It has been five years since Vanguard introduced the first asset allocation or “all-in-one” ETFs in Canada. Simply put, these one-ticket solutions have been an absolute game-changer for do-it-yourself investors.
I’m on record to say that if investing has been solved with low-cost index funds, then investing complexity has been solved by using a single asset allocation ETF. Yes, it can be that easy.
I put my money where my mouth is by holding Vanguard’s All Equity ETF (VEQT) in my RRSP, TFSA, LIRA, and corporate investing account. Many of my financial planning clients also hold asset allocation ETFs in their portfolios.
Related: How I Invest My Own Money
It started back in 2018 with the launch of three asset allocation ETFs; Vanguard’s Conservative ETF Portfolio (VCNS), Vanguard’s Balanced ETF Portfolio (VBAL), and Vanguard’s Growth ETF Portfolio (VGRO).
Vanguard later added an all-equity version (VEQT), a conservative income ETF (VCIP), and the retirement income ETF (VRIF) to complete what it calls the full range of risk profiles for investors and retirees.
In the last five years, Vanguard’s asset allocation ETFs have grown to almost $9 billion in assets under management – making it one of the fastest-growing investment products in Canada. VGRO is the most popular with $3.8 billion in assets, making it the 17th largest of the 1,000+ ETFs in Canada.
There’s a reason why “just buy VGRO” is the mantra for many enthusiastic DIY investors on Reddit.
I spoke with Sal D’Angelo, Head of Products for Vanguard Americas, about the impact Vanguard’s asset allocation ETFs have had on the Canadian investment landscape.
He said the company felt good about launching a brand new ETF category, given the appetite for balanced funds in Canada.
“Approximately half of the $1.89 trillion in mutual fund assets are held in balanced funds,” said D’Angelo.
The value proposition for asset allocation ETFs have certainly been enticing enough to (slightly) disrupt the balanced mutual fund market. After all, why pay nearly 2% MER for a balanced mutual fund when you could hold a balanced ETF for nearly 1/10th of the cost?
“We’ve definitely seen bigger growth than expected over the past five years,” said D’Angelo.
The Vanguard Effect on Asset Allocation ETFs
Imitation is the sincerest form of flattery, but nothing new for Vanguard. The so-called ‘Vanguard effect’ is real. Shortly after launching VCNS, VBAL, and VGRO many other asset managers launched their own suite of asset allocation ETFs.
The category is booming, with industry assets under management now at ~$14 billion dollars and growing. While that represents just over 4% of the ETF industry, the category is generating between 5-10% of industry flows (new money) over the past three years.
“We’re flattered that others have emulated the product,” said D’Angelo.
Vanguard believes, the more low-cost, simple-to-understand and broadly diversified products there are available, the better for Canadian investors.
Five years represents a significant milestone when it comes to benchmarking performance against its category peers, and Mr. D’Angelo was eager to highlight the performance of Vanguard’s asset allocation ETFs.
- VGRO beat 92% of category peers over 5yrs, 85% for VBAL, and 53% for VCNS.
- VGRO and VBAL were just awarded a FundGrade A+ Award in 2022, which is awarded for funds that demonstrated outstanding risk-adjusted performance. Only about 6% of eligible funds available in Canada win this prestigious award.
- VEQT was also a winner of the FundGrade A+ Award but was not part of the original three ETFs that launched back in 2018.
Is the 60/40 Portfolio Dead? Nope
While on the subject of performance, I asked Mr. D’Angelo about the 60/40 portfolio given its historically bad year in 2022.
He said the 60/40 portfolio is alive and strong and will continue to serve investors well over the long term.
“Past research has shown that these types of difficult years happen occasionally, but the benefit is that long-term valuations for stocks and bonds are attractive moving forward,” said D’Angelo.
- Stock-bond declines are not long-lasting: Looking back to 1976, simultaneous losses in both U.S. stocks and bonds have only occurred 0.4% of the time, on a 1-year rolling return basis.
- The 60/40 portfolio was negative only 14% of the time on a 1-year basis and 0.6% on a 5-year rolling return basis.
- The stock-bond correlation remains negative in the long-term – Our study of 60-day and 24-month stock-bonds rolling correlations from 1992 to 2022 suggests that over the long-term, the correlation between stocks and bonds remains negative. That said, long-term inflation is one of the determinants of correlation between the two asset classes.
Mr. D’Angelo says that bonds will continue to act as a ballast to the portfolio:
“High-quality bonds reduce the impact of a market downturn in a multi-asset portfolio, as seen in 2008 and more recently in 2020.”
Also, more than 90% of bonds’ total return is generated by coupons, not capital appreciation. In a rising interest rate scenario, negative returns generated by price declines can be more than offset by higher coupons if an investor’s time horizon is longer than their bond portfolio duration.
Finally, current interest rates / coupons are favourable, with high-quality bonds yielding 4-6%.
I agree with this assessment and remind VBAL investors that the balanced fund had outstanding returns from 2019 to 2021 before suffering losses in 2022:
- 2019 – 14.81%
- 2020 – 10.20%
- 2021 – 10.29%
- 2022 – (-11.45%)
“Vanguard research expects average annual returns of about 7% for a 60/40 balanced portfolio over the next 10 years,” said D’Angelo.
Final Thoughts
You won’t find a bigger fan of asset allocation ETFs than me. I invest my own money in VEQT. Many of my financial planning clients use asset allocation ETFs in their portfolios. Heck, the entire premise of my DIY Investing video series centres around how easy it is to hold a single asset allocation ETF so you can move on with your life.
I’m grateful to Vanguard for launching this category and making it easy for DIY investors to manage their own low-cost, risk-appropriate, and globally diversified portfolio.
The good news is, after five years, we’re still in the early innings of adoption for asset allocation ETFs. I fully believe that more and more investors and advisors will understand the importance of cost on investment returns over the long term and will continue to adopt low-cost asset allocation ETFs in their portfolios.
