Happy New Year! 2021 was another crazy year for investors. Unlike 2020, which saw global stock markets shrug off a 30% decline before posting positive returns for the year, 2021 began with a meme stock craze and ended with a flurry of new all-time highs in both Canadian and US stock markets.
In this post I’ll share the 2021 investment returns for global stock and bond markets. Since you can’t directly invest in an index, I’ll use the performance of various Canadian-listed Vanguard ETFs as a proxy for each index.
2021 Investment Returns
Who predicted that Canadian stocks would lead the way in 2021? That’s exactly what happened with Vanguard’s FTSE Canada Index ETF (VCE) posting a 28.50% return. VCE closely matches the S&P/TSX 60 (the largest stocks in Canada), but Vanguard also offers a broader “all cap” Canadian index fund (VCN), which tracks about 180 stocks, and it returned 25.61% in 2021.
U.S. stocks continued their astonishing run in 2021. Vanguard’s S&P 500 Index ETF (VSP) returned 27.90% in 2021, while the broader US Total Market Index ETF (VUN), which tracks about 4,000 stocks, returned 24.41% in 2021.
These results speak to the continued dominance of large cap growth stocks, particularly south of the border.
On the international side, Vanguard’s FTSE Developed All Cap ex North America Index ETF (VIU) returned 9.57% last year, while Vanguard’s FTSE Emerging Markets All Cap Index ETF (VEE) was flat with just a 0.08% increase in 2021.
It was a poor year for bond returns, but maybe not as bad as some initially feared.
Vanguard’s Canadian Aggregate Bond Index ETF (VAB) posted a -2.85% return for the year, after increasing by 8.60% in 2020. Vanguard’s Canadian Short-Term Bond Index ETF (VSB) didn’t fare much better, posting a -1.05% return last year after a 5.14% gain in 2020.
The Vanguard U.S. Aggregate Bond Index ETF (VBU) was down -2.07% in 2021 after posting a positive 7.24% return in 2020. And, the Vanguard Global ex-U.S. Aggregate Bond Index ETF (VBG) was down -3.04% in 2021 after posting a positive 3.85% return in 2020.
Vanguard Asset Allocation ETF Returns 2021
Some investors, like me, prefer to bundle all of these investments into one globally diversified and automatically rebalancing ETF – called an asset allocation ETF. Here are the results for Vanguard’s asset allocation ETFs:
| ETF | Stock/Bond | 2021 | 2020 |
| VEQT | 100/0 | 19.59% | 11.29% |
| VGRO | 80/20 | 14.90% | 10.89% |
| VBAL | 60/40 | 10.27% | 10.24% |
| VRIF | 50/50 | 7.56% | n/a |
| VCNS | 40/60 | 5.77% | 9.41% |
| VCIP | 20/80 | 1.46% | 8.43% |
Remember, these asset allocation ETFs are actually bundles of 4-7 individual ETFs. VEQT is comprised of the following four ETFs:
- VUN – 43.7% weight
- VCN – 29.8% weight
- VIU – 19.2% weight
- VEE – 7.3% weight
The other asset allocation ETFs include the four ETFs above, plus three individual bond ETFs (VAB, VBU, and VBG).
I believe there’s a behavioural advantage to holding the bundled-up version of these ETFs. Why? Because if we see the individual parts (and their daily returns) we might be tempted to tinker with our portfolio. Indeed, why hold emerging markets (VEE) when the returns have been so poor compared to North American stocks?
Related: Top ETFs and Model Portfolios for Canadian Investors
But there’s a saying that your portfolio is like a bar of soap – the more you touch it, the smaller it gets.
Canadian stocks have had a dismal run compared to U.S. stocks over the last decade. I don’t know of any investor who wanted to hold more Canadian stocks. In fact, one of the biggest complaints I get about VEQT is its ~30% weighting to Canadian equities.
But, as 2021 showed us, we simply don’t know which markets will outperform in the future. Last year’s losers routinely become next year’s winners (and vice versa). That’s why it’s sensible to hold a globally diversified portfolio, to capture all global stock returns rather than concentrating in any one country or region.
At this time last year, many investors wanted to ditch Canadian stocks and go all-in on the S&P 500. Some wanted to shift out of the S&P 500 and go all-in on the NASDAQ 100. A select few wanted to dump the NASDAQ in favour of Cathie Wood’s ARKK. That one didn’t work out so well…
This is classic performance chasing. The problem is, past performance is not indicative of future returns.
Sometimes I think ETF investors need to take a page out of the value investor playbook. Instead of loading up on what has done extraordinarily well last year, value investors counterintuitively look for stocks that have performed poorly in the past. That’s because they’re after future returns, not past performance. And stocks trading at attractive valuations tend to have higher expected future returns.
With that in mind, which investment do you think should have higher expected future returns? The all-time high S&P 500 ETF, or the (relatively) poor performing emerging markets ETF?
Now, I’m not suggesting that investors put all of their money into emerging markets. But they certainly shouldn’t deliberately avoid emerging markets because of the recent underperformance.
My 2021 Investment Returns
I invest 100% of my money in Vanguard’s All Equity ETF (VEQT). It stands to reason that I should have achieved a 19.59% return across all of my accounts. But investment returns don’t work that way. We need to account for any contributions and/or withdrawals, as well as the timing of those cash flows throughout the year.
Here are my 2021 investment returns:
- RRSP – 19.68%
- TFSA – 19.32%
- LIRA – 19.59% (this aligns exactly with VEQT’s return because there were no contributions or withdrawals)
- Corporate – 20.88%
- RESP – 21.25% (my kids’ RESP is invested in TD e-Series funds)
It’s interesting that for all of the fussing index investors do over which portfolio to choose (Vanguard, iShares, BMO, TD, Horizons, etc), the TD e-Series funds have held up remarkably well compared to a similar all-equity ETF portfolio.
That’s why, for me, it doesn’t really matter which product you choose. Select an appropriate asset mix that you can stick to for the long-term and then find a product that matches what you’re looking for. Don’t lose sleep over 5 basis points of cost (0.05% MER), or an extra 5% allocation to Canadian stocks.
Final Thoughts
2021 was another fantastic year for investment returns. Canadian stocks led the way with a 28.50% return, while U.S. stocks closely trailed at 27.90%. A globally diversified all-stock portfolio returned 19.59% (dragged down by international and emerging market stocks). These are eye-popping numbers.
The long-term annual average stock returns are closer to 8-10%, depending on which country’s stock market you follow. But because the past decade’s stock returns have been so high, it makes sense to lower our expectations for future annual returns to the 6% range.
This is not to rain on anyone’s investing parade. But I fear that many investors have come to believe double-digit investment returns are a given, and that moving money into hot performing sectors or countries is a guaranteed recipe for success.
That warning doesn’t mean markets are going to crash anytime soon. Stocks can continue to climb, crash, or go sideways for many years. No one knows.
The point is, if you’re a balanced or conservative investor who’s feeling a bit of FOMO and wanting to increase your equity allocation to chase returns, think again. Remember why you set up your portfolio in the first place. It was to maximize returns, given the amount of risk you are willing to take.
How did your investments perform in 2021? Did you make any changes to your portfolio? Let me know in the comments.
