How To Choose The Right Asset Allocation ETF

How To Choose The Right Asset Allocation ETF

Nobel laureate Harry Markowitz famously said that diversification is the only free lunch in investing. A portfolio concentrated in just a handful of stocks, or one that holds only Canadian or US stocks, may have a much wider range of outcomes than a more broadly diversified portfolio that includes stocks from every country. Most investors should also have some bond exposure to help reduce volatility. Bonds tend to hold their value when stocks fall (yes, 2022 was a notable exception), so when that happens a diversified investor can sell bonds to buy more stocks at a discount.

This concept of diversification and using an appropriate asset mix makes good sense, but it might also make things complicated for the average investor to build a properly diversified portfolio.

However, if investing has been solved with low cost index funds, then investing complexity has been solved with asset allocation ETFs, or all-in-one ETFs.

What are Asset Allocation ETFs?

An asset allocation ETF holds a pre-determined mix of Canadian, US, international and emerging market stocks, plus Canadian, US, and international bonds. It automatically rebalances this mix when markets move up and down, so you don’t have to worry about tinkering with your portfolio.

Let’s say you invest in Vanguard’s Balanced ETF (VBAL). This asset allocation ETF is made up of seven underlying ETFs representing stocks and bonds from around the world. Altogether it holds more than 13,000 global stocks and 18,000 global bonds.

Most major ETF providers offer their own suite of asset allocation ETFs. You’ll typically find the classic 60/40 balanced ETF, an 80/20 growth-oriented ETF, a 40/60 conservative ETF, and even an aggressive 100% equity ETF.

Related: How I Invest My Own Money

For this article, we’re going to stick with the two biggest names in the asset allocation space: Vanguard and iShares.

Vanguard’s asset allocation ETFs include

  • Vanguard’s Conservative Income ETF (VCIP) – 20% stocks and 80% bonds
  • Vanguard’s Conservative ETF (VCNS) – 40% stocks and 60% bonds
  • Vanguard’s Balanced ETF (VBAL) – 60% stocks and 40% bonds
  • Vanguard’s Growth ETF (VGRO) – 80% stocks and 20% bonds
  • Vanguard’s All Equity ETF (VEQT) – 100% stocks

iShares’ asset allocation ETFs include:

  • iShares Core Income Balanced ETF (XINC) – 20% stocks and 80% bonds
  • iShares Core Conservative Balanced ETF (XCNS) – 40% stocks and 60% bonds
  • iShares Core Balanced ETF (XBAL) – 60% stocks and 40% bonds
  • iShares Core Growth ETF (XGRO) – 80% stocks and 20% bonds
  • iShares Core Equity ETF (XEQT) – 100% stocks

How to choose the right asset allocation ETF?

This isn’t like the old days when you would try to pick winning mutual funds by looking up their past returns. By nature, over the long term, an all-equity portfolio is going to outperform an 80/20 portfolio, which will outperform a 60/40 portfolio, and so on.

Choosing the right asset allocation ETF starts with determining the most risk appropriate portfolio for your age, time horizon, goals, and your capacity to endure the ups and downs of the market. Too often investors chase past winners and then abandon ship when those winners come crashing down to earth. Conversely, many investors flee to conservative investments after a downturn, only to miss out on the eventual recovery when stocks rise again.

What we want to do is select an asset mix that we can stick to for the long term, regardless of the current market conditions. For many people, that’s the tried-and-true 60/40 balanced portfolio. For others, who maybe have a longer time horizon or a larger appetite for risk, an 80/20 or even a 100% stock portfolio may be perfectly sensible.

You can get a decent sense of your risk tolerance by taking this investor questionnaire on the Vanguard website.

Follow that up by watching this excellent video by Shannon Bender on how to choose the right asset allocation ETF:

I like this video because it gives you an idea of the range of outcomes you can expect from the various asset mixes over time. Hint, you should probably be more conservative than you think over timeframes of less than 10 years.

