Vanguard changed the self-directed investing game in Canada with the launch of its new suite of asset allocation ETFs. Now investors can get an ultra low cost, globally diversified portfolio of equities and bonds with just one product. The funds first came in three flavours – VCNS, VBAL, and VGRO – each with a different target asset allocation for the conservative, balanced, and growth-minded investor. Shortly after came the sweetener, at least for me, when Vanguard introduced an all-equity version called VEQT.
Asset allocation ETFs take away the biggest pain point for DIY investors by removing the need to periodically re-balance when adding new money or whenever markets veer off course. Simply buy units of a single ETF and hold, and/or add new money as needed. Vanguard’s professional managers take care of the rest so you can enjoy a mostly hands-off investing experience.
What is VEQT?
The Vanguard All Equity ETF Portfolio trades under the ticker symbol VEQT. It’s one of five asset allocation ETFs offered by Vanguard. Just like the name suggests, VEQT’s asset allocation is made up of 100 percent equities. VEQT is a “fund of funds”, meaning it’s a wrapper that contains four other Vanguard ETFs. Here’s what’s under the hood:
- Vanguard US Total Market Index ETF 39.8%
- Vanguard FTSE Canada All Cap Index ETF 29.8%
- Vanguard FTSE Developed All Cap ex North America Index ETF 23.0%
- Vanguard FTSE Emerging Markets All Cap Index ETF 7.4%
While investors are often cautioned not to put all their eggs in one basket, in this case with just one ETF your investment portfolio would have exposure to more than 13,900 stocks from around the globe. It doesn’t get much more diversified than that.
Sector weightings for VEQT include:
- Financials 26.3%
- Industrials 13.5%
- Technology 12.1%
- Consumer Services 10.5%
- Oil & Gas 9.5%
- Consumer Goods 9.0%
- Health Care 7.6%
- Basic Materials 6.0%
- Utilities 3.0%
- Telecommunications 2.5%
Finally, VEQT (like all of Vanguard’s asset allocation ETFs) comes with a management fee of 0.22 percent. The total management expense ratio (MER) will be known at a later date but it is expected to be 0.25 percent.
VEQT | My New One-Ticket Investing Solution
It was January 2015 when I sold all of my dividend stocks and switched to an index investing strategy. At the time I went with a two-ETF solution comprised of Vanguard’s FTSE Canada All Cap Index ETF (VCN), and Vanguard’s FTSE Global All Cap ex Canada Index ETF (VXC). This was a variation on the three-fund model portfolio popularized on the Canadian Couch Potato blog (the third fund being Canadian bonds – VAB).
The simple two-fund portfolio worked out great for me, growing by a total of 41.43 percent in the three years from January 2015 to January 2018. Last year was more challenging and the two-fund portfolio lost 4.25 percent after a weak fourth quarter sunk the stock markets.
I wasn’t looking to make a change but back in February 2019 Vanguard launched VEQT – adding the 100 percent equity allocation ETF to its product mix. I was intrigued enough and so on March 4th of this year I wrote about potentially adding VEQT to my portfolio in an effort to reduce my home country bias.
One comment on that blog struck a chord with me and caused me to eventually change my mind:
“I think you’re over complicating things, and should just go with VEQT in both accounts. The one fund asset allocation ETFs are a game changer for DIY investors, so why mess with the simplicity of them? There are good reasons to have some home bias anyway – we spend in Canadian dollars so it’s not great to have too much exposure to foreign currency risk, especially in retirement. Historically, about 30% home bias has been the sweet spot for reducing portfolio volatility.”
He was right. The simplicity of the one-fund solution far outweighed any benefits I’d gain from tinkering with the Canadian equity exposure in my portfolio.
On March 6th I pulled the trigger, replacing VXC and VCN in my RRSP and TFSA accounts with my new one-ticket solution, VEQT.
Foreign Withholding Taxes with VEQT
One thing I did consider before making the switch to VEQT was foreign withholding taxes. The U.S. government levies a 15 percent tax on dividends paid to Canadians. Since I had foreign equity exposure through VXC, the estimated foreign withholding tax “drag” on my portfolio was around 0.48 percent (on top of the 0.27 percent MER). That made holding VXC relatively costly at a total of 0.75 percent.
I downloaded Justin Bender’s Foreign Withholding Tax calculator at his Canadian Portfolio Manager blog and determined that VEQT only had an expected foreign withholding tax of 0.24 percent – or just half of the taxes imposed on VXC. Combined with the lower expected MER of 0.25 percent and the total all-in costs for my new one-fund portfolio would be just 0.49 percent.
Final thoughts
Four years ago I decided to shed my behavioural biases and follow the overwhelming evidence that investing in a low cost, broadly diversified portfolio of index funds will lead to better investor outcomes. I achieved this with a two-ETF portfolio because at that time a one-fund solution did not exist.
Then along came the balanced ETF. Pioneered in Canada by Vanguard but now offered by the likes of iShares, Horizons, and BMO, these asset allocation ETFs are what do-it-yourself investors like me have been waiting for.
