For most Canadians, mutual funds are still the mainstay of their investment portfolios. However, many investors are fed up with high fees that are being charged on mutual funds that rarely match, let alone outperform, the market.

Investing in lower cost exchange-traded funds, or ETFs, seems like a good alternative.

The knock on ETFs is that they can be complicated for do-it-yourself investors to manage and get proper diversification across Canadian, U.S., and International stock markets, not to mention adding the right mix of bonds and knowing when to rebalance it all when markets fluctuate.

A balanced fund, with regular rebalancing and low-costs, would take away this pain point from DIY investors, but up until this year a one-ticket solution didn’t exist within an ETF format.

That all changed when two investment companies, Vanguard and Horizons, introduced their own all-in-one balanced ETFs. Designed to be a one-ticket solution for investors, these ETFs hold an appropriately diversified mix of foreign and domestic stocks and bonds, with rules that determine when and how often the portfolio gets rebalanced.

Vanguard and Horizons: One-Ticket ETF Solutions

Vanguard and Horizons One Ticket ETF Solution

I took a closer look at these all-in-one balanced ETF solutions from Vanguard and Horizons, and asked Ben Felix, associate portfolio manager at PWL Capital, to share his thoughts on their suitability inside registered and non-registered portfolios:

Vanguard All-In-One ETFs (VCNS, VBAL, VGRO)

On January 25, 2018 Vanguard launched three “asset-allocation” ETFs that are listed on the Toronto Stock Exchange and can be purchased through a discount brokerage.

  • Vanguard Conservative ETF Portfolio (TSX: VCNS) – Holds 40 percent equities and 60 percent fixed income.
  • Vanguard Balanced ETF Portfolio (TSX: VBAL) – Holds 60 percent equities and 40 percent fixed income.
  • Vanguard Growth ETF Portfolio (TSX: VGRO) – Holds 80 percent equities and 20 percent fixed income.

Each portfolio consists of seven Vanguard ETFs wrapped up into one product, each representing broad and diversified asset classes across regions and market capitalizations (large, mid- and small).

Vanguard portfolios are monitored daily and rebalanced regularly to ensure they stay within their target weights of plus or minus two percent.

Investors can expect a total management fee of 0.25 percent, including HST.

*Update: Vanguard has recently added two new asset allocation ETFs to its line-up. First is the Vanguard Conservative Income ETF Portfolio (VCIP), which holds 20 percent equities and 80 percent fixed income. Second, there’s Vanguard All-Equity ETF Portfolio (VEQT), which holds 100 percent equities from around the globe. I recently switched my portfolio to VEQT.

Ask the expert on Vanguard:

Felix says that even when you consider additional foreign withholding tax costs, the Vanguard all-in-one products are cheaper than going through a robo-advisor service and investors are getting a comparable portfolio.

“The Vanguard asset allocation funds are good in a taxable account, as good as anything in a TFSA, and fine in an RRSP, though you could do a little better if you want to buy U.S.-listed ETFs in your RRSP.”

Horizons One-Ticket ETFs (HCON, HBAL)

On August 2, 2018 Horizons launched two “one-ticket” ETF solutions that are listed on the Toronto Stock Exchange and can be purchased through a discount brokerage.

  • Horizons Conservative TRI ETF Portfolio (TSX: HCON) – Holds approximately 50 percent equity securities and 50 percent fixed income securities.
  • Horizons Balanced TRI ETF Portfolio (TSX: HBAL) – Holds approximately 70 percent equity securities and 30 percent fixed income securities.

Each portfolio consists of seven ETFs from Horizons’ suite of Total Return Index (TRI) ETFs. They use an investment structure known as a Total Return Swap to deliver index returns in a low-cost and tax-efficient manner.

Although initially marketed with a “zero-percent” management fee, investors still pay the cost of the underlying funds and can expect a total management fee of 0.18 percent for HCON and 0.20 percent for HBAL.

