When I wrote an article about how my American friends can easily index their portfolio with Vanguard Target retirement funds, I was wondering when/if these products would come to Canada.
To rewind a little, the Vanguard retirement funds allow you to pick a fund based on the year that you want to retire. The fund will then automatically adjust your asset allocation of indexed equity/bonds as you get closer to retirement. All of this for a fee of less than 0.16% – cheaper than what we would pay for a basket of index ETFs in Canada.
Up until recently, Canadians could almost mimic these all-in-one balanced ETFs with either Tangerine mutual funds with a MER of around 1%, or via a Robo Advisor that would charge a fee of at least 0.40% + ETF MERs. These fees are reasonable, and the products are great, but can we do better with just as much convenience?
Vanguard has created three new ETFs that I believe are game changers for passive index investors out there. These three ETFs are essentially balanced ETFs with set asset allocation and will rebalance automatically to maintain the set ratio of equity/bonds.
No more doing calculations then buying/selling positions to maintain your asset allocation – simply keep buying one ETF and forget it! Oh and get this, the MER is 0.25% which is not far off from what you’d pay for a basket of low-cost index ETFs – which you would need to rebalance yourself. To lower costs even further, consider a discount brokerage that offers commission-free ETF trades.
Vanguard All-in-One ETFs
Here are the three Vanguard ETFs straight from the Vanguard website:
|Vanguard ETF||Investment objective||Ticker||Strategic asset allocation|
|Vanguard Conservative ETF Portfolio||Seeks to provide a combination of income and moderate long-term capital growth.||VCNS||40% equity/
60% fixed income
|Vanguard Balanced ETF Portfolio||Seeks to provide long-term capital growth with a moderate level of income.||VBAL||60% equity/
40% fixed income
|Vanguard Growth ETF Portfolio||Seeks to provide long-term capital growth.||VGRO||80% equity/
20% fixed income
Vanguard Conservative ETF Portfolio (VCNS – 40% equity/60% fixed income)
- 35.4% Vanguard Canadian Aggregate Bond Index ETF
- 14.9% Vanguard US Total Market Index ETF
- 14.3% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 11.8% Vanguard FTSE Canada All Cap Index ETF
- 10.7% Vanguard US Aggregate Bond Index ETF CAD-hedged
- 9.9% Vanguard FTSE Developed All Cap EX North America Index ETF
- 3.0% Vanguard FTSE Emerging Markets All Cap Index ETF
Vanguard Balanced ETF Portfolio (VBAL – 60% equity/40% fixed income)
- 23.8% Vanguard Canadian Aggregate Bond Index ETF
- 22.4% Vanguard US Total Market Index ETF
- 17.8% Vanguard FTSE Canada All Cap Index ETF
- 14.8% Vanguard FTSE Developed All Cap EX North America Index ETF
- 9.5% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 7.2% Vanguard US Aggregate Bond Index ETF CAD-hedged
- 4.5% Vanguard FTSE Emerging Markets All Cap Index ETF
Vanguard Growth ETF Portfolio (VGRO – 80% equity/ 20% fixed income)
- 29.9% Vanguard US Total Market Index ETF
- 23.8% Vanguard FTSE Canada All Cap Index ETF
- 19.9% Vanguard FTSE Developed All Cap EX North America Index ETF
- 11.9% Vanguard Canadian Aggregate Bond Index ETF
- 6.1% Vanguard FTSE Emerging Markets All Cap Index ETF
- 4.8% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 3.6% Vanguard US Aggregate Bond Index ETF CAD-hedged
As you can see from how I opened the article, I’m pretty bullish about these ETFs. Vanguard has created a product that offers a globally diversified indexed portfolio by purchasing a single low-cost ETF. I’m not sure it can get much better than this for a passive investor.
If you are an investor with a long timeline before retirement, consider VGRO which has a higher percentage of equities. As you get closer to retirement, you may want to reduce the volatility in your portfolio by increasing your bond allocation by switching to either VBAL or VCNS. Or you could buy a bond ETF to supplement the portfolio – whichever is easier for you.
Are there any downsides? I’m not sure if this would be considered a downside, but there are tax implications that you should be aware of. Since these ETFs automatically rebalance between equity/bonds on a regular basis to maintain their ratios, they will incur capital gains tax (in addition to taxation on their distributions) if they are held in a taxable account. Because of this, I would recommend keeping these ETFs within tax-sheltered accounts. I wonder if Blackrock (iShares) will counter with a similar product.
For more reading on passive investing, here are 6 other ways to index your portfolio.