I use the following assumptions for expected future annual investment returns in my financial planning projections:

Average return assumptions

  • Low risk 20/80 portfolio = 3.30%
  • Conservative 40/60 portfolio = 4.00%
  • Balanced 60/40 portfolio = 4.70%
  • Growth 80/20 portfolio = 5.40%
  • Aggressive 100% portfolio = 6.10%

Keep in mind these are long-term projections. Investment returns can vary widely in a single year. PWL Capital’s Justin Bender back-tested returns for each of the Vanguard and iShares‘ asset allocation portfolios and found the worst 1-year return for each of them:

Worst 1-year return

  • Low risk 20/80 portfolio = -12.18%
  • Conservative 40/60 portfolio = -18.85%
  • Balanced 60/40 portfolio = -25.49%
  • Growth 80/20 portfolio = -31.79%
  • Aggressive 100% portfolio = -37.74%

However, the annualized 20-year returns were a lot closer to my financial planning assumptions:

Annualized 20-year returns

  • Low risk 20/80 portfolio = 4.24%
  • Conservative 40/60 portfolio = 5.14%
  • Balanced 60/40 portfolio = 6.01%
  • Growth 80/20 portfolio = 6.82%
  • Aggressive 100% portfolio = 7.58%

You can see that there isn’t a huge difference in long-term returns between these portfolios. The goal is to be in an asset mix you can stick with for the long term, so if chasing the highest return with 100% stocks is going to cause you stomach-churning anxiety throughout your investing life, then take comfort knowing you’re not giving up much by choosing a balanced or growth portfolio.

Remember, nobody failed to meet their retirement goals because they invested in a sensible low-cost balanced portfolio instead of a more aggressive portfolio.

Strike a compromise between FOMO and fear. What I mean is that you want an asset mix that makes you feel just a little bit of FOMO when stocks are soaring, and feel a little bit less afraid when stocks are falling.

Vanguard, iShares, others?

Okay, so once you’ve selected an appropriate asset mix, you’ll still need to decide which ETF provider to choose (Vanguard, iShares, BMO, TD, Horizons, Mackenzie, and Fidelity all offer a suite of asset allocation ETFs).

I’ll keep this part brief because there’s no need to overthink it.

For simplicity, if you want to narrow down your decision, the asset allocation ETFs offered by Vanguard and iShares are perfectly sensible options for your portfolio. There aren’t enough differences to lose sleep over the decision.

iShares’ asset allocation ETFs are slightly cheaper – they cost 0.20% MER compared to Vanguard’s 0.24% MER at the time of this writing.

In terms of geographical weighting, iShares holds slightly more US equity and international equity, while Vanguard holds slightly more Canadian equity and emerging market equity.

The iShares’ portfolios have also slightly outperformed Vanguard’s pretty much across the board over all time periods, likely owing to US and international equity outperforming Canadian and emerging market equity.

The differences are negligible, though, so pick one provider and stick with it – or hedge your bets by holding a Vanguard product in one account and iShares in another. Just don’t switch between them every year chasing past performance.

Final Thoughts

It has never been easier to be a successful DIY investor than it is today. That’s because new one-stop investing solutions like asset allocation ETFs have taken the complexity out of building and maintaining a portfolio.

They’ll also save you a bundle on fees. Where most mutual fund portfolios charge an average MER of 2%, you’ll pay 1/10th of that with an asset allocation ETF.

If you want to reduce the investment fees that you pay, diversify your portfolio into an appropriate mix of global stocks and bonds, and simplify your investments with an all-in-one automatically rebalancing ETF, then consider switching to a risk appropriate asset allocation ETF.

That’s exactly what my DIY Investing Made Easy video series is designed to do – show you exactly how to make the transition from an expensive and underperforming mutual fund portfolio and into a simple, low cost asset allocation ETF so you can cut your fees to the bone and move on with your life.

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  1. Frito on April 19, 2023 at 3:24 pm

    Why does everyone follow the 20% chunk system? I’m more 50/50 but no one seems to have that as an offering. Why not 25/75, 50/50, 75/25? Is it just to be able to compare results to other funds? We need an outlier!

    • Robb Engen on April 19, 2023 at 3:40 pm

      Horizons offers a 50/50 (HCON) and 70/30 (HBAL), but their all-in-ones use a total return swap (no interest and dividend income paid out, just deferred capital gains) which is not really appropriate for registered accounts.

      Not sure the answer to your question as to why there aren’t more in-between mixes. I suppose Vanguard and iShares would say you could just own equal parts of a 40/60 and 60/40 mix to get your 50/50, but for you that defeats the purpose of an all-in-one. I hear you.

