Tag Archives: asset allocation ETFs

What you need to know before investing in All-in-One (Asset Allocation) ETFs

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By Michael J. Wiener

Special to the Financial Independence Hub 

 

I get a lot of questions from family and friends about investing.  In most cases, these people see the investment world as dark and scary; no matter what advice they get, they’re likely to ask “Is it safe?”  They are looking for an easy and safe way to invest their money.  These people are often easy targets for high-cost, zero-advice financial companies with their own sales force (called advisors), such as the big banks and certain large companies with offices in many strip malls.  An advisor just has to tell these potential clients that everything will be alright and they’ll be relieved to hand their money over.

A subset of inexperienced investors could properly handle investing in an all-in-one Exchange-Traded Fund (ETF) if they learned a few basic things.  This article is my attempt to put these things together in one place.

Index Investing

Most people have heard of one or more of the Dow, S&P 500, or the TSX.  These are called indexes.  They are a measure of the price level of a set of stocks.  So, when we hear that the Dow or TSX was up 100 points today, that means that the average price level of the stocks that make up the index was up.

It’s possible to invest in funds that hold all the stocks in an index.  In fact, there are funds that hold almost all the stocks in the whole world.  There are other funds that hold all the bonds in an index.  There are even funds that hold all the stocks and all the bonds.  These are called all-in-one funds.

Most people know they know little about picking stocks.  They hear others confidently talking about Shopify, Google, and Apple, but it all sounds mysterious and scary.  I can dispel the mystery part.  Nobody knows what will happen to individual stocks.  Bold claims about the future of a stock are about as reliable as books about future lottery numbers.  However, the scary part is real.  If you own just one stock or a few stocks, you can lose a lot of money.

When you own all the stocks and all the bonds, it’s called index investing.  This approach to investing has a number of advantages.

Investment Analysis

Investors who pick their own stocks need to pore over business information constantly to pick their stocks and then stay on top of information to see whether they ought to sell them.  When you own all the stocks and all the bonds, there’s nothing to analyze or track on a frequent basis.

Risk

Owning individual stocks is risky.  Any one stock can go to zero.  Owning all stocks has its risks as well, but this risk is reduced.  The collective stocks of the whole world go up and down, occasionally down by a lot, but they have always recovered.  We can’t predict when they’ll drop, so timing the market isn’t possible to do reliably.  It’s best to invest money you won’t need for several years and not worry about the market’s ups and downs.

To control risk further, you can invest in funds that include both stocks and bonds.  Bonds give lower returns, but they’re less risky than stocks.  Taking Vanguard Canada’s Exchange-Traded Funds (ETFs) as an example, you can choose from a full range of mixes between stocks and bonds:
ETF Symbol     Stock/Bond %
      VEQT           100/0
      VGRO           80/20
      VBAL           60/40
      VCNS           40/60
      VCIP           20/80

Cost

Sadly, many unsophisticated investors who work with financial advisors don’t understand that they pay substantial fees.  These investors typically own mutual funds, and the advisor and fund company help themselves to investor money within these funds.  There is no such thing as an advisor who isn’t paid from investor funds. Continue Reading…

MoneySense ETF All-Stars 2022

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MoneySense has just published its annual feature, the ETF All-Stars 2022. For the first time in several years, I was not the lead writer on this package although I was involved in my role as Investing Editor at Large. We passed the writing reins to veteran financial freelance writer Bryan Borzykowski, who has previously written MoneySense’s annual Robo-advisor feature and is currently writing a new book to be titled ETFs for Canadians for Dummies.

As I point out in another MoneySense column, there is another ETF book published in 2021 that makes a good complement to the All-Stars package.  Reboot Your Portfolio is written by Dan Bortolotti of PWL Capital. Dan was the lead writer of the first edition of the ETF All-stars and served as a panelist for several subsequent years, along with his PWL colleague Justin Bender. In recent years, PWL advisors Ben Felix and Cameron Passmore have served as some of the panelists responsible for selecting the All-stars. The team of 8 panelists is unchanged from last year.

You can find the new edition of the All-stars by clicking here: Best ETFs in Canada for 2022.

As Bryan points out in his overview, by design, the panel didn’t make that many changes from previous years. The idea all along has been to provide a bunch of core low-cost, broadly diversified ETFs that don’t need to be changed every year. Certainly, the panel has never felt obliged to recommend brand new “theme” ETFs just for the sake of change.

Here’s my summary of the main changes:

Canadian Equities

No changes to last year’s lineup.

US Equities

The panel dropped the list of US equity ETFs from ten last year to seven this year.

International Equities

Last year’s picks return, plus the panel added three Emerging Markets ETFs: XEC, ZEM and EMXC.

