I ditched my financial advisor more than a decade ago and started investing on my own. I was fed up with paying high fees for underperforming mutual funds. Dividend paying stocks were growing in popularity and so I decided to take the plunge and build my own portfolio of blue-chip companies.
Several years later I realized my folly; it’s hard to pick winning stocks. It’s even more difficult to consistently pick winners and avoid losers over the long term. Overwhelmingly, the academic research showed that passive investing using low cost index funds or exchange-traded funds (ETFs) has a much better chance of outperforming active investing that focuses on stock picking and market timing.
I bought into the research, sold my dividend stocks, and set up my new investment portfolio using two low cost, broadly diversified ETFs. More recently I moved to an all-in-one solution with Vanguard’s VEQT.
Today, investors have many more choices available to build an investment portfolio on the cheap. I’ll show you three ways to lower your investment costs, diversify your portfolio, and reduce the time you spend worrying about investing.
1). Use a Robo Advisor
A traditional financial advisor or wealth manager might cost an investor between 1.5 to 2.5 percent in management fees each year. Then along came robo-advisors to disrupt the portfolio management model and drive down costs to less than 1 percent.
A robo-advisor helps you build a portfolio based on your risk tolerance, experience, and time horizon. Once your model portfolio is built all you have to do is make regular contributions and the robo-advisor will allocate your cash into the appropriate investments.
The robo-advisor takes care of rebalancing your money whenever the portfolio drifts away from its original allocation (due to market movements or from your own contributions).
Competition is heating up in the robo-advisor space with the likes of Wealthsimple, Nest Wealth, Justwealth, ModernAdvisor, Questwealth, and WealthBar all vying for your investment dollars. BMO SmartFolio has been around for a while and more recently RBC launched its own robo-platform with RBC InvestEase.
2.) Invest in index funds
An index fund tracks a stock or bond market and aims to deliver market returns minus a very small fee. All of the big banks offer index funds, typically at half the cost (or lower) than their traditional equity or bond mutual funds.
One popular set of index funds is TD’s e-Series funds. These funds can only be purchased online but they offer tremendous savings over their actively managed mutual fund cousins. Investors can find e-Series funds for Canadian equities, Canadian bonds, as well as U.S. equities and International equities all for fees of about 0.50 percent or less.
Another solid set of index funds comes from Tangerine’s Investment Funds. These are one-fund solutions that come in five flavours; with the traditional 60 percent equities, 40 percent bonds balanced portfolio being its most popular. The expense ratio on Tangerine’s funds comes in at 1.07 percent – higher than TD’s e-Series funds, but still a bargain compared to the industry average.
Investors who use dollar cost averaging and make regular contributions throughout the year should consider index funds over ETFs. That’s because investors can buy and sell mutual funds without incurring any commission charges or fees, whereas ETFs may be subject to trading fees, depending on your broker.
3.) One-ticket ETF solutions
It’s never been easier to build an extremely low cost and globally diversified portfolio with just one investment product. The one-ticket ETF solution was first introduced to Canada by Vanguard. Since then, Horizons ETFs, iShares, BMO, and TD have all launched their own suite of all-in-one balanced ETFs.
Vanguard offers five of these ETFs, each with an MER of 0.25 percent. The most conservative allocation is 20 percent equities and 80 percent fixed income, while the most aggressive has 100 percent allocation to equities.
For retirees, check out Vanguard’s new VRIF income fund solution.
Horizons lists three asset allocation ETF portfolios; one with a 50 / 50 split between stocks and bonds, one with 70 percent equities and 30 percent bonds, and the other with a 100 percent allocation to stocks. The MER on these ETFs is between 0.15 percent and 0.19 percent.
iShares offers five asset allocation ETFs that mirror Vanguard’s line-up, from a 20/80 income ETF to a 100 percent equity ETF. All five of their balanced ETFs come with a MER of 0.20%.
BMO lists three asset allocation ETFs, starting with a conservative 40/60 option, a balanced 60/40 option, and a growth 80/20 option. All three come with a MER of 0.20%.
Finally, TD recently introduced its own suite of asset allocation ETFs. The three products include a conservative 30/70 option, a balanced 60/40 option, and an aggressive 90/10 option. The management fee is 0.25%.