      • JP on April 19, 2023 at 4:26 pm

        Do you think those Horizons ETFs are a good fit for non-registered account if receiving regular distributions is not ideal from a tax implications standpoint?


        • Robb Engen on April 19, 2023 at 5:18 pm

          Hi JP, they can be a good option if one of your primary objectives is to avoid taxable income.

          Horizons does have other individual corporate class “total return” ETFs as well (if you don’t like the make-up of their all-in-one funds).

        • Bob S on April 19, 2023 at 7:44 pm

          I caught something from Ben Felix at some point in time (can’t find it now) that the total return swap approach may have some regulatory risk such that the Horizon structure could be disallowed in the future. In that case, the ticker might become HUMP for Humpty Dumpty as it comes tumbling down. It hasn’t happened yet in the few years that I became aware of Horizon’s offerings.

          If you realize that there is an added risk, then the expected higher return could be worthwhile.

          • Robb Engen on April 19, 2023 at 8:02 pm

            Hi Bob, you’re right and I looked for it to share the link and it has been taken down – it’s a few years old so maybe it’s getting an overhaul.

            Total return swaps were in the government’s crosshairs a few years ago but it has been quiet since then. Horizons has some information on their website on what they would do in the event a future government disallows this structure.

            The risk isn’t zero, that’s for sure. It’s likely you’d have to realize those deferred capital gains if the fund has to be dissolved. But I’m not an expert on this.

    • Brenda on April 19, 2023 at 3:58 pm

      You can mix & match the 20% increment funds to get any stock/bond % split. All in two funds is a close enough compromise for flexibility perhaps?

      E.g. Using Vanguard funds
      25/75 = 91.5% VCIP + 8.5% VGRO
      50/50 = 50 % VCNS + 50% VBAL
      75/25 = 91.5% VGRO + 8.5% VCIP
      95/5 = 75% VEQT + 25% VGRO

      • Frito on April 19, 2023 at 5:26 pm

        I guess my point is that I shouldn’t have to do the math to get what I need. I do split my investments in these types of funds between conservative and balanced (BAL should be 50/50 don’t you think?), but why don’t the fund companies? All they do is mix and match their own ETFs to fit the bill, so why not offer a few different ratios?

        • Robb Engen on April 19, 2023 at 5:34 pm

          I’m guessing they prefer to have fewer funds with more assets in each because it looks more impressive.

  2. Curt on April 19, 2023 at 3:33 pm

    Yet again, excellent post. Your consistent message continues to inspire confidence in your advice and our decisions based on it. Thank you Robb.

    • Robb Engen on April 19, 2023 at 3:43 pm

      Curt, you’re too kind – thanks so much!

  3. Ian Lewis on April 20, 2023 at 12:18 am

    I find it hard to get an etf which has the allocation which I want. They all seem to have too much US equities for my intent. I would like a 70 equity 30 fixed income/cash allocation. in equities I would like about 20 to 25 pct Us equities 15 to 20% other international and about 30% canada to get the benefit of the dividend tax credit as most of my assets are in a non registered account. This mix is not uncommon for pension and foundation accounts so it’s not that unusual. None of the etfs are close an idea how to get close to this. The mix and max funds also won’t help as they will still have too much US

    • Robb Engen on April 20, 2023 at 10:55 am

      Hi Ian, that’s the one challenge with a pre-constructed all-in-one fund is the geographic allocations might not line-up with your preferences.

      US equity typically makes up the largest allocation because it represents the largest market relative to the rest of the world.

      The closest you could get is holding equal parts of Vanguard’s VBAL and VGRO, which would get you:

      Canadian – 21%
      US – 30%
      International 14%
      Emerging – 5%

      Otherwise, you’d have to build your own portfolio with individual ETFs (30% VCN, 25% VUN, 15% VIU/VEE).

  4. Gur R on April 20, 2023 at 12:51 am

    Thank you for the post. Love the topics. I was buying VEQT but will likely switch to XEQT for one simple reason. Vanguard’s VEQT section on their website used to post the aggregate underlying holdings but they took that function away. iShares XEQT still shows its underlying aggregate holdings (ex. 2.68% Apple, 2.23% Microsoft etc.). I feel that this is beneficial information for one to have. What are your thoughts Robb?

    • Robb Engen on April 20, 2023 at 10:58 am

      Hi Gur, the underlying holdings are the four individual Vanguard ETFs (VCN, VUN, VIU, VEE) so I suppose you could just look at their individual holdings to see what’s included.

