Beyond One-Stop ETF Shopping

by: Dan Bortolotti

The new asset allocation ETFs launched by Vanguard and iShares in 2018 have made it easier than ever for investors to build a low-cost balanced portfolio. If you want a globally diversified mix of 80% stocks and 20% bonds, for example, the Vanguard Growth ETF Portfolio (VGRO) will deliver that with a single trade. Want a more traditional balance of 60% stocks and 40% bonds? The iShares Core Balanced ETF Portfolio (XBAL) will do all the heavy lifting.

Of course, prefab portfolios won't fit the needs of all investors. Say, for example, your financial plan calls for an asset allocation of 50% stocks and 50% fixed income. None of the Vanguard or iShares asset allocation ETFs has this mix, so you'll need to look for a different solution. But that doesn't necessarily mean you have to build your portfolio from scratch using multiple ETFs. Let's consider some ways you can combine an asset allocation ETF and other products without completely sacrificing simplicity.

Blend two asset allocation ETFs

Vanguard and iShares both offer funds with a mix of 80% (VGRO and XGRO) and 60% equities (VBAL and XBAL); Vanguard also has a conservative version with 40% stocks (VCNS). If your asset allocation falls between these targets, you might consider combing two of the ETFs.

For example, if you want to build a 50/50 portfolio, you could hold equal amounts of VBAL and VCNS. Since the former holds 60% stocks and the latter holds 40%, blending them gives you an overall equity allocation of 50%.

You could do something similar if your target asset mix is 70% equities: just hold equal amounts of VBAL and VGRO (or XBAL and XGRO).

Asset Mix VGRO or XGRO VBAL or XBAL VCNS
70% stocks / 30% bonds 50% 50%
50% stocks / 50% bonds 50% 50%

You will still need to rebalance from time to time, but it will be so straightforward that you won't even need a spreadsheet: just try to keep the value of the two holdings roughly equal.

Reduce risk with a bond ETF

If you're willing to do a little more math, you can achieve other target asset mixes by combining VGRO or XGRO with a bond ETF. This has the benefit of being somewhat cheaper than blending two of the asset allocation ETFs, since bond funds have lower fees.

If you put 62.5% of your portfolio in VGRO or XGRO, for example, and the remainder in a traditional bond ETF, the combined total works out to an even 50% bonds and 50% equities. Here are the formulas for adjusting your overall asset mix in this way:

Asset Mix VGRO or XGRO Bond ETF
70% stocks / 30% bonds 87.5% 12.5%
50% stocks / 50% bonds 62.5% 37.5%
30% stocks / 70% bonds 37.5% 62.5%

Combine them with a GIC ladder

For conservative investors in particular, another option is to combine VGRO or XGRO with a ladder of GICs.

This has a few advantages. First, because GICs do not have management fees, they can further reduce the cost of the portfolio, especially when compared with an option such as VCNS, which is 60% bonds. Second, GICs have higher yields than government bonds of the same maturity. And finally, they are likely to be more tax-efficient than bond funds in a non-registered account.

Just be aware of the key drawbacks with GICs. They are not liquid, which means you cannot sell them before their maturity date, so you need to be comfortable locking up your money for 1-5 years. GICs are also less than ideal for investors who are regularly adding new money, since you can't buy them in small amounts without creating an unwieldy portfolio.

Moreover, if there is a sharp downturn in equities and your only holdings are a single ETF and a GIC ladder, there is no opportunity to rebalance until the next GIC matures. So, you may want to include a bond ETF or high-interest savings account as part of your fixed-income allocation to add flexibility.

Here's an example of how a couple with $400,000 spread over 5 accounts could set up a relatively easy-to-manage portfolio with an overall allocation of 50% equities. They could start with 62.5% of the portfolio ($250,000) in VGRO or XGRO and then build the fixed-income allocation ($150,000) using a bond ETF, a GIC ladder, and some cash:

Account VGRO or XGRO Bond ETF GIC ladder Cash
Total 250,000 20,000 80,000 50,000
TFSA 65,000
TFSA 65,000
RRSP 60,000 10,000 40,000
RRSP 60,000 10,000 40,000
Non-registered 50,000

Don't take it too far

One word of caution here: while the new Vanguard and iShares asset allocation ETFs can be combined with other products, there is a danger of going overboard. Remember, the goal of these ETFs is to make portfolios simpler, not more complicated. If these ETFs are just going to be a small part of a portfolio with a dozen or more moving parts, don't bother with them at all.

If you want the easiest solution, then just choose one of the asset allocation ETFs and hold it in all of your accounts. And if you want a little bit of customization, you can use one of the strategies I've outlined above. But if you're one to obsess over your precise allocation to emerging market equities, or if your goal is to save every basis point in taxes, then a customized portfolio of individual ETFs is more appropriate - though it always comes at the cost of more complexity.