I wish these options would have been available to me back when I first started investing. Now it’s easier than ever to build an investment portfolio on your own. You can invest on the cheap, too, if you know where to look. Hint: It’s not with the big banks and investment advisors who sell you on their stock picking and market timing expertise.
Indeed, you can build a hands-off portfolio for less than 1 percent a year with a robo-advisor. Or, with slightly more effort, open a discount brokerage account and buy a one-ticket ETF solution for less than 0.25 percent a year.
Today, Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.
|ETF||TSX Symbol||Management fee||Target annual payout|
|Vanguard Retirement Income ETF Portfolio||VRIF||0.29%||4%|
Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.
But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.
With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.
Indeed, you could think of VRIF as the retirement equivalent of VBAL.
Vanguard Retirement Income ETF Portfolio (VRIF)
VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.
Here’s a look under the hood of VRIF:
|Canadian aggregate fixed income||VAB||2.0%|
|Canadian corporate fixed income||VCB||24.0%|
|Emerging markets equity||VEE||1.0%|
|U.S. fixed income (CAD-hedged)||VBU||2.0%|
|Developed ex North America equity||VIU||22.0%|
|Global ex U.S. fixed income (CAD-hedged)||VBG||22.0%|
Here is the geographic breakdown of VRIF’s holdings:
- Canada – 35%
- United States – 20%
- Developed ex North America – 44%
- Emerging markets – 1%
VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.
A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.
Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.
VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base.
I spoke with Scott Johnston, head of product at Vanguard Canada, about the launch of VRIF and got the chance to ask him some questions about the new product.
He said the success of Vanguard’s asset allocation ETFs were a big part of the background on creating VRIF. Both investors and advisors were looking for the simplicity of a balanced ETF, but something that could deliver regular and stable income to help achieve retirement income goals.
Investors with a keen eye will notice that the underlying holdings of VRIF don’t generate 4% income. Mr. Johnston says with the total-return focus, VRIF will naturally pay out about 60% of its distributions through interest and dividends, with the remaining 40% coming from capital appreciation.
I asked if that would lead to the dreaded ‘return of capital’ and Mr. Johnston said that would only be expected to occur one out of every ten years.
“VRIF has a 5% annual return target,” he said.
One benefit of VRIF’s total return approach and transparency with its underlying ETF holdings is that it doesn’t have to chase yield to meet its distribution target. Rather than guaranteeing a fixed return for the long term, Mr. Johnston says Vanguard will adjust VRIF’s target distribution once per year to meet its objectives.
“In the current low interest rate environment, there is increased interest in higher-yielding products and narrow sectors. Investing in these products (and their riskier asset classes) might be appealing in the short term, but it could lead to capital loss over the longer term as these products experience more performance and distribution volatility during periods of market turbulence.”
VRIF is also tax efficient enough to hold in both taxable and tax-sheltered accounts. This aligns with the idea that an asset allocation ETF like VBAL is also appropriate to hold across all accounts. VRIF, as the retirement equivalent of VBAL, would then be appropriate as a single ticket holding across all accounts in retirement.
When asked about Vanguard’s approach to holding CAD-hedged versions of U.S. and Global fixed income, Mr. Johnston says their considerable research has shown that the risk return is improved when hedging foreign income back to Canadian dollars. That way it’s not subject to the potentially volatile movements of foreign currency.
I’m excited to see Vanguard launch an asset allocation ETF aimed at solving one of the more difficult problems in retirement planning: How to derive income from an ETF portfolio.
VRIF is a low cost, globally diversified, single ticket solution for retirees to earn a predictable and tax efficient stream of monthly income. VRIF can be held across all accounts, making it a true game changer for retirees looking for income from a simple and easy-to-manage solution.
Now, ETF investors don’t have to worry about the complexities of selling ETF units or relying on smaller, quarterly distributions to generate their retirement income needs. Simply convert your portfolio to VRIF to get a 4% annual payout target with a 5% annual return target.
Thanks to Vanguard Canada for the early preview of the VRIF. Let me know your thoughts on the new retirement income solution VRIF in the comments below.
