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Two years ago, Vanguard launched a suite of asset allocation ETFs that changed the game for DIY investors in their accumulation years. These balanced ETFs provide low-cost, global diversification, and automatic rebalancing with just one fund.
On Wednesday (Sept 16), Vanguard announced another evolution in the asset allocation ETF space with a new product aimed at retirees in the decumulation phase. The Vanguard Retirement Income ETF Portfolio, or VRIF, uses global diversification and a total return approach to provide steady monthly income at a target payout rate of 4% per year.
| ETF | TSX Symbol | Management fee | Target annual payout |
|---|---|---|---|
| Vanguard Retirement Income ETF Portfolio | VRIF | 0.29% | 4% |
Saving for retirement is by far the number one objective for investors and Vanguard believes that space is well covered with their now flagship products like VEQT, VGRO, and VBAL. An investor in his or her accumulation phase could simply move down the risk ladder, switching from VEQT to VGRO to VBAL as they get closer to retirement age.
But what to do with your ETF portfolio in retirement? It’s a question I get every time I mention the benefits of investing in asset allocation ETFs. Prior to today, the answer was to sell ETF units as necessary to meet your spending needs or rely on smaller, quarterly distributions of around 2% per year.
With VRIF, investors get a predictable monthly income stream (targeted at 4% per year) to help meet their regular spending needs and not have to worry about rebalancing and/or selling ETF units.
Indeed, you could think of VRIF as the retirement equivalent of VBAL.
Vanguard Retirement Income ETF Portfolio (VRIF)
VRIF is a single-ticket income solution. It’s a wrapper containing eight underlying Vanguard ETFs that offer global exposure to more than 29,000 individual equity and fixed income securities.
Related: Top ETFs and Model Portfolios in Canada
Here’s a look under the hood of VRIF:
| Asset class | ETF | Weight |
|---|---|---|
| Canadian equity | VCN | 9.0% |
| Canadian aggregate fixed income | VAB | 2.0% |
| Canadian corporate fixed income | VCB | 24.0% |
| Emerging markets equity | VEE | 1.0% |
| U.S. fixed income (CAD-hedged) | VBU | 2.0% |
| U.S. equity | VUN | 18.0% |
| Developed ex North America equity | VIU | 22.0% |
| Global ex U.S. fixed income (CAD-hedged) | VBG | 22.0% |
Here is the geographic breakdown of VRIF’s holdings:
- Canada – 35%
- United States – 20%
- Developed ex North America – 44%
- Emerging markets – 1%
VRIF focuses on a total return approach using an approximate asset allocation of 50% equity and 50% fixed income. This approach allows the portfolio to payout from capital appreciation in years when the portfolio yields fall below the target.
A total-return approach is more tax-friendly because VRIF can distribute from capital appreciation. In that case, only the difference between the cost basis and the sale price is taxed. Meanwhile, the full dividend distribution from underlying securities is taxable.
Vanguard highlights the transparency of VRIF and its underlying holdings, saying because its building blocks are clear, you always know what you’re investing in and why, adding that regular monitoring and rebalancing helps maintain exposures across key sub asset classes and risk levels.
VRIF’s 0.29% management fee (before taxes) is roughly one-third the cost of any comparable monthly income mutual fund in Canada. Costs matter, especially to retirees with sizeable portfolios who are looking to keep more of their returns and protect their investment base. Continue Reading…
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