Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.
This edition of the Money Bag answers your questions about the performance of index tracking ETFs, what to buy for a first-time investment, clarifying the MER on asset allocation ETFs, taking CPP early, and whether it still makes sense to hold bonds in your portfolio.
First up is Melanie, who likes the idea of investing in low cost ETFs but is concerned about the lack of performance data. Take it away, Melanie:
Couch Potato Returns
Hi Robb, I have read a lot about the ease and benefit of switching to a “Couch Potato” like portfolio. I personally would love to switch to something easier than managing my own portfolio but I rarely have seen real information on the performance of these portfolios and am therefore hesitant to switch.
I’m wondering if you could tell me about the actual performance of these so-called Couch Potato portfolios?”
Hi Melanie, thanks for your email.
It’s common to question the past performance of a portfolio of ETFs, given that many of them are relatively new and don’t have a long track record.
The first thing to understand is that the Couch Potato style ETF portfolios that I’m talking about track specific market indexes like Canada’s TSX, the S&P 500 in the U.S., and other large indexes around the world. Those indexes have been around for many many years and so if your ETF portfolio is simply trying to replicate the performance of those indexes then it should be very easy to perform a back-test and see exactly how they would perform had they existed for the last 25 years or so.
The good news is that Justin Bender at PWL Capital has done the work for us and back-tested all of the Vanguard and iShares asset allocation ETFs to show their theoretical performance over time.
You’ll see, for example, that Vanguard’s 60/40 ETF portfolio (VBAL) has a 25-year annualized return of 6.82%, which is quite good.
I have also tracked the performance of index mutual funds, which typically cost a bit more than ETFs but take a similar approach.
19-Year Old’s First Investment
Next up is Garrett, who wants some advice for his daughter’s first investment:
My daughter is a 19-year-old university student. She has not opened a TFSA yet, but she has $12,000 (saved tips from her job) ready to invest. I was thinking of just having her purchase a ETF for Canadian Banks… thoughts?
Hi Garrett, first I’m going to assume that your daughter does not need this money for any other purpose other than long-term investing. Money needed in the next 1-3 years to pay for school, buy a car, or for a house downpayment should be kept in a high interest savings account.
Your question reminds me that there’s a sub-Reddit called “Just Buy VGRO” that sort of tongue-in-cheek answers this question for first-time investors.
VGRO is all about low cost, broad diversification, and no rebalancing required. And, if she opens her TFSA account through a platform like Wealthsimple Trade, she won’t incur any fees or commissions to buy the ETF.
The other go-to platform for first-time investors is Wealthsimple Invest (the robo-advisor platform), where they will simply allocate the $12,000 into a portfolio of low cost index ETFs.
Best thing for her to do is open the account and buy something diversified so that she never has to worry about monitoring or rebalancing.
The problem with a bank ETF like BMO’s Equal Weight Banks Index ETF (ZEB.TO) is that it owns just six Canadian banks – not exactly diversified. And, it comes with an MER of 0.55%, which is relatively expensive for just six holdings.
Compare that to VGRO, which holds 12,649 stocks and 17,209 bonds from all over the world. It costs a measly 0.25%. Now you know why they say, “Just Buy VGRO.”
Asset Allocation ETF Fees
Speaking of VGRO, John wants to know if asset allocation ETFs (like VGRO) charge two layers of management fees:
You’re a big proponent of asset allocation ETFs like VBAL, VGRO, and VEQT. My question is this: Since these ETFs contain 6-7 other ETFs, do you get charged the MER for those underlying holdings (in addition to the MER for the asset allocation ETF)?
Hi John, great question and one that I’ve received often from readers. The answer is no, you don’t pay additional fees for the underlying holdings of the ETFs. What you see is all there is.
You’re right that asset allocation ETFs like VBAL, VGRO, and VEQT are “wrappers” that contain several other Vanguard ETFs that represent different asset classes and regions.
VBAL holds these seven Vanguard ETFs:
- Vanguard US Total Market Index ETF
- Vanguard Canadian Aggregate Bond Index ETF
- Vanguard FTSE Canada All Cap Index ETF
- Vanguard FTSE Developed All Cap ex North America Index ETF
- Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- Vanguard US Aggregate Bond Index ETF CAD-hedged
- Vanguard FTSE Emerging Markets All Cap Index ETF
The benefit of investing in VBAL is that it automatically rebalances to maintain its target asset mix. This means you don’t have to buy and sell individual ETF holdings on your own.
Yes, each of the individual ETFs has its own management fee. But Vanguard packaged up all seven of these ETFs into one “asset allocation” ETF and just charges a flat fee (MER) of 0.25%. That’s it.
Taking CPP Early
Here’s Farhan, who wants to know if he should take his CPP early or wait until 65:
Hi Robb, I am 61 years old and retired in March of this year. I am currently drawing a pension from OMERS. My wife is 60 years old and drawing a long-term disability claim from insurance and CPP disability.
My question is, should I take my CPP now or wait until I turn 65? Thanks!
Hi Farhan, thanks for your email. The answer really depends on other aspects of your finances. Do you need the income now, or can you get by on your OMERS pension, your wife’s disability income, and/or some personal savings for the next four years?
The math really favours waiting to take CPP at 65 and, if you can, defer taking CPP until age 70. You’re penalized 0.6% for every month that you take CPP earlier than 65. That means if you take it now you’ll get 28.8% less than you would if you waited until 65.
Now, many people argue that it’s better to take CPP as soon as possible because you never know if/when you’ll meet an untimely demise. But that ignores the fact that a 60-year-old male has a 50% chance of living until age 89, and a 25% chance of living until age 94.
Deferring CPP is a way to ensure that you don’t run out of money if you happen to live a long and healthy life. CPP benefits are indexed to inflation and payable for life.
Why Should I Own Bonds?
Finally, Colin wants to know if bonds still have a place in his portfolio, given that interest rates have nowhere to go but up:
Hi Robb, can you explain why anyone should own a bond fund right now? The unit values have gone up because interest rates have gone down. If rates go back up, unit values will fall.
Perhaps it’s better to hold 25% cash for the fixed component, or to buy GICs
I have 15% of my investments sitting in High Interest Savings, which now only pay 0.5%. Better than nothing but still appalling. Any suggestions?
Hi Colin, it’s certainly counterintuitive to hold bonds when rates have nowhere to go but up, but we’ve also been saying that for quite some time now and bonds haven’t performed that poorly:
Bonds are the ballast that protect your portfolio from the overall volatility of the market. A 60/40 balanced portfolio is still up on the year (2%) and had about half the volatility of an all-equity portfolio. There’s a behavioural component at work there – bonds help you stay the course.
That said, there is a good argument to keep your fixed income in GICs instead of bonds. The problem is that GIC rates aren’t all that attractive either.
High interest savings rates are also abysmal these days, but it’s the best option for a risk-free return. You’ll need to look outside the big banks and towards a credit union or online bank to find better yields.
I use EQ Bank, which pays an every day rate of 1.7%, plus a $20 bonus when you open an account and deposit $100.
Do you have a money-related question for me? Hit me up in the comments below or send me an email.