Outside of weekly trips to the grocery store, most of us sheltered in place for many weeks before the economy slowly opened back up across the country. That meant little to no spending on travel, dining, and entertainment – three of the hardest hit industries.
That resulted in Canadians stashing away $127 billion into their chequing and savings accounts in the first half of 2020. In other words, Statistics Canada reported the national savings rate jumped from 2-3% pre-pandemic to a whopping 28.2% from April through June.
That’s a seriously impressive savings rate, but one that has to be reconciled with unemployment still at 10.2% and more than 500,000 mortgage deferrals soon coming to an end. There’s clearly a disparity between those with the means to work from home and save, and those whose livelihoods have been turned upside down.
We are, thankfully, in the former group and have managed to keep a consistent income working from home. Our big savings were travel refunds from our trips to Italy and the U.K. But we put most of that into our backyard; pouring a concrete pad, buying a hot tub, and replacing our patio furniture.
I don’t keep a close eye on our savings rate but I was curious so I pulled up our budgets from the previous five years. Our savings rate has increased this year and we’re projected to save 36.5% of our income. The increase is mainly due to pausing our gym memberships, less restaurant spending, and less on entertainment and travel. It might have hit 40% if our wine budget didn’t increase 🙂
Our savings rate for the past five years:
- 2020 – 36.5%
- 2019 – 30.8%
- 2018 – 31.7%
- 2017 – 29.4%
- 2016 – 26.6%
Has your savings rate changed during Covid-19? Let me know in the comments.
This Week(s) Recap:
I wrote a bit of a tongue in cheek post about whether I’ve already achieve F.I.R.E. (Financial Independence, Retire Early). To be clear, I’m definitely not retired. It just feels that way when you can work on what you want, when you want.
From the archives: 5 financial traps seniors fall into and how to avoid them
In case you missed this on Rewards Cards Canada, here’s a look at Air Canada’s reimagined Aeroplan program.
I got to see a sneak preview of a new investment product that will be launching this week. Without giving anything away, I’ll just say that you’ll definitely want to keep an eye out for my review on Wednesday.
The credit card sign-up wars are starting to heat up so now’s the time to start looking for a new rewards card (or add a new one to your line-up). Our friends at Credit Card Genius have you covered with the best credit cards in Canada.
Jason Heath looks at the financial implications of buying a vacation property.
Nick Maggiulli looks at why poor people stay poor. The answer is complicated, but they are, in essence, stuck in a poverty trap.
An interesting take by Max Fawcett – Progressive parties have spent too long insisting that they won’t tax home equity. Here’s a thought: Maybe they should.
I loved this post from Morgan Housel, who explains why you should save like a pessimist and invest like an optimist:
“Be a little bit paranoid, knowing the assumptions you hold today could break tomorrow, and you’ll need enough room for error to make it to the next round.”
Here’s Nick Maggiulli again explaining what your psychology says about your relationship with money.
Related to my introduction on spending and saving during the pandemic, Preet Banerjee’s latest SPENT video shows how Americans spent their weekly $600 unemployment benefits:
The Irrelevant Investor Michael Batnick explains why money printing won’t cause inflation.
Speaking of inflation, Alexandra Macqueen wrote a guide to help you understand inflation, how it’s calculated, and what it means for your personal finances:
“The CPI is not without controversy, however, and one of the most disputed aspects is how the index treats the cost of shelter.
The cost of housing prices is excluded from the CPI, although runaway housing costs have characterized the last decade in Canada’s major cities.”
The Michelle is Money Hungry blog shares an important conversation about time freedom.
Millionaire Teacher Andrew Hallam explains why the intelligence of an investment decision shouldn’t be judged based on stories, hopes, forecasts…or an isolated result.
A Wealth of Common Sense blogger Ben Carlson shares a key lesson on why even the best stocks have to crash.
Curious about the 4% safe withdrawal rule? See if you can pass this quiz on the Michael James on Money blog.
Travel expert Barry Choi shares a guest post on the My Own Advisor blog on whether travel hacking is worth it.
Another addition to the asset allocation ETF game. This time it’s TD, with what they call their One-Click portfolios.
Finally, check out this fascinating read on money – the true story of a made up thing.
Have a great weekend, everyone!