New Vanguard All-in-One Portfolio ETFs

I know I promised to talk more about leveraged strategies in February. I have been back-testing these strategies diligently and, believe me, I’m excited to start tracking them so you get an idea of my thought process.

However, Vanguard Canada just came out with some game-changing ETFs for passive investors! Now any investor can buy a single ETF and get great, automated results for a super low price (0.22% management fee).

This is the kind of competition stuff I love and it’s going to trigger a new price war for similar products with Blackrock (iShares Canada) and BMO ETFs. I just had to do a post on this!

It’s also why I stopped tracking the Couch Potato-like portfolios each month in the Portfolio Updates. There is no longer any compelling reasons to buy three or four ETFs and do the re-balancing yourself.

One-Solution Fund Products

One solution funds are a great way to make investing easy for investors. A single fund—usually categorized as “Conservative”, “Balanced”, "Aggressive", or “Growth”—will automatically re-balance stocks and bonds to a specified allocation on a regular basis.

These funds will mix Canadian stocks, U.S. stocks, International stocks, Canadian bonds, U.S. bonds, and International bonds for you. They may also add in other components like REITs, gold, commodities, and other asset classes.

Conservative funds target about 40% stocks and 60% bonds, Balanced funds target 60% stocks and 40% bonds, and Growth funds target 80% stocks and 20% bonds. There are some variations depending on the fund manager, but it looks pretty close to this.

There are also funds that tailor to other needs like Income funds, or Tax-efficient funds. Both are questionable in my view as they tend to be heavily marketed. In my skeptical mind, heavily marketed products are not doing a good job selling themselves so there is often a “catch”. In the case of these products, it’s usually higher fees while pushing the emotional sell of “less tax”. They tend to provide meaningful tax benefits to the small portion of investors who are very, very wealthy, but are often sold to the typical investor with less than $1 million in financial assets.

One solution funds do all the work for you. So instead of trying carefully to re-balance once or twice a year, maintaining balance with new contributions, or letting your allocations get out of wack—you just mindlessly buy the one ETF and get back to knitting, racing bicycles, or whatever else you enjoy. (Money is quite ho-hum after all).

Until now there was no great way to invest in a one-fund solution. You could choose Tangerine Funds and pay 1.07% in fees, you could buy a big-bank/insurance company rip-off mutual fund for 1.5 - 3% in fees, or you could invest in an iShares CorePortfolio product and pay 0.25% plus expensive fees in the underlying products up to 0.65%. In a nutshell, you were getting soaked one way or another on these total portfolio products.

New Vanguard Canada Multi-Asset ETFs

This month, Vanguard began offering a new suite of ETFs labelled Multi-Asset ETFs. These are one-solution funds that are truly low cost. The management fee is set at 0.22% and the underlying holdings are all low-cost Vanguard ETFs. I expect the true MER (Management Expense Ratio) with all costs included to be around 0.25%, but that’s a guess. That would land around $250 in total hidden costs per $100,000 invested.

These new ETFs are a fantastic deal as they are. In my mind, they are so cheap it’s not worth buying the separate ETFs and re-balancing yourself anymore if you're a passive buy-and-hold investor. You don't have to worry about tax triggers, screwing up your portfolio, humming and hawing about which ETF to buy this month, or any other worries that newer investors deal with.

All of these new Vanguard ETFs trade on the Toronto Stock Exchange in Canadian dollars—so no fuss with currency or exchange hassle. I think these new, cheap one-fund ETFs are the answer for most Canadian investors who want to manage their own money.

If you use Questrade or National Bank Direct as your brokerage, you can purchase these ETFs for free! Because you never need to re-balance, you don’t incur any extra costs directly. Basically you pay the MER (automatically deducted from your ETF) and that's it.

Vanguard Growth ETF Portfolio (VGRO.TO)

This is the new Growth ETF offered by Vanguard Canada. Consistent with it’s brand, it targets an 80% allocation to stocks and a 20% allocation to bonds. It’s an ETF wrapper product that holds other low-cost Vanguard ETFs, so let’s take a look at what the approximate holdings will be.

