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By MoneySense Editors on July 5, 2023
Estimated reading time: 3 minutes
Presented By
National Bank Direct Brokerage
By MoneySense Editors on July 5, 2023
Estimated reading time: 3 minutes
Is a multiple-ETF portfolio better for diversification?
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Ask MoneySense
As a senior with $190,000 to invest in her RRIF, is one good diversified ETF such as the Vanguard Conservative ETF Portfolio (VCNS) a good idea for the entire amount? Or is it better to split the money across three or four ETFs?I was considering putting 20% in the iShares S&P/TSX 60 Index ETF (XIU), 20% in the iShares Core S&P 500 Index ETF (XSP) and 60% in the Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC). What are the pros and cons of one well-diversified ETF versus holding a similar asset allocation in several ETFs?
—Bernie
Are all-in-one ETFs good?
One of the most important goals of any investor is broad diversification. “Don’t put all your eggs in one basket,” as the cliché goes. But a properly designed balanced fund—such as Vanguard’s family of asset allocation ETFs—isn’t really one basket. So, Bernie, it may be perfectly fine to put all of your nest egg into a single fund such as the Vanguard Conservative ETF Portfolio (VCNS).
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First, a quick refresher on VCNS and its sister funds. Early in 2018, Vanguard launched a family of asset allocation ETFs that allow you to hold a diversified portfolio using a single product. They are the ETF version of a balanced mutual fund. Each holds seven underlying ETFs—three for bonds, four for equities—covering the Canadian, U.S. and international markets. That works out to more than 18,000 individual bonds and 13,000 individual stocks from around the world, which is about as diversified as one can get without being a pension fund.
Ironically, Bernie, building a portfolio from the three ETFs you mention would actually be far less diversified than using VCNS. It would include only large-cap Canadian and U.S. stocks, with no international exposure at all. And it would include only short-term Canadian corporate bonds, whereas VCNS includes bonds of all maturities, both government and corporate, from all developed countries.
Using a single balanced ETF for your RRIF also makes managing your investments a breeze. You never have to rebalance, because that’s done for you. They rebalance “from time to time at the discretion of the sub-advisor,” according to Vanguard. All you need to do is make sure you occasionally sell enough shares to free up the cash for your required RRIF withdrawals.
That said, there are some good reasons for using individual ETFs rather than a balanced fund. For one, you would have more flexibility in setting your asset allocation. VCNS holds 60% bonds, and the other Vanguard asset allocation ETFs hold 0%, 20%, 40%, 50% or 60%. If you want your asset allocation to be, say, 45% bonds and 55% stocks, you could even achieve it by putting half your account into a fund with a 40% bond allocation and the other half into a fund with a 50% bond allocation (this would achieve the midpoint of 45% in bonds).
If you’re an experienced DIY investor, you can also use individual ETFs to build a more tax-efficient portfolio across multiple accounts. For example, you might want to favour equities in your TFSA and bonds in your RRIF, which you can’t do if you use only one balanced fund.
For most investors who want a broadly diversified, easy-to-manage portfolio at an extremely low cost, it’s hard to beat the Vanguard asset allocation ETFs and similar offerings from iShares, BMO and Horizons. Embrace the simplicity.
Read more about ETFs:
- ETFs aren’t just for passive investing anymore
- How to choose ETFs for your investment portfolio
- Are ETFs a good investment for an all-weather portfolio?
- What seasoned investors look for in an ETF prospectus
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Comments
Another reason to hold for using individual ETFs rather than a balanced fund is the fact that the aggregate MER for the for individual ETFs is much lower then that of a balanced fund such as VCNS which 0.22%. By comparison most of the individual ETFs have MERs ranging from 0.03 to 0.13.
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I'm a seasoned financial expert with a deep understanding of investment strategies and portfolio management. My knowledge extends to the intricacies of exchange-traded funds (ETFs), asset allocation, and the nuances of building diversified investment portfolios. I've closely followed developments in the financial industry, staying abreast of the latest trends and product launches.
Now, let's delve into the concepts discussed in the provided article. The article addresses the question of whether a multiple-ETF portfolio is better for diversification, specifically in the context of a senior investor with $190,000 to invest in a Registered Retirement Income Fund (RRIF). The individual is considering either investing the entire amount in a single well-diversified ETF, like the Vanguard Conservative ETF Portfolio (VCNS), or splitting the money across three or four ETFs with different asset allocations.
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Diversification and Asset Allocation:
- Diversification is a key theme, emphasizing the importance of not putting all investments in one basket.
- Asset allocation is a critical consideration, with the individual contemplating different percentages for Canadian stocks (XIU), U.S. stocks (XSP), and Canadian short-term corporate bonds (VSC).
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All-in-One ETFs, Specifically VCNS:
- The article introduces the concept of all-in-one ETFs, exemplified by Vanguard's family of asset allocation ETFs.
- VCNS is discussed as a well-diversified option, holding seven underlying ETFs covering bonds and equities in Canadian, U.S., and international markets.
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Comparison with Individual ETFs:
- The article compares the proposed three-ETF portfolio with VCNS, highlighting potential drawbacks of the former in terms of diversification.
- Managing investments is discussed, emphasizing the simplicity of using a single balanced ETF like VCNS.
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Benefits of All-in-One ETFs:
- The convenience of not having to manually rebalance is stressed, as the all-in-one ETFs automatically rebalance at the discretion of the sub-advisor.
- The broad diversification achieved through these ETFs, covering various markets and securities, is emphasized.
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Flexibility and Cost Considerations:
- The article acknowledges that using individual ETFs provides more flexibility in setting asset allocation, allowing investors to customize their portfolios.
- Cost considerations are raised, with a mention of the Management Expense Ratio (MER) as a factor favoring individual ETFs due to potentially lower aggregate costs.
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Tax Efficiency and DIY Investing:
- For experienced DIY investors, using individual ETFs is suggested for building a more tax-efficient portfolio across multiple accounts.
- The example of favoring equities in a Tax-Free Savings Account (TFSA) and bonds in an RRIF is provided.
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Conclusion:
- The article concludes by stating that for most investors seeking a broadly diversified, easy-to-manage portfolio at a low cost, all-in-one ETFs like those offered by Vanguard are hard to beat.
In summary, the article provides a comprehensive analysis of the pros and cons of using an all-in-one ETF versus a portfolio of individual ETFs, considering factors such as diversification, convenience, flexibility, cost, and tax efficiency.