Cheaper than using a robo-advisor, and easier to manage than an unwieldy portfolio of multiple ETFs, a one-ticket solution gives investors the best of both worlds.
Still, I didn’t have what I was looking for until the all-equity ETF (VEQT) came along. It was my “Desert-Island” pick for a panel that chose the best ETFs for a MoneySense feature.
100 percent equity allocations aren’t for everyone. I’ve got a long time horizon, high risk tolerance, years of investing experience, plus a defined benefit pension backstopping my retirement. VEQT works for me. You might be better suited for VBAL, or VGRO.
The bottom line is there’s an asset allocation ETF – a one-ticket solution – for every self-directed investor who wants to simplify their holdings, lower their costs, and broaden their diversification. Are you ready to make the switch?
A commonly held view in the do-it-yourself investing community is that to maximize returns one simply needs to cut ties with their expensive advisor and manage their own portfolio.
On the surface, this makes sense. Costs matter, so if you can slash your investment fees from 2% down to 0.5% or lower your returns will improve by the same measure.
Let’s say you’re one of the millions of Canadians invested in a typical bank branch balanced fund (ex. RBC Select Balanced fund, or TD Comfort Balanced fund). The management expense ratio (MER) on that fund is about 2%, and the fund itself is invested in 60% global stocks and 40% global bonds.
This fund isn’t trying to do anything special, so while it’s considered “actively managed” in reality it closely tracks its benchmark index (a global balanced fund). The returns will then equal the benchmark, minus the 2% fee.
Now let’s say you have a lightbulb moment and realize these fees are costing you up to 33% of your returns (assuming a gross return of 6% before fees).
You decide to open up your own self-directed brokerage account, transfer your account, and invest in a balanced asset allocation ETF (ex. Vanguard’s VBAL or iShares’ XBAL). Your fees are now about 0.20% and you are still invested in largely the exact same portfolio of global stocks and bonds.
The result, in theory, should be an increase in returns of about 1.8% (the difference in fees that are staying in your portfolio rather than enriching your advisor, their bank employer, and the mutual fund manager).
Whether you get those returns is another matter.
One, you need to become an emotionless robot when it comes to your portfolio. When markets drop, like they’re prone to do from time-to-time, you need to resist the urge to do something.
If you’re tempted to hit the sell button every time the market reacts to some bad news, you’re not going to capture those returns.
Similarly, you might fall victim to investing FOMO. That’s when you see higher returns in another investment and get the urge to abandon your sensible balanced portfolio to chase those returns.
This could manifest in global equity investors wanting to switch to only US stocks, or US stock investors to switch to tech stocks, or tech stock investors to switch to bitcoin. The temptation is real, and when you’re in control of your own investments it’s easy to get distracted and start dabbling in individual stocks and funds.
Let me be clear. It’s extremely unlikely that you’re going to outperform your old bank managed mutual fund if you can’t stay in your seat with a similar lower cost portfolio. Panic selling, or return chasing, will almost certainly lead to worse outcomes.
Be an emotionless robot.
Another option is to take your brother-in-law’s advice and move to a boutique investment manager who will invest your portfolio in a mix of stocks and funds that the manager thinks will outperform the market. Surely you’ll beat the bank managed fund’s returns with this approach, right?
Not so fast.
Now you have an advisor charging similarly high fees AND making discretionary trades in your portfolio. That’s a poor combination to begin with. Add an element of untrustworthiness – just take a look at this 59 page list of unpaid fines from advisors who misappropriated funds or failed to act with due diligence – and this could be a recipe for disaster.
Say what you want about the banks and the high fees they charge for what amounts to a closet index fund, you’re less likely to incur these types of shenanigans with a bank managed fund.
Finally, even if you make the successful transition to DIY investor and manage your portfolio like an emotionless robot, you still have lost access to professional advice (whether that advice was any good in the first place is another story).
Almost everyone can use financial advice at some point in their lives. That’s why pairing low cost DIY investing in index funds with on-demand financial advice from an advice-only planner at key life stages can lead to better financial outcomes.
Promo of the Week:
There’s still time to register for Wealthsimple’s transfer bonus where you can get a 1% match on the money you transfer (plus they’ll cover any transfer fees when you move $15,000 or more.
Simply register by August 31st and that will buy you another month to complete your transfers.
If you want help – sign up for my DIY Investing Made Easy video series where I walk you through the entire process of opening your account, transferring over existing accounts, funding your new account with new contributions, and buying your chosen ETF.
Use my referral code: FWWPDW and open your Wealthsimple account today.
There’s no limit either, the more you fund, the more cash back you earn (cash back paid over 12 monthly instalments).
Weekend Reading:
This former financial services executive is boating, re-qualifying as a lifeguard and learning to operate VHF radio in retirement.
Michael James on Money reviews the latest edition of Fred Vettese’s Retirement Income for Life.
Humble Dollar founder Jonathan Clements was given a year to live, and he’s determined to make the most of his remaining time.
A Wealth of Common Sense blogger Ben Carlson explains why introducing politics into your investment process is toxic to your portfolio:
“Every president in modern economic history has overseen drawdowns in the stock market.”