U.S. Broad Stocks:  30%
Canadian Broad Stocks:  24%
Developed Countries Stocks:  20%
Emerging Markets Stocks:  6%
Canadian Broad Bonds:  11.7%
International Broad Bonds:  4.7%
U.S. Broad Bonds:  3.6%

This portfolio is for younger savers with higher risk tolerances. It’s going to provide similar results as the Growth Portfolio I've been tracking monthly to this point. Returns are likely to be quite high in rising stock markets, but during a broad market downturn this ETF could fall around 40% in value.

Vanguard Balanced ETF Portfolio (VBAL.TO)

The new Balanced ETF is going to target 60% stocks and a 40% allocation to bonds. Again, it’s an ETF wrapper product and here are the underlying holdings rounded to approximate allocations.

U.S. Broad Stocks:  22.5%
Canadian Broad Stocks:  18%
Developed Countries Stocks:  15%
Emerging Markets Stocks:  4.5%
Canadian Broad Bonds:  23.5%
International Broad Bonds:  9.5%
U.S. Broad Bonds:  7%

This portfolio ETF will provide similar results to the Moose Income Portfolio, but it won’t have the tilt to dividend income. The downside risk is lower than the Growth ETF Portfolio (VGRO.TO), so this is designed for a middle of the road investor who can stomach a 30% drop in the value of their portfolio.

This portfolio configuration would typically be used by an investor with moderate risk tolerance and a longer timeline, or a retiree with larger savings and a margin of safety.

Vanguard Conservative ETF Portfolio (VCNS.TO)

The Conservative ETF will target a 40% allocation to stocks and 60% allocation to bonds. Here are the underlying holdings and their approximately target allocations.

U.S. Broad Stocks:  15%
Canadian Broad Stocks:  12%
Developed Countries Stocks:  10%
Emerging Markets Stocks:  3%
Canadian Broad Bonds:  35%
International Broad Bonds:  14%
U.S. Broad Bonds:  11%

This portfolio ETF is designed for a more risk-averse investor. I would say it might be most appropriate for a more risk-averse retiree or someone who gets nervous about even the smallest losses. It might also be a good choice for someone who needs to use their money in the mid-term (5-10 years).

In a relatively bad stock market situation, this portfolio will probably drop around 20% in value. That’s really quite small! In my view, if you can’t stomach a 20% drop, you should not be investing. Life is about risk management, not risk avoidance.

The Future of Portfolio ETFs

Vanguard seems to be the trend-setter in Canada when it comes to ETF products. However, you can expect that iShares, and maybe BMO, will soon offer competitive products.

Both iShares and BMO have the building blocks in place for low-cost portfolio ETF offerings, so I think it’s only a matter of time. In the past, iShares especially has really pushed to make the price of their competing products even lower than Vanguard. BMO tends to focus on being slightly different, so they might stick with more specialty products and drop the price a little on their Income Portfolio ETF (ZMI.TO). I guess we'll see.

I would not be surprised to see fees on portfolio ETFs drop to the high-teen range by 2020. This would put the fees just a few basis points higher than the massive portfolio mutual funds offered to Vanguard’s U.S. investors.

All in all, this is a huge win for investors! If you are an ambitious new investor, I would say you can still put all your money into XAW.TO and keep making those monthly contributions. However, once you hit around $50,000, you might want to change gears and throw money into VGRO.TO or VBAL.TO to temper the volatility of your portfolio. You might also choose to wait and see what iShares and BMO come up with…

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The Big 2017 Financial Review

As we’re well into 2018 by now, it’s time to share the Moose house numbers for 2017.

As you probably figured out by the regular monthly updates, 2017 was a big year for us. We hit some big financial milestones and our investments rocketed higher thanks to disciplined investing and favourable markets.

We started 2017 with around $442,000 in our investment accounts. On top of that, we have pensions which were valued at approximately $103,000. Our other assets and debts are trivial. We pay off our credit cards each month and we always carry a moderate balance in our chequing accounts to cover about 2 months of expenses.

