All posts by Financial Independence Hub

Q&A on VRIF: Vanguard’s new Retirement Income ETF Portfolio

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Vanguard Canada

Special to the Financial Independence Hub

Republished with permission of Vanguard Canada

Late last year we launched a new all-in-one ETF solution, VRIF, to complement our existing line up of popular asset allocation ETFs.

VRIF, or the Vanguard Retirement Income ETF Portfolio, provides steady and predictable income to help investors meet their monthly expenses. It is made up of eight underlying Canadian Vanguard ETFs and will make an annual payout (currently 4% of the portfolio) split across equal payments each month.

The product has generated interest from investors and advisors along with several industry observers helping it become one of our top selling ETFs over the past few months and generating $150 million in assets (as of February 8, 2021).

It has also led to some questions on how it works and what it hopes to achieve. I wanted to collect some of those common questions and provide a few answers about VRIF.

1) What makes VRIF different from other similar monthly income funds and ETFs?

VRIF is unique in a few different ways. It incorporates a total return approach, meaning the portfolio is constructed to ensure it can help meet the daily living expenses of investors. There is an annual payout (currently 4% of the portfolio) split across equal payments each month. This is appropriate for investors and retirees looking for regular income as well as helping RRIF account withdrawals. For example, if you hold $30,000 in VRIF at the start of the year, that equates to $100 a month, for $1,200 over the year.

You also get a fully diversified portfolio with a mix of stocks and bonds, global diversification and a low-cost management fee of 0.29%*, which is currently about one-third of other similar retirement income products across the industry.

Another advantage to VRIF is that investors can rely on Vanguard’s global investment experts to monitor and assess the portfolio to meet the return target, along with providing regular rebalancing to help simplify the monthly income component. It really is a single ticket solution for investors to access monthly income.

* The management fee is equal to the fee paid by the ETF to Vanguard Investments Canada Inc. and does not include applicable taxes or other fees and expenses of the ETF.

2) How can VRIF help retirees and investors looking for income?

Managing income in retirement is not an easy task. There are a lot of ETFs and mutual funds for building up your retirement savings but not many for people who are looking to use those savings for their retirement spending.

With 30% of Canada’s population being 55 or older, the need for income has never been greater among investors. VRIF gives you a regular consistent payout each month (currently 4% of the total portfolio) and readjusts it once per year. Each year we set a dollar amount and it’s the same for every month in that year. The outcome is a simple and low-cost investment option that can help people enjoy their retirement.

3) How does VRIF expect to achieve the annual payout for investors given the current low-yield environment and where does that payout come from?

Within VRIF, we use a well-diversified total return approach to achieve a tax-friendly annual payout, (currently 4% of the portfolio) split across equal payments each month, that includes income from the portfolio and capital appreciation. Continue Reading…

How to use Statistics to Lie to yourself about a Stock Crash

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By Michael J. Wiener

Special to the Financial Independence Hub

Wouldn’t it be great if we could predict the future movements of stock markets so we could capture the gains and avoid the losses?  It turns out we can’t, but that doesn’t stop people from trying.

After a Twitter exchange with John De Goey, I ended up reading the article The Remarkable Accuracy of CAPE as a Predictor of Returns by Michael Finke.  He gives a chart that appears to show we can predict the coming decade of stock returns by calculating what is known as the CAPE (Cyclically Adjusted Price-to-Earnings Ratio).

For our purposes, we don’t need to know much about the CAPE other than that it is a measure of how expensive stocks are and that it was invented by Robert Shiller, who received a Nobel Prize in Economics in 2013.  In fact, we don’t even have to calculate the CAPE ourselves; it is freely available and updated daily.

Right now, stock prices are very high.  As I write this, the CAPE for U.S. stocks stands at 37.  The only time it was higher in the past century was during the tech boom and bust around the year 2000.  We seem to be repeating the boom part, and the fear is that we may soon repeat the bust part.

Here is my reproduction of a chart similar to Finke’s chart:

Finke’s chart used nominal U.S. stock returns rather than real (inflation-adjusted) returns, but they show the same thing: an apparently close relationship between the CAPE and U.S. stock returns over the subsequent decade.  Given the current CAPE, stock returns appear to be predictable to within +/- 3% per year.  That would be amazingly accurate if true.

Based on this chart and the fact that the CAPE is currently 37, we’d expect the average annual stock return in the next 10 years to be between inflation minus 4% and inflation plus 1.5%.  If true, this would clearly mean it makes sense to sell stocks.  De Goey made his position clear in an article titled Get Out!.

Sadly, there holes in this story.  Nobel Prize winner Shiller invented the CAPE, but he isn’t involved with Finke’s paper, despite De Goey’s implication when he defended Finke’s chart saying “Oh, and the guy who came up with the concept has a Nobel Prize.”

You might wonder how the chart above has so many points when we’re talking about 10-year returns and it covers only 25 years of stock market data.  The answer is that the chart uses 300 overlapping 10-year periods.  So, each point represents a starting month.  Two successive months are likely to have nearly the same CAPE and nearly the same 10-year annual returns.  So, we get lots of bunched up dots.