HCON and HBAL are rebalanced semi-annually.

Ask the expert on Horizons:

Felix says the make-up of the Horizons ETFs is well suited for non-registered accounts, particularly for high-income earners. That’s because of its unique Total Return Swap structure, which doesn’t actually hold any stocks or ETFs.

“The benefit of this “synthetic” exposure to stocks and bonds is that you do not receive any income from the fund. No dividends, no interest, only the total return of the index as a capital gain or loss. This is beneficial in a taxable account especially for those in a high tax bracket.”

When it comes to diversification Felix does say the Horizons one-ticket funds are not as well diversified compared to the Vanguard asset allocation funds. The Vanguard ETFs are total market funds, whereas the underlying indexes for the Horizons funds are heavily focused on large cap stocks, with minimal exposure to mid caps, and no exposure to small caps.

“The Horizons one-ticket funds are great in a taxable account for anyone taxed at a high rate, but they are probably not worth holding in a registered account, not to mention that they are lacking in diversification regardless of the account that they are held in.”

Final thoughts

For the past three and a half years I’ve enjoyed the simplicity and diversification of my two-ETF portfolio consisting of Vanguard’s VCN (Canadian equities) and VXC (Global equities). I call it my four-minute portfolio because I literally spent four-minutes monitoring and rebalancing it last year. Still, some people called my two-ETF solution too simple.

Is it possible for investors to build a diversified portfolio with just one ETF?

The simple answer is yes. With exposure to global stocks and bonds, these one-ticket solutions from Vanguard and Horizons offer broad diversification at a very low cost. That makes these balanced ETFs an appealing simple and low-maintenance investment option for do-it-yourself investors.

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27 Comments

  1. Brad S on September 18, 2018 at 5:35 am

    Being ETFs, usually incurring commission to purchase, I assume that one should only make periodic purchases rather than monthly?

    • Robb Engen on September 18, 2018 at 6:41 am

      Hi Brad, I’d say in general that it’s best to spread out your purchases (maybe quarterly) so as to not incur hefty trading commissions. Some discount brokerages, such as Questrade, offer free ETF purchases so your mileage may vary.

      In addition to timing you should also consider the size of your trade. Yes, if you contribute $250 per month then maybe wait four months before you pull the trigger on a trade. But if you contribute $1,000 per month or more then it’s fine to make a trade every month or two.

      I see these one-ticket solutions as a great buy-and-hold strategy and so perhaps if you already have a chunk of your portfolio in mutual funds, stocks, or other ETFs then you could move them over in one shot.

      • Owen @ PlanEasy.ca on September 19, 2018 at 1:12 pm

        We use Questrade and I have to say the free ETF purchases are a great feature. It takes trading commissions entirely out of the picture until 20+ years down the road when you start to sell.

  2. Terry Boyd on September 18, 2018 at 6:40 am

    Just wondering how one can purchase the Vanguard ETFs – (can you do it on your own or have to be through a broker?); and what then, would be the TOTAL cost of getting in to the Vanguard ETF products?
    Are there also costs, when it comes time to withdraw /close the account?

    • Robb Engen on September 18, 2018 at 6:46 am

      Hi Terry, you can purchase these ETFs from any discount brokerage (any of the big banks, Questrade, etc.). They trade like stocks under their own ticker symbols (VCNS, VBAL, VGRO). I use TD Direct Investing.

      The total cost for a do-it-yourself investor would be the MER of the fund (0.25%), plus a bit of a drag from foreign withholding taxes (another 0.18% or so), depending on whether you hold the funds in your RRSP, TFSA, or non-registered account, plus any trading commissions you would incur for buying and selling the funds. Most brokerages charge $9.99 per trade, but free options do exist.

  3. Dale Roberts on September 18, 2018 at 7:20 am

    Great post Robb. I have to admit that I am uncomfortable with the synthetic approach. And I am usually uncomfortable with things I don’t understand.