      I didn’t know VEQT used to show the individual stock holdings on their page, but I wouldn’t be concerned about it.

  5. Terry Newcombe on April 20, 2023 at 11:01 am

    Thanks for the reassuring post, Robb! I’ve been using VEQT and VSB for my 70/30 mix the last few years, but last year I panicked and replaced all my VSB with 1-year GICs. I’m feeling it isn’t time yet to return to bonds but I want the cash-any-time flexibility of ETFs, so I’m leaning to High Interest Savings Account (HISA) ETFs — but I’m wondering why you don’t mention them as an alternative to Bond ETFs for this next year or so (at least for those of us not using a single asset allocation ETF). Could you explain why not, please? They appear to have very low MERs (0.12-0.16%) and 4-5% yields. For example, I was thinking of HSAV (Horizon Cash Saver Maximizer ETF) for my non-registered account and CASH (Horizons High Interest Savings ETF) for my RSP account. Thanks for your thoughts.

    • Robb Engen on April 20, 2023 at 12:34 pm

      Hi Terry, my pleasure!

      The VEQT / VSB combo is great for retirees or those nearing retirement who don’t want longer duration risk with their bonds. Switching the short-term bond component with a HISA ETF or 1-year GIC also seems sensible given their high rates.

      I’m not one for predictions but I’ll just say it’s not 2022 anymore and the bond bloodbath is largely behind us. Probably a lot more upside in bonds than in GICs and cash if rates fall in the coming year.

      But, HISA ETFs are a nice option to hold a chunk of your portfolio that you’ll be drawing from in the coming 1-3 years.

      Perhaps a nice bucket strategy of VEQT / VSB / HISA ETF would be appropriate to hold. Spend from the HISA ETF, and rebalance VEQT and VSB periodically to get back to your original target mix.

      Also worth noting that the big bank brokerages block the purchase of HISA ETFs, so investors who use those platforms would need to use their own bank’s ISAs.

  6. MG Madden on April 20, 2023 at 11:04 am

    Excellent article Robb and very timely for me. I was just in the process of deciding on an appropriate investment for some cash in my RIF and this article appeared in my inbox.
    Awesome. Thanks

  7. AnotherLoonie on April 21, 2023 at 9:06 am

    Great stuff, Robb. I couldn’t agree with you more on asset allocation ETFs. I sort of regret starting with a four-fund portfolio (VCN, VEE, VUI, VUN) in my TFSA since it has just complicated things needlessly. Any new account I start I just buy VEQT, and it has made life much simpler.

    • Robb Engen on April 21, 2023 at 10:24 am

      The nice thing about a registered account (like your TFSA) is you could sell all four of those funds and immediately purchase VEQT without any adverse consequences.

      That’s exactly what I did when I switched from VCN/VXC to VEQT.

      • AnotherLoonie on April 21, 2023 at 11:01 am

        Yea, that’s a good point. I think I need to take a closer look at doing just that. Thanks!

        • Robb Engen on April 21, 2023 at 11:43 am

          It’s counterintuitive because we’re taught never to sell low, or to never interrupt compounding, etc. But you’re literally buying back the exact same funds, just inside of an all-in-one product. And if you do it immediately during trading hours you’re out of the market for about a hot minute at most.

  8. Mintyfresh on April 21, 2023 at 2:27 pm

    Hi Robb. Thank you for the article and all the great work you do. I’m struggling with the suggestion that “there isn’t a huge difference in long-term returns between these portfolios”. I’m not saying everyone should hold an all-equity portfolio, but the difference in long term returns between the 60/40 and 100% equity ETFs was 1.57% per year. Over a short time frame, maybe that’s not a big deal. But over longer investing horizons of 20+ years, the difference in compounding would be substantial. I agree an investor shouldn’t stretch beyond their risk tolerance, but they should also understand that safety comes at an opportunity cost.

    • Robb Engen on April 21, 2023 at 6:54 pm

      Hi Mintyfresh, my point is not to just look at the mix that delivered the highest return. A successful investor needs to hold through all of the ups and downs over 20+ years to realize those higher returns.

      If the lower volatility 60/40 portfolio keeps you in your seat, then you’re much more likely to achieve a good outcome.

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