But the truth is that we have very little data.  We really only have two independent 10-year periods.  Despite the impressive correlation the chart shows, we’re extrapolating from little information.

To show the problem, let’s repeat this chart for another time period:

I didn’t choose this date range at random; I selected it to make a point.  If we were to devise a strategy based on this chart, we’d say not to worry if the CAPE gets high because you’ll still get decent returns.  But when the CAPE is in the 17 to 18 range, stocks are either going on a big run, or they’ll crash, and you have to be ready to get out.  This is obviously nonsense.  It’s dangerous to try to build strategies on too little information.

Here’s a chart using S&P 500 stock data from 1936 to the present:

This data still only covers seven independent decades, but we can see the real picture of the relationship between the CAPE and stock returns is a lot fuzzier than the first chart made it seem.  We can still reasonably guess that a higher CAPE reduces future expected stock returns, but the range of returns is still wide. Continue Reading…

Bonds are back but what did they just say?

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

Bonds are the adult in the room. And when they speak, we should probably hear them out. This week [late June] bonds went on a tear. What were bonds trying to say? They were listening to the ‘Fed Speak’ in the U.S. that left many confused. Of course, the Federal Reserve and the Federal Reserve Chairman set the overnight rates that affect bond markets and our borrowing costs. It’s an economic lever. Maybe the adults in the room are suggesting that inflation is not a threat? We’ll see deflation in the near future? Or maybe a recession is closer than we think?

Here’s a good barometer for the bond market and economic sentiment – long term U.S. treasuries.

They’ve had a good month (and more) and they had an explosive week. The index ETF was up about 3% over the last two days. Long term treasuries are known as some of the best stock market risk managers. They punch above their weight.

Must read: Bonds are the adult in the room.

Recently I suggested that the stock and bond markets are buying the transitory inflation argument.

And in my most recent MoneySense weekly I had a look at some of the economic data for Canada and the U.S., including that recent Fed Speak and reaction.

Perhaps the bond market is going well beyond saying ‘inflation is transitory’. Let’s have a listen to what a few experts say about this weeks stock and bond activity.

David Rosenberg says look out below.

In a recent Globe and Mail piece Mr. Rosenberg suggested that inflation jitters will turn into deflation fear by year end. (pay wall) Of course bonds like deflation. And that’s one reason why we hold bonds right? Even though almost no one thinks that we could enter a long period of economic contraction and deflation. From Mr. Rosenberg …

“When these temporary disturbances fall out of the data, people are going to be surprised at how low the readings are going to be on these official inflation statistics,” the famed Canadian economist said in an interview Friday.

“I think we’re going to go back to talking about disinflation and deflation [by] the end of the year.”

The boring balanced portfolio is having its way these days. Stocks for growth and bonds for ballast and no-growth scenarios. Readers will know that I am also a fan of covering off inflation as well, you’ll read about that in the new balanced portfolio.

Investing is like a box of chocolates.

To quote Forrest Gump, you just never know what you’re going to get. This past week gave us that big and important reminder. Who would have thought that bond investors would have a such a sweet week? I’m happy to hold long term treasuries and that TLT and the BMO Canadian dollar version in ZTL.

Mike Philbrick at ReSolve Asset Management offered via Twitter …

No one knows the future price of any asset class so diversification is incredibly important as the first line of defense.

And as an example, pick your poison of inflation or deflation or economic shocks of any variety. More from Mike …

Another great example, why making sure investors are always exposed to inflation shocks rather than trying to time it … Money and mindshare piled in recently but all the returns came months before that, when investors were not noticing.

Perhaps there is no real economic growth?

Perhaps the bond markets echo Lance Roberts (no relation), CIO and partner at RIA Advisors, with respect to what is real and sustainable economic growth?

The reason that rates are discounting the current “economic growth” story is that artificial stimulus does not create sustainable organic economic activity.

And on the inflation front from Lance, you can’t create real inflation from artificial growth. From that post …

Yes, we see that word “deflation” again.

Rethinking the 60/40 portfolio?

That has been a hot topic for quite some time given the low yield environment. Many suggest tweaking up your equity exposure to the 70% level or so, if you have the risk tolerance. That was certainly covered in this post on the Horizons one ticket ETFs. Those portfolios employ U.S. Treasuries that help dampen the volatility of increasing equity exposure. Continue Reading…

Navigating Fixed Income Challenges with Flexibility

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By Brian Giuliano

Brandywine Global Investment Management, a specialist investment manager of Franklin Templeton

(Sponsor Content)

Flexibility and adaptability can work to an investor’s advantage in the challenging fixed income markets of 2021. Structural disinflationary trends are now clashing with cyclical inflationary forces in a global economy struggling to recover from the COVID-19 pandemic. Add on interest rates at record lows, demographic pressures, heavy government debt levels, and widespread technological disruption throughout the global economy.

The market environment of low interest rates makes it difficult to generate income while preserving capital. As a result, many investors have taken on additional credit or interest rate risk to try to earn a more attractive income from fixed income assets.

