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
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.”
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.