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 12,200 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
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.
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?