Fixed Income

While Fixed Income has been a languishing asset class in recent months, the panel didn’t view this as alarming. Its previous lineup of Bond ETFs returns largely intact, with just one casualty: the panel decided to remove the Vanguard Global Bond ETF (VGAB.) For those who are nervous about more losses from rising interest rates, it continues to emphasize short-term bond ETFs like VSB and XSB

Note that in my recent MoneySense Retired Money column on the alleged Death of Bonds, I quote panelist Ben Felix, who still sees a role for fixed income in diversified portfolios. My column suggests those worried by rising rates can either park in treasury bills and wait for further interest rate hikes later this year, or ladder 1- and 2-year GICs every few months. Several 1-year GICs now pay close to 3%. That may be below the rate of inflation of late but at least  its beats losses of near 10% sustained by aggregate bond ETFs. Continue Reading…

MoneySense Retired Money: Are Asset Allocation ETFs truly diversified?

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OptimizedPortfolio.com

My latest MoneySense Retired Money column looks at the dilemma many retirees and would-be retirees face these days: that with sky-high stock prices and interest rates seemingly bottoming and headed up, there’s no such thing as a truly “safe” investment. Click on the highlighted headline for full column: Is the All-Weather portfolio the answer to the shortage of “safe” investments? 

Even supposedly safe bonds, bond funds or ETFs largely suffered losses in 2021 as interest rates seemed poised to rise: now that various central banks are starting to hike rates, such pain seems destined to continue in 2022 and beyond.

Yes, short-term bank savings accounts and GICs seem relatively safe from both stock market meltdowns and precipitous rises in interest rates, but then there’s the scourge of inflation. Even if you can get 2% annually from a GIC, if inflation is running at 4%, you’re actually losing 2% a year in real terms.

But what about those Asset Allocation ETFs that have become so popular in recent years. This site and many like it are constantly looking at products like Vanguard’s VBAL (60% stocks to 40% bonds) or similar ETFs from rivals: iShares’ XBAL or BMO’s ZBAL.

The nice feature of Asset Allocation ETFs is the automatic regular rebalancing. If stocks get too elevated, they will eventually plough back some of the gains into the bond allocation, which indeed may be cheaper as rates rise. Conversely, if stocks plummet and the bonds rise in value, the ETFs will snap up more stocks at cheaper prices.

But are these ETFs truly diversified?

True, any one of the above products will own thousands of stocks and bonds from around the world. They are geographically diversified but I’d argue that from an asset class perspective, the focus on stocks and bonds means they are lacking many other possibly non-correlated asset classes: commodities, gold and precious metals, real estate, cryptocurrencies, and inflation-linked bonds to name the major ones.

The Permanent Portfolio and the All-Weather Portfolio

I’ve always kept in mind Harry Browne’s famous Permanent Portfolio, which advocated just four asset classes in four 25% amounts: stocks for prosperity, long-term bonds for deflation, gold for inflation and cash for recessions.

A bit more complicated is the more recent All-Weather portfolio, from American billionaire and author Ray Dalio, founder of Bridgewater Associates. You can find any number of variants of this by googling those words, or videos on YouTube.com.  There’s a good book on this, Balanced Asset Allocation (by Alex Shahidi, Wiley), which makes the All-Weather portfolio its starting point. Continue Reading…

XEQT Review: An iShares All-Equity ETF Analysis

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By Bob Lai, Tawcan

Special to the Financial Independence Hub

A while ago, I wrote a VEQT review where I performed a thorough and deep analysis of the Vanguard All-Equity ETF. While I really like VEQT, we ended up buying XEQT for our kids’ RESPs due to a few key reasons. The beauty of a one-fund solution ETF such as the iShares All-Equity ETF (XEQT) means there’s no need to re-balance regularly. This makes it a very straightforward and simple investment approach. More importantly, the all-in-one ETFs provide instant asset class diversification and geographical diversification, all for a very low management fee.

Vanguard and iShares are two of the most well established and most trusted ETF companies in the world. Both companies offer similar all-equity ETFs – VEQT and XEQT, respectively. Lately, when I’m coaching clients new to investing, I’d typically recommend XEQT to them because of the lower MER fee compared to VEQT.

Although XEQT is great for beginner investors, this all-equity ETF is just as good for experienced investors. This ETF definitely has a place in most investors’ portfolios.

Having written a VEQT review, I figured I needed to write a similar review for XEQT so readers can compare the two side-by-side.

Table of Contents
iShares All-Equity ETF – XEQT
XEQT Fees
XEQT Underlying Holdings
XEQT Top 10 Market Allocation
XEQT Top 10 Holdings

XEQT Sector Exposure

XEQT Returns
XEQT Distributions
Foreign Withholding Tax with XEQT
XEQT Review – Pros and Cons of XEQT
Pros of XEQT
Cons of XEQT
XEQT vs. VEQT

iShares XEQT vs. Other iShares ETF Funds

XEQT vs. XGRO
XEQT vs. XIC
XEQT vs. XAW
XEQT vs. ITOT
Who should buy XEQT?
Summary – XEQT Review

iShares All-Equity ETF – XEQT

The iShares All-Equity ETF Portfolio, XEQT, holds 100% in equity. This means that the ETF holds no bonds. iShares have several all-in-one ETFs and XEQT falls in the more volatile, riskier spectrum of all the all-in-one ETFs because XEQT holds 100% in stocks.