We have been renting since 2016, so there are no real estate assets or associated debt. At the beginning of 2017, we owned two vehicles: both older models. The value of these vehicles would have been around $13,000 combined.

Savings Rate Information

Since we both have careers with defined benefit pensions and plenty of mandatory deductions, calculating the true savings rate can be a bit subjective. Do you include employer contributions to certain plans into income and expenses? If you include pensions, should you also include benefits and union dues? How much control do you have over these kinds of expenses?

I decided to keep things as simple as I could without distorting the numbers too much.

Basically I took our net income (which is the money actually deposited into our accounts) and added both our pension contributions and the employer contributions. This formed the denominator of the adjusted income number.

Then for savings—the numerator of the equation—I added our personal savings from net paycheques, our pension contributions, and the employer pension contributions. This isn’t a perfect calculation because my wife’s pension isn’t vested yet, meaning her employer contributions don’t go towards our net worth numbers. However, we’ll assume she will be in the pension plan at least until that becomes vested.

2017 Financial Information

I welcome any questions about these numbers, including suggestions on how I should better calculate savings rates!

Beginning Net Worth Data

Investment Accounts: $442,000
Pensions Value: $103,000
Vehicles: $13,000
2017 Starting Total Net Worth: $558,000

Income Data

Net Income: $113,000
Estimated Taxes: $30,800
Other Federal Deductions: $6,800
Benefits & Pension Payments: $22,900
2017 Combined Gross Income: $173,500
Other Gain: $4,300 asset sale from our truck

Expenses Data

House Rent Expense: $19,150
Tuition Expenses: $2,700
Other Living Expenses: $31,650
2017 Total Expenses: $53,500

Savings Data

Personal Savings: $63,500
Pension Contributions: $19,450
Employer Contributions: $24,550
2017 Total Adjusted Savings: $107,500
Savings Rate from Adjusted Income: 68.5%

Ending Net Worth Data

Investment Accounts: $671,000
Pensions Value: $135,000 (wife’s pension is not vested yet)
Vehicle: $7,000
2017 Ending Total Net Worth: $813,000

Summary Observations

Overall I'm very happy with our numbers for the year. Our expenses were kept pretty tight considering our lavish, first-world lifestyle. We eat like kings, we do a fair amount of entertaining, we live in a beautiful newer rental home, drive a nice and reliable vehicle, I ride a super-nice mountain bike, and we live in general luxury and comfort.

We keep our expenses under control mainly through limiting outside entertainment (bars, restaurants, big name concerts, etc.), choosing to rent a size-appropriate dwelling instead of buying a too-large, too-risky house, having just one older model vehicle (2010 Mazda), and focusing on basic and wholesome living. We buy staple groceries and cook nearly everything from scratch, we make our own wine, and we spend a lot of our spare time with friends at homes or outdoors, reading and studying, and enjoying fun volunteering activities.

In 2018, I expect that our rent expenses are going to drop a bit while education expenses will go up significantly. Our other living expenses will remain pretty comparable.

We've got a few vacations planned, but they're already partially paid for and part of our normal spending. Given our spending, we would need a net worth around $1.5 million to quit our jobs tomorrow and never work again without any reduction in spending power for the rest of our lives. (That's not the plan.)

Our income should go down a bit as I am trying to work less overtime and will be booking most of my overtime for more days off instead of pay. Unfortunately in my position it is nearly impossible not to work overtime as I am a shift worker with an odd schedule and working on some of my days off is part of the job and largely out of my control.

We are in the fortunate position where our household income is definitely higher than the Canadian average. The median total household income for couples in Edmonton area is around $120,000, so we would be solidly in the upper-middle class (approx. 70th percentile).

With two, full-time earners in this house, it makes sense that we earn above the average. Considering our education levels, we are right in the ballpark for average earners with my wife earning a bit below the average and myself earning above (mostly because of that overtime pay).

If you are looking to get ahead financially, Alberta is a good place to be!

Comments & Questions

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