Ben Felix writes that despite some incredible success stories, trading options has generally been a disaster for retail investors.
How big of a return should you expect from your investments? Here’s why it may be less than you think.
Here’s a MoneySense primer on withdrawing from RESPs. Worth a read.
What if your child is nearly done University but still has a balance in their RESP? Mark Walhout has you covered:
Ben Felix again on why investors seek a narrative when stock markets crash (the Yen carry trade, anyone?). <–G&M subs
The ‘tax-free trap’: How a simple phrase skews Canadians’ savings choices:
“The sweet allure of “tax-free” in a title suggests governments should avoid choosing names for tax-sheltered savings plans that contain a heuristic cue, whether it be favourable or unfavourable.”
Finally, here’s Of Dollars and Data blogger Nick Maggiulli on how long stocks can underperform.
Have a great weekend, everyone!
Hopefully by now my financial planning clients and blog readers have been conditioned to ignore short term drops in the market – even big ones like we experienced this past week.
The reason why stocks have such attractive long-term returns is because they ARE risky to own in the short-term. That’s a feature, not a bug.
But it’s understandable that investors get fearful when they see markets fall 2% or more in a day. These big moves to the downside bring out panic-inducing headlines and calls for further pain in the future.
The truth is nobody knows where stocks are heading in the short-term.
This past two-day stretch was the worst two-day stretch for stocks since the last worst two-day stretch for stocks that you don’t remember or care about anymore.
Remember this one – the worst day ever for stocks back in February 2018? Neither do I.
Or, think of it this way: Were you happy with your investment portfolio when the market closed on Friday June 28th?
Because that’s pretty much where global stocks have retreated – back to their June 28th prices, which were all-time highs by the way.
Ignore the Doomers and the negative news headlines, heck – stop checking your portfolio multiple times a day. This too shall pass.
This Week’s Recap:
Last week I shared a report that showed more than 80% of new condo investors in Toronto were bleeding cashflow to the tune of $605 per month. Not good!
From the Twitterverse:
Imagine buying individual stocks? https://t.co/h6Yvmlautx
— Boomer and Echo (@BoomerandEcho) August 2, 2024
On a personal note, we’re enjoying the Olympics and watching some locals compete (Paige Crozon and Kacie Bosch on the Women’s 3×3 basketball team, Apollo Hess on the men’s swimming relay team, and Sarah Orban in cycling – women’s team sprint).
Promo of the Week:
Over the years I’ve had self-directed investing accounts at various brokerages like TD Direct, Questrade, and Wealthsimple Trade for one reason or another.
But I’d prefer to have all of my accounts on one platform, and my platform of choice is Wealthsimple.
Simply put, Wealthsimple offers the best user experience, is truly commission-free (no pesky ECN fees like on the Questrade platform), and has all of the automations you’d want to make your DIY investing experience as hands-off and hassle-free as you want it to be.
I’ve recently moved a LIRA to Wealthsimple and the transfer process was incredibly easy – it took about 1 minute to initiate the transfer from Wealthsimple’s mobile app, and the transfer itself took just three days to move in-kind from TD.
Wealthsimple even proactively reimbursed the $150+HST transfer-out fee that TD charged me.
I’m patiently waiting for Wealthsimple Trade to offer corporate investing accounts and RESPs, and then my transition to one platform will be complete.
And right now, until August 31st, you can get a 1% match (cash back incentive) when you register and then deposit or transfer over $15,000 to your Wealthsimple Trade account.
Use my referral code: FWWPDW and open your Wealthsimple account today.
There’s no limit either, the more you fund, the more cash back you earn (cash back paid over 12 monthly instalments).
Weekend Reading:
Morningstar’s Christine Benz shares 20 lessons for a successful retirement.
Retirement brings with it a host of questions. The No. 1 question: Do we have enough for a financially comfortable retirement?
Globe and Mail reader Troy Brooks explains why retirement is his third act:
“My advice to others is that if you want to retire – and it makes sense financially – do it. Work can easily become your default purpose in life, but none of the friends and family we lost during the past few years wished they had spent more time at work. I think of retirement as my third act, in which all the plot points of life come together to what I hope will be a satisfying conclusion.”
However, this retirement and longevity researcher explains why your endless summer retirement dream is a fantasy.
I’ve often said that pairing low cost do-it-yourself investing with on-demand financial planning advice at key life stages is a recipe for great financial outcomes. But some people aren’t cut out for DIY investing. The Rational Reminder podcast hosts help explain when you should hire a financial advisor:
Your kids believe it’s time for someone else to manage your money, but you’re used to doing it on your own and want to save on fees. What are your options? An important read for retired self-directed investors.
Longevity is the key to managing retirement savings, but using rules of thumb like planning to age 95 may be a poor fit for some people:
“We need to recognize that many retirees are underspending in retirement and have the potential for a better quality of life.”
Finally, the always entertaining Jamie Golombek (who, along with Tim Cestnick and Mark Goodfield, is one of the few writers who can make tax planning interesting) takes on the CRA over home-office expenses.
Have a great weekend, everyone!