Do the new "ETFs of ETFs" fit into your portfolio?
Asset allocation ETFs offer a whole portfolio's worth of bonds and stocks in a single, simple and affordable product. Here’s how they work, and why they've got people talking.
All-in-one asset allocation ETFs have been making the news recently after the introduction of a trio of offerings from Vanguard. Canadian Couch Potato describes them as, "probably the most important new ETFs to be launched in Canada in the last couple of years."1 So how do they work?
What are ETFs of ETFs?
As the name suggests, an asset allocation ETF is an "ETF of ETFs," made up of several "sub-ETFs." This provides a whole portfolio's worth of assets—global equities and fixed-income—in a single ETF.
This means you get an entire portfolio, similar to those offered by robo-advisors, at a lower cost. You also get global exposure, typically including diversification across North American, developed international and emerging markets.
Why are investors talking about them?
Asset allocation ETFs are making the news this year because Vanguard has only recently launched its offering in Canada. But similar products have been available in the U.S. for some time.
Dozens of asset allocation ETFs are available on U.S. stock exchanges, from companies including BlackRock, First Trust and Invesco PowerShares.
According to BlackRock, its U.S. asset allocation ETF provides "a simple way to build a diversified core portfolio focused on growth using one low-cost fund."2
Similarly, Vanguard claims that its ETF of ETF products offer broad diversification and can help investors reduce their risk. With this in mind, they offer three asset mixes—Conservative, Balanced and Growth—"designed to meet the risk and return requirements of a wide range of investors."3
Another major advantage of these ETFs is that they are regularly rebalanced, helping to maintain target asset allocations, which can save investors a lot of time.
Now that Vanguard has launched these products, it's likely that other Canadian providers will follow.
Look inside Vanguard’s three asset allocation ETFs, and you'll notice they all carry the same seven ETFs, just with different ratios of stocks to bonds.
Their equity holdings include U.S. Total Market and Canadian All Cap ETFs, and both developed and emerging overseas All Caps. Their fixed income holdings are comprised of three aggregate bond index ETFs.
BlackRock's iShares Core Growth Allocation ETF, designed for U.S. investors, is structured similarly to Vanguard's Balanced offering. Its nine holdings are made up of almost 60% equities and almost 40% bonds, with the remainder a small amount of cash and/or derivatives.
The low-cost and established ETFs that make up the equities portion of the fund include iShares' Core S&P 500, Core S&P Mid-Cap, Core Total USD Bond Market and International Aggregate Bond.
A (very) low-cost way to diversify
Of course, one of the key attractions of asset allocation ETFs is their low cost: Vanguard's management fee is a mere 0.22%, and that of iShares is 0.33%.
Compare these to mutual funds that take a similar approach, like the BMO Growth ETF Portfolio, which carries an MER of 1.72%, or the Dynamic Global Asset Allocation A Series, which charges 2.55%, and you can see why Canadian investors are excited to see these products appearing on the market.
Who do they appeal to?
By offering a diverse portfolio of international stocks and bonds in one inexpensive product, asset allocation ETFs make building a diversified portfolio as easy as buying a single ETF. They can also potentially serve as a simple, low-cost core to a larger portfolio or as a performance benchmark.
However, before you buy, it's worth noting that since some of these ETFs contain a high proportion of fixed income assets, there may be more tax-efficient ways to invest if you are holding these products in taxable accounts. *
Vanguard's new asset allocation ETFs are available through Qtrade Investor. To place a trade visit Trade > Equity.
For more information:
*If you have questions about potential tax implications, please speak to a qualified tax specialist.
For further reading:
Finally an investor needs in a single ETF. MoneySense, February 1, 2018.
- "Vanguard's One-Fund Solution." "Canadian Couch Potato, February 5, 2018." http://canadiancouchpotato.com/2018/02/05/vanguards-one-fund-solution/ (Accessed March 1, 2018).
- "iShares Core Growth Allocation ETF (AOR)." iShares, March 1, 2018. " https://www.ishares.com/us/products/239756/ishares-growth-allocation-etf (Accessed March 1, 2018).
- "Vanguard asset allocation ETFs." Vanguard, March 5, 2018. https://www.vanguardcanada.ca/individual/etfs/about-our-asset-allocation-etfs.htm?cmpgn=DP2018CAPAAAL0002. (Accessed March 5, 2018).
- "BMO Mutual Funds Expenses and Fees." BMO, March 9, 2018. " https://www.vanguardcanada.ca/individual/etfs/about-our-asset-allocation-etfs.htm?cmpgn=DP2018CAPAAAL0002 (Accessed March 9, 2018).
- "Dynamic Global Asset Allocation Fund Series A." Dynamic Funds, March 9, 2018. " https://funds.dynamic.ca/fundprofiles/en-US/H8BK/A/CAD (Accessed March 9, 2018).