    The greatest fear for ETFs in a major correction is liquidity of underlying assets. That might require real assets behind the investments. ETFs did really well in the last major correction 2008, ETF assets had net inflows in the US, active funds went the other way. Yes Indexers are smarter, ha. 🙂

    • Robb Engen on September 18, 2018 at 10:30 pm

      Thanks Dale! I agree with you on the synthetic approach. No need to make things unnecessarily complicated.

  4. Jim on September 18, 2018 at 8:07 am

    Good morning Robb.
    In turning 71 this year I will need to turn my RRSP’s into RRIF’s. At the moment the portfolio is about 50/50 re Canadian and US equities with RBC Dominion Securities.
    My advisor is suggesting a Fidelity Balanced Pool Fund which would manage everything for me but I am concerned about the advisor and fund combined fees.
    I am somewhat of a DIY investor with our TFSA’s and non-registered portfolios with CIBC Investor’s Edge.
    I would have no problem having a balanced Vanguard ETF(s) in my RRIF either with RBC or in an RBC Direct Investing account or a transfer to CIBC (much lower fees in these) but I am concerned about being able to manage these to make certain I have enough cash for my RRIF withdrawals as I age.
    I would assume I would have to sell a portion of these ETF’s for withdrawals (probably semi-annually) as I do not necessarily need the income at this point.
    There may be other options and I still have plenty of time to decide.
    Any thoughts?
    Jim

    • Benjamin Felix on September 18, 2018 at 6:46 pm

      Hi Jim,

      I’d be concerned about fees on the Fidelity product too. You are correct that you could sell ETF units to raise cash for your RRIF minimum, but you could also do an in-kind withdrawal. This would mean moving ETF units from your RRIF to a taxable account or TFSA (if you have room). There is no requirement to make a sale for the withdrawal.

      Ben

    • Robb Engen on September 18, 2018 at 10:35 pm

      Hi Jim, thanks for the detailed comment. You’re right, you’d need to sell off a portion of the ETF to generate your desired income each year.

      I always go back to this article because it perfectly captures the bucket approach to retirement income and how best to manage withdrawals from an ETF portfolio: https://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/

      Hope that helps!

      • David on September 21, 2018 at 1:44 pm

        Robb:

        Dumb question. If I transfer from a RIF to a TFSA does this mean there’d be no tax incurred?

        And can I transfer to my kids’ TFSAs or does it have to be to my own TFSA?

        David

        • David on September 22, 2018 at 5:37 am

          P.S. I was thinking of an “in kind” transfer of shares, rather than a cash transfer.

          • Robb Engen on September 22, 2018 at 3:00 pm

            Hi David, any funds taken out of your RIF, whether taken as cash or transfer in-kind, will be taxable as income. If you withdraw the RIF minimum then there won’t be any tax withheld by your financial institution, but since it’s included in your taxable income then tax may be payable when you file.

            If you withdraw more than the minimum RIF amount then you’ll need to pay withholding taxes at that time.



        • David on September 22, 2018 at 3:12 pm

          Thanks, Rob

  5. Gail on September 18, 2018 at 8:31 am

    Hi Rob
    I have a chunk of money sitting in cash with RBC Wealth Mgmt. Fees are a problem for sure. To put this into a lock and leave ETF – what is the ticker symbol? In fact, what would be a well rounded balanced investment with a low fee to lock and leave an entire retirement fund? I am a huge fan of Saskatchewan Pension Plan, however there is a transfer limit of 10,000 per year. Any suggestions?

    Gail

    • Benjamin Felix on September 18, 2018 at 6:57 pm

      Gail,

      There are only a handful of “lock and leave” ETFs available in Canada. In terms of a balanced investment, VBAL is 60% stocks and 40% bonds, while VCNS is 40% stocks and 60% bonds. Everyone’s situation is different, but in general either one of these ETFs could comprise an entire retirement fund.

