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Modifying Your Asset Allocation When Using All-in-One ETFs

Last week, I compared two heavy hitters in the all-in-one ETF marketplace – iShares vs Vanguard.

Here is a quick backgrounder from the article that summarizes these convenient investment products:

Many of you know how much I appreciate and recommend the Vanguard all-in-one ETFs. What I like most about them is that in a single ETF, it provides investors with a complete globally indexed portfolio that will automatically rebalance to maintain the set ratio of equity/bonds. All for a very low management expense ratio (MER) of 0.25%.

Comparing both products, it looks like Vanguard has met its match! While both products are very similar (and awesome), it’s a toss up on which is better. If you’ve already started a portfolio using Vanguard all-in-one products, I’d say to stay the course. If you’re new to investing, then I think the iShares all-in-one ETF line will serve you well with a slightly lower MER and slightly more equity exposure outside of Canada. Either way, investors win with the low fees and ease of use. As mentioned earlier, combine it with a discount broker that offers commission-free ETFs, and you’ll save even more!

The post was quite popular which resulted in a number of questions.  One question that I received a number of times was how to modify your asset allocation as you age with all-in-one ETFs.

As you probably know, a general investment rule of thumb is to increase your bond allocation as you age and get closer to retirement.  This will essentially reduce the drastic ups and downs of your portfolio (volatility) to:

  1. help you sleep at night; and,
  2. help reduce the damage when withdrawing from your portfolio during a big down year for equities.

As these ETFs are great as a “set it and forget it” type of investment, the downside is that the equity/bond allocation is fixed.  So how do we fix this conundrum?  Keep reading!

How to Modify your Asset Allocation when using All-in-One ETFs

So say that a young investor, Sally, starts off with VGRO (or XGRO) which has an 80%/20% equity/bond allocation.  As previously mentioned, as Sally gets older and closer to retirement, she may want to increase her bond allocation to reduce volatility. But how does she do with a product with a fixed asset allocation?  Here are a few strategies:

  1. Swap VGRO for VBAL – This is the quick and dirty solution.  That is to swap VGRO which is 80%/20% equity/bonds for VBAL which has a 60%/40% split.  While this solution does not allow for a gradual increase in bonds or for a specific bond allocation other than 40%, it gets the job done by establishing a common balanced portfolio.  It also keeps the portfolio simple by maintaining one ETF.  This solution may not be ideal for a non-registered portfolio as it will generate capital gains tax.
  2. Keep VGRO and add VBAL – This solution is a bit more elegant as it allows the investor to gradually increase their bond allocation.  For this method, the investor would simply stop buying VGRO but adding a new position VBAL with new money.  As VBAL increases, the overall bond allocation of the portfolio will increase.  One downside is that this portfolio will never reach or exceed 40% bonds.  Another is that the investor will need to do a little math to determine their bond allocation.  For example, if you have $10k in VGRO that’s ($2k bonds) and $10k in VBAL ($4k bonds), that will give you $6k bonds on a $20k portfolio which is a total of 30% bonds.
  3. Keep VGRO and add an Index Bond ETF – In this solution, you simply add a low-cost indexed bond ETF like Vanguard’s VAB.  This is my preferred strategy when adding bond allocation to your all-in-one ETF because it’s easy and solves a number of problems.  First, like the second option above, you don’t need to sell anything, so no extra capital gains in a non-registered portfolio.   Second, the bond allocation of your portfolio is more flexible.  I like the idea of gradually increasing to 50% bonds for a traditional retirement, this method will allow for this gradual allocation whereas the other two have limitations of up to 40% bonds.

Final Thoughts

While the all-in-one ETFs are a great solution for beginner and veteran investors alike, there are some drawbacks, namely the fixed bond allocation of these funds.  In an ideal world, Vanguard would offer Canadians target retirement funds like they offer our friends in the U.S.  The bright side is that there are some creative ways around this limitation.

My favorite solution is to gradually add an indexed bond ETF like VAB to slowly increase your bond allocation as you get closer to retirement.  Alternatively, if you are willing to manage two ETFs in your portfolio, consider getting a little wild and create your own VGRO/XGRO with three ETFs as explained in my simple indexing guide.

Despite these limitations, both Vanguard and iShare’s all-in-one ETFs are among my favorite investment products and are highly recommended especially for those just starting their investment journey.  Happy investing!

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12 Comments

  1. nobleea on February 4, 2019 at 12:33 pm

    Options 2 and 3 are the obvious ones.
    It’s not like you need to flip an allocation switch the second you turn age XX (whatever that might be). It should be a gradual change. Instead of making a hard switch at age 50 (for example), start making the change to contributions at 44 or 45, and keep on going til 52 or 53. If by then, you’re not at the ideal allocation, then you can do a hard switch for the remaining.

    • FT on February 6, 2019 at 8:51 am

      Good ideas, thanks Nobleea!

  2. Ian on February 19, 2019 at 3:23 am

    Now that VEQT has arrived, what would your thoughts be towards something like 80% VEQT and 20% VAB/ZAG for a young investor. An investor could simply add more to the bond component as they age. Easy two fund solution ;)

    • FT on February 19, 2019 at 8:30 am

      I like it Ian ! And if you already have a lot of Canadian exposure , xaw plus bond ETF would also work !

  3. Mr. Prairie FIRE on March 7, 2019 at 12:15 pm

    Thanks for this post! So good and answers my questions. I was hesitant to switch to an all in one, but now seriously considering it given the simplicity of Optin 3. Much appreciated.

  4. retireby45 on June 19, 2019 at 4:58 pm

    I have recently started investing in RRSP/RESP. I am 35 and plans to retire by 45. I have been investing in real estates (in US) from past few years and its giving me consistent passive income

    Since moving to Canada, and still plan to work for another 10yrs, what percentage contribution would you recommend for me in RRSP/RESP vehicle (My daughter is 3 yr old right now). I dont plan to immediately start using RRSP money as my passive income will be enough to cover our yearly expenses

    I have opened RRSP with 70% Stocks (50% US, 20% Canada) and rest in Fixed Income. RESP i am going with 90-95% Equity and will switch to more conservative after/around 10 yrs (KISS principle)

    I am sure you guys have better model for me to follow? any recommendation?

    • FT on June 20, 2019 at 10:36 am
      • retireby45 on June 20, 2019 at 1:25 pm

        Thanks FT. This looks good. Any such article on RRSP or TFSA as well.
        I am just trying to understand what would a person of my age (and retirement age in mind) would and should start with their investment in RRSP/TFSA/RESP.

        I guess the model might still be same just redistribution might happen but looking for some guidance. I have never done index investing before. I am reading about it but also need some practical advice.

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