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…

Comments & Questions

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12 Replies to “New Vanguard All-in-One Portfolio ETFs”

  1. What happens with this type of fund and US withholding for dividends? Does it matter, or should this kind of all-in-one fund by held in a specific account and avoid TFSAs?

    1. Mr. Rich Moose says:

      These ETFs will have some withholding tax drag compared to the true index when held in any registered account (TFSA or RRSP).
      You can recover withholding taxes in a Non-registered account on your annual tax return.
      Any Canadian-listed ETF which holds foreign assets will lose some return due to withholding taxes in registered accounts. Thankfully in this environment dividend yields are pretty low (~1.6% on Global ETF).
      In these funds, the withholding tax will reduce annual returns by approximately 0.10-0.20%. That’s pretty reasonable. If I was looking for a simple investing solution I would pay that price and consider it a cost of business.

  2. “You can recover withholding taxes in a Non-registered account on your annual tax return.”

    Nope, you can’t. Not with the ETFs mentioned above at least. In non-registered accounts you can only recover the foreign withholding tax (in total or partially) if you ETFs belongs to one of following groups:

    A. Canadian fund that holds US or international stocks directly.
    B. US-listed ETF that holds US stocks
    C. US-listed ETF that holds international stocks.
    D. Canadian ETF that holds a US-listed ETF of US stocks.
    E. Canadian ETF that holds a US-listed ETF of international stocks.

    The Vanguard ETFs above do not belong to any of these categories; thus you won’t be able to recover any foreign withholding taxes.

    Also, the US foreign withholding tax is not applicable at all if your funds are in an RRSP and the funds are either of type B and C above. This means you can use the RRSP to avoid paying withholding taxes. But this works only when buying ETFs of type B or C.

    AS for the TFSA, yes, there is no way to get around paying the withholding tax.

    For more details see “Foreign Withholding Tax Explained” on Canadian Couch Potato or just a Google search.

    1. Mr. Rich Moose says:

      I see that CCP doesn’t address:
      A Canadian ETF that holds Canadian-listed ETFs which hold US-listed ETFs of US/international stocks.
      However, if you read Justin Bender’s CPM Blog, he suggests most of the tax will be mostly recoverable in a Non-registered account. (Clarified by Justin in the comments). In Non-registered accounts, after recovery, he estimates the remaining withholding tax will cause a 0.01-0.02% drag.

  3. I agree that these Vanguard ETFs are better than any mutual fund, Robot Advisor or even a (human) Financial Advisor. There is no reason to pay any fees just for implementing a boring passive investing strategy. Still, I do like the flexibility of having a portfolio made of several funds as opposed to one fund. My reasoning below:

    Three scenarios for which I don’t prefer these Multi-Asset ETFs:

    Scenario 1: I keep all my money invested. I don’t have an emergency fund or anything like that because I want my money to be working all the time. Then let’s assume I buy VGRO but after sometime there comes the bear market and while equities are being crushed I lose my job as colophon. As a result I need to withdraw money from my investments to get by. With a one fund portfolio, each withdrawal will affect both your equities and bonds. On the other hand, with multiple funds in your portfolio, you can selectively sell the better performing asset (bonds in this case) while leaving the equities untouched. Selling equities at the bottom of a beat market would amplify your loses in the long term. So, I like the flexibility that multiple funds provide in cases like this.

    Scenario 2: I know index investing is about passiveness. But sometimes I like being a “little” active. Ex. One do not have to be an all knowing finance GURU to know bond prices go down when yields go up. The longer the duration of the bond, the harder the price gets affected. This is actually happening right now. If you have a one fund portfolio, you cannot choose to keep your bond duration shorts. I like this kind of portfolio optimizations because they are very easy to do and everybody knows the FED is in a tightening cycle. Other example, I like over-weighting some regions which become comparatively cheap when looking at the P/E ratios. International and Canadian Stocks are cheap when compared to the Americans as we speak. This information is everywhere, is very easy to find for free. This is not market timing. These are just very easy to implement optimizations that I believe can improve your portfolio performance.

    Scenario 3: you can get around the foreign dividend withholding tax if you carefully pick the correct fund. These Vanguard funds won’t allow you to do that.

    1. Mr. Rich Moose says:

      I agree the worst part about these Portfolio ETFs in an NR account is the bonds. That said, considering all the costs etc., it is probably still the best choice for 90% of people out there.
      The possible gains from managing 3-4 separate ETFs is certainly less than 0.5%. That could easily be wiped away and then some by a bad decision or two. Again, maybe 10% of people will do it better.

  4. Would there be foreign withholding tax if it is held in a RESP?

    1. Mr. Rich Moose says:

      Withholding taxes would not be recoverable in an RESP. If you choose the Conservative ETF (VCNS.TO), the estimated tax drag is 0.12% annually.

  5. How do you feel about these all-in-one funds used in a non-registered account? For example, I have maxed out my TFSA and RRSP with Wealth Simple, but want to know how to have a tax efficient portfolio for my non-reg/taxable account. Not sure if this is an ideal option.

    1. Daren (Editor) says:

      I think it’s a generally good option that reduces the chances of passive investors making many of the common rookie mistakes. And the price is right.
      There are, however, options out there which make your non-registered portfolio more tax efficient. Swap-based ETFs are one example.

  6. Hi Daren,

    Iam also on the same boat as Jaymes in regards to maxed out registered accounts.

    When investing in non registered accounts how does one claim the income earned and how what is the amount taxed? I assume it’s based in your own personal marginal tax rate?

    1. Daren (Editor) says:

      You would get a tax slip each year in February called a T3. It breaks down your income on each ETF in your non-registered account by income type. If you buy and sell, realizing capital gains or losses, you would calculate that off of a different statement which your broker provides.
      Everything is taxed based on your province, income level, and type of income. Canadian dividends and capital gains are taxed the lowest while other income and interest income are taxed at your marginal rate.

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