      Ben

    • Robb Engen on September 18, 2018 at 10:37 pm

      Hi Gail, these all-in-one balanced ETFs would certainly be appropriate as a set-it-and-forget-it retirement fund. Check out the tickers mentioned in this post (VBAL and VGRO for starters).

  6. Dan on September 18, 2018 at 12:42 pm

    What yields can be expected from VGRO I would like this ETF to be a good chunk of my RRF creating a steady income

    • Robb Engen on September 18, 2018 at 10:42 pm

      Hi Dan, the fund is new and has only paid out two quarterly dividends. I don’t anticipate the yield being much more than 2 percent (if that). Read the article I linked to in my reply to Jim to see how to generate retirement income by selling off small chunks of your ETF holdings (home-grown dividend).

      • DAn on September 19, 2018 at 5:14 am

        Thanks Rob
        I really liked this ETF
        Can you direct me towards a similar product that has good dividend

        • Robb Engen on September 19, 2018 at 9:17 am

          Hi Dan, there isn’t a comparable “all-in-one” dividend ETF but you could try a three fund approach like this:

          Canadian High Dividend Yield Index ETF (VDY)
          U.S. Dividend Appreciation Index ETF (VGH)
          Developed ex North America High Dividend Yield Index ETF (VIDY)

          • John on September 23, 2018 at 8:25 am

            Hi Rob

            I see even with the approach you give to Dan of using three funds to give a person balance they are Vanguard funds.

            There are thousands of funds available and some of them will perform as well or better than Vanguard’s. I am a newcomer to ETF’s and have not put much money into them as I am enjoying equities at the moment. I have found that Dynamic and Blackrock funds along with a couple of First asset funds have been solid performers. Why do you prefer Vanguard over all the others?



          • Robb Engen on September 23, 2018 at 9:07 am

            Hi John, my preference toward Vanguard is simply because I own Vanguard funds and I believe they have a good investment philosophy of keeping things simple. They benchmark using broad market indexes and keep costs extremely low.

            Are there other options? Certainly. In fact, by all accounts iShares XAW is a ‘better’ product than VXC due to its structure and lower cost. But an investor could do much worse than choosing one or more Vanguard ETFs.



  7. Owen @ PlanEasy.ca on September 19, 2018 at 1:15 pm

    I like that more companies are coming out with all-in-one solutions, but there is something about the synthetic ETFs that I find off-putting. My preference would be to purchase ETFs that actually hold the underlying assets, even if slightly more expensive or slightly less tax efficient.

    What do you think Robb?

    • Robb Engen on September 19, 2018 at 9:44 pm

      Hi Owen, there’s definitely pros and cons to the “Total Return Swap”. By not holding the stocks or ETFs, investors receive the total returns of the underlying securities, but not the income (no dividends, no interest). That’s beneficial in a non-registered account, particularly for those in a high tax bracket.

      One of the cons to this approach is a ‘swap fee’ over and above the MER, as well as the risk of regulatory changes in the future. In talking to Ben Felix, he mentioned this:

      “The larger risk is regulatory – if the government decided to disallow this advantageous structure you might be forced to liquidate your position, triggering all of your as-yet unrealized gains in a single year.”

      • Owen @ PlanEasy.ca on September 21, 2018 at 1:45 pm

        That’s a great point about new regulations triggering capital gains, potentially a lot of capital gains and all at once too.

        My other concern would the the counter party risk with these swap based ETFs. It works well most of the time but it’s not risk free. Someone is on the other side of those swaps and there is always a risk they’re unable to pay.

  8. Charlie on January 13, 2019 at 7:01 am

    Hi Rob,
    For an investor that has US funds in a taxable account and wants to continue to hold USD, is there an equivalent fund to VBAL? What could be other simple alternate USD ETF tax efficient strategies for this account.
    Thanks
    Charlie

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