MSCI EAFE (Eur/Aus/FE Developed) IMI Net Tax Total Return Index (Unhedged CAD$): 10.13%
Return of the MSCI EAFE (Eur/Aus/FE Developed) IMI Net Tax Total Return Index (local currencies): 18.48%
Return of the MSCI Emerging Markets IMI Net Tax Total Return Index (unhedged CAD$): -1.13%
Return of the MSCI Emerging Markets IMI Net Tax Total Return Index (local currencies): 2.32%
Equities were positive to very positive most everywhere in 2021. It was another excellent year for those who stayed invested and for those who used index funds to ensure they got the actual gain the market generated and not anything materially less than that.
Dan, congratulations on your new book! What an excellent use of COVID-enforced home time. I’ve just ordered a copy from Indigo. Thanks so much for this site and all the wealth of information it contains.
@Tim: Many thanks for the observations about the CAD’s performance in 2021, which is interesting. I also appreciate the good wishes about the book, and I hope you enjoy it!
Hi Dan, thanks again for all your efforts in maintaining such a great resource for all of us!
I have a chunk of money that I may be spending in the next 0-5 years on a car. My initial plan was to just put all of it into XBB in the meantime since my time horizon is so short, but then when I looked I saw that XBB actually had negative returns for the past year or so. I used to think bonds would never really lose money and so this would be a safe short term bet, but now I’m wondering is even XBB too risky for such a short time horizon?
@Alex: XBB is definitely not a short-term savings fund: the average term of the bonds in this ETF is 10 years. If you’re saving for the short term, then a savings account is really the only option that will guarantee you don’t lose money over that period. I try to remind people that saving for a house or car is, well, savings. It’s not an investment. In an era of low interest rates we just need to accept that there is little or no return on savings.
Thanks for the advice! For the past 6 months, my money has been in a promotional Tangerine savings account with 2.1% interest, but the promotional interest rate ends after 6 months. I now see Simplii financial is offering the exact same thing for the first 6 months (2.20% interest), so I’ll probably just keep trying to take advantage of things like this for as long as possible.
Dan, thank you so much. I use this post every year to calibrate that I am not screwing up my RBC DI Coach Potato allocations.
It is so so helpful!!
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Since 2016 when I moved to this approach I have been hovering very close to your 70/30 allocation, so no major screw up on my side . This year I was a little under Coach potato primarily because emerging markets treaded water and I weight that at 10%.
My “socially responsible” responsible RSP fund is as follows for anyone who is interested (probably not LOL)
31% Bonds
15% CA Large
8% CA Small
15% US Large
8% US Small
9% EAFE Developed
10% EAFE Emerging
4% EAFE Small Cap
Thanks again. I have a question about long term use of the all in one ETFs. So say I have 25 years till retirement and my plan is to slowly get more conservative. So I start with the 80/20 and as the year goes on I move closer to 20/80 and then all fixed income when I retire. What’s the best way to do this with the all in ones? Do I sell and re-buy the ones I want? Just wondering about most efficient way to do this or am I better off buying the underlying ETFs and slowly buying more of the bonds as I get older.
Dan read your book from cover to cover=excellent & highly recommended to all.
Curious if you have any opine/comment on Henry Mah income growth investment strategy/salary for life. Also IMHO a fascinating/interesting/eye opening read.
Hey Dave, Many post retirement portfolios will not go all the way to 0% equity. Often I think the equity will drop to 30-50% based on your comfort level. You likely could shift to just buying Bonds to shift your weight but its a function of how the rate of purchase of Bonds that you are buying and performance of equity, if the remaining equity is doing very very well you may be forced to sell to keep the ratio you want even if you are not buying more equity.
You can see in the returns above (20% eq 2% return, 50% eq 8.5% return, 80% eq 15%return). So you may not want to go down to all Income or 20% equity post retirment but get a little return like 40% equity whilst greatly reducing risk at same time
Some rules of thumb is equity level could be 100-age (conservative), 110-age (middle), 120 – age (aggressive)
2 cents…
I am sure Dan can provide more professional advice :)
@Dave: Mark has already provided some good overall advice. Your question is pretty common, actually, and part of me feels like it’s not really a problem. While it’s true that you can’t use a single asset allocation ETF on autopilot from now through your retirement, that’s also true of any alternative. There’s no scenario where buying the underlying ETFs makes this easier: it will always be more complicated to manage multiple funds.
It’s also worth pointing out that if you’re investing in an RRSP or TFSA, changing your asset mix at some future date would be extremely easy, cheap and tax-free. For example, if you’re using VGRO now (80% equities) and you want to switch to 70% equities, you can just sell your current ETF and buy 30% VAB + 70% VEQT. Three trades, a few minutes, and no tax consequences. Several years later, you can sell those and buy VBAL to move to 60% equities. (This is obviously more of an issue in a taxable account.)
Once you’re in retirement and drawing down the portfolio, there is no question that all of this becomes more complicated. But using asset allocation ETFs can still make things easier. For example, you could use a combination of cash (for one year’s worth of cash flow), GICs (for the next three to five years of cash flow) and then one bond ETF and one all-equity ETF for the rest of the portfolio.
@mike: Thanks for your comment, and glad you enjoyed the book!
I have not read Mr. Mah’s book.
https://www.dimensional.com/us-en/insights/researching-retirement-myths-and-realities-about-asset-allocations
Hey Dan, any thoughts on this? I googled it after Dave asked his question above.
It is very interesting yet elements seem counter intuitive to me
The inputs or assumptions to his simulation do not seem to be communicated in the article.
Because of this I am not sure that their conclusion would hold up for all 70 year windows. I am wondering if there is some cherry picking here to drive to his conclusion or if it would hold up reasonably well across varying 70 year windows.
Mark
Please disregard full literature here
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3881168