But there are pitfalls to this approach. Without a counterweight to the extra portfolio risk, investors could be vulnerable to an increase in interest rates or a selloff in credit markets.

One option for investors is a multisector strategy with the flexibility to adapt quickly to changing markets. A strategy that’s able to capture opportunities when available but also play defense when market conditions call for it.

Global Income Optimiser strategy

The portfolio team behind the Franklin Brandywine Global Income Optimiser strategy are strong believers in flexibility, which means we try to adapt the income and risk exposures in a portfolio to the market environment. This approach does not have any structural, home country or sectoral biases. We aim to rotate the portfolio across what we believe are the best risk-adjusted return opportunities in the global fixed income universe.

Our goal is to generate high-yield-like returns with investment-grade-like volatility for investors. We want to maximize the income that can safely be earned in a given market environment.

The Franklin Brandywine strategy seeks returns from across the investment universe, including global investment grade and high yield credit, developed market sovereigns, structured credit and emerging market debt. Furthermore, sector rotation, duration management, quality rotation and security selection are employed to meet the strategy’s investment objective. Foreign currency is hedged primarily back to an investor’s base currency, such as the Canadian dollar; however, limited exposure may be used opportunistically to add alpha for a portfolio.

This strategy became available to retail investors in Canada on June 4, when Franklin Templeton introduced the Franklin Brandywine Global Income Optimiser Fund*. Globally, the strategy has a successful track record, dating back to its inception in 2013. In the U.S, a similar fund, to the degree allowed by Canadian regulations, is 5-star rated by Morningstar.** Brandywine Global is a specialist investment manager that was part of Franklin Templeton’s acquisition of asset manager Legg Mason in 2020.

Portfolio positioning for the reopening

Brandywine Global sees growth and inflation returning to the global economy this year. We increased spread duration late in the first quarter of 2020 and began reducing high quality government bond duration; so overall portfolio duration was roughly flat last spring. From last summer through winter, we materially reduced portfolio duration.

Now, the positioning of the strategy is for a short duration, cyclically-oriented portfolio of companies that have some pricing power, given inflationary pressures from the reopening trade. There’s a mix of U.S. and European names with a concentration in the BBB and BB space. The level of credit risk is largely investment grade over the long term; less than 5% of the portfolio is in CCC securities. High quality government bonds can help manage volatility. These and other ‘safe’ assets offer lots of ‘episodic value’ for the portfolio at times, especially during volatile markets, by being sources of alpha and acting as a counterweight to riskier holdings.

Capital protection is a top priority, and the Brandywine team will not reach for yield in this strategy.

Environmental, social, governance assessments

Also, Brandywine Global integrates ESG analysis into our comprehensive assessment of information risk and price risk with this strategy. The focus is on the material ESG issues that can impact a country’s economic growth, the business activities of a corporation, or the integrity of securitized collateral. Continue Reading…

Renting vs Buying Property while living abroad: Which is best for Financial Independence?

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By Emily Roberts

For the Financial Independence Hub

Financial independence means different things to different people. It has an impact on your life planning and whether renting is preferred over buying property. If you’re planning to go abroad and live elsewhere like continental Europe, Eastern Europe, or south-east Asia, then plans may be different again.

In this article, we look at whether renting is better than buying when you’re financially independent (or working towards it).

What Does Financial Independence mean to You?

Financial independence is possible at various levels. People refer to it by different names including Barista FIRE, CoastFIRE, FI, and others.

One approach is to reach a modest level of financial independence to provide a minimal income from investments, and to let them grow from their current level for a decade or longer while working an easier, low-paid job. Another approach is to wait until you have enough and then retire, but with the occasional freelance or consulting gig too.

Financial independence doesn’t necessarily mean retirement, which generally speaking refers to stopping working as a primary source of income. Different strokes for different folks.

Advantages of Renting

When still working, renting comes out of your paycheck and reduces what you can invest for future financial independence. Some people decide to live and work abroad to reduce their living expenses, to allow them to save faster.

Renting in the US

Americans can rent places Stateside but have to be careful of the long-term leases and associated fees along with any restrictions on tenants.

Depending on the city, renting has become quite expensive, causing some to look abroad.

Renting Abroad

Renting abroad can save you considerable money compared to back home.

For instance, PropertyGuru provides rooms for rent in Kuching, Malaysia. They have rooms for under $100 a month, studios for greater privacy, and larger multi-bedroom apartments in newly constructed buildings too. Their team can locate suitable rental accommodation close to major facilities and transport links, so whether you’re working there, planning to retire, or just on vacation, they can find something suitable.

Advantages of Buying

Purchasing real estate is something that appeals to many people. When they don’t like the idea of not owning where they live, then they lean far more towards buying.

Owning property domestically is possible when the prices are affordable. Unfortunately, cities with the most jobs typically also enjoy robust real estate markets with high prices to match. Sinking most of the next egg into a home makes retirement difficult. The ongoing ownership costs aren’t cheap either. Continue Reading…