XEQT seeks to provide long-term capital growth by investing primarily in one or more exchange-traded funds managed by BlackRock Canada, or an affiliate that provides exposure to equity securities. Just like its counterpart all-in-one ETFs, iShare All-Equity ETF trades on the Toronto Stock Exchange under the ticker name “XEQT” and is traded in Canadian dollars.

XEQT is a relatively new ETF. It was created in Aug 2019. Some key facts of XEQT:

  • Inception Date: Aug 7, 2019
  • Eligibility: RRSP, RRIF, RESP, TFSA, DPSP, RDSP, taxable
  • Dividend Schedule: Quarterly
  • Management Fee: 0.18%
  • MER: 0.20%
  • Listing Currency: CAD
  • Exchange: Toronto Stock Exchange
  • Net Asset: $595.48M
  • Number of holdings: 4
  • The number of stocks: 9,444

XEQT Fees

XEQT has a management expense ratio (MER) of 0.20%, which is 0.05% lower than VEQT. While 0.05% may not seem a lot, if your portfolio value is $250,000, it means $125 in fees each year. While it’s not an enormous amount of money when your portfolio is that big, it adds up eventually.

One thing to note is that the all-in-one and all-equity ETFs that Vanguard, iShares, and other ETF companies all have very low management fees. These management fees are typically much, much lower than the MER on the typical mutual funds available to Canadians. The low MER is one of the key reasons why index ETFs are excellent investment options for Canadians.

If you use a discount broker like Questrade, you can buy ETFs commission free. This would reduce your overall transaction cost significantly. If you use Wealthsimple, you can also buy ETFs commission free.

Check out my Questrade vs. Wealthsimple Trade review to see which discount broker is best for you.

XEQT Underlying Holdings

Like other iShares all-in-one ETFs, XEQT holds four iShares ETFs which means that XEQT holds 9,033 stocks. The underlying holdings are:

  • iShares Core S&P Total US Stock (ITOT) – 48.02%
  • iShares MSCI EAFE IMI Index (XEF) – 24.39%
  • iShares S&P/TSX Capped Composite (XIC) – 22.71%
  • iShares Core MSCI Emerging Markets (IMEG) – 4.64%

The rest of the portfolio holds USD and CAD cash and/or derivatives.

XEQT Top 10 Market Allocation

Here is XEQT’s top 10 market allocation.

  • US: 47.13%
  • Canada: 23.79%
  • Japan: 5.37%
  • UK: 3.08%
  • Switzerland: 2.25%
  • France: 2.23%
  • Germany: 1.92%
  • Australia: 1.84%
  • China: 1.74%
  • Netherlands: 1.27%

The exposure to each country will vary month over month but the variations are typically in the fractions of a percentage. XEQT has a much higher exposure to the US market compared to VEQT. While XEQT has 8.89% exposure to other markets, iShares did not provide such information on the website. Continue Reading…

How the Asset Allocation in your ETF can help drive Returns  

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By Kevin Prins, BMO ETFs

(Sponsor Content)

“Diversification” is a word that gets thrown around a lot these days: and for good reason. A diverse and balanced portfolio can help provide more consistent returns versus individual securities. The asset allocation of your exchange traded funds (ETFs) is of paramount importance to help provide more consistent returns and targeting an appropriate portfolio risk level.

The good news is that ETF providers have provided choice in a range of all-in-one portfolios that are delivered as an ETF on the exchange. Now you can choose from a diverse mix of both domestic and foreign equities and fixed income.

Coupled with your specific investment goals and tolerance for risk, you can rather easily determine which ETF is a good fit for you by considering its strategic asset allocation relative to your needs.

Strategic Asset Allocation vs. Chasing the Asset Class with the highest return

Predicting the top performing asset class year to year is extremely difficult and, when poorly executed, can lead to disappointing results for your portfolio.

But with a diversified Asset Allocation ETF, you can take all the guesswork out of investing.

In other words, your portfolio’s fortunes aren’t tied to a single asset class, making it far more resilient, while simultaneously increasing your chance of having exposure to markets when they have bull runs.

Many investors who try to do it themselves will rely on friends, market research, or maybe even an investment blog to help them pick the securities that will comprise their portfolio.

But this can be time-consuming and risky. Not to mention that these portfolios tend to be under diversified.

You’ll gain exposure to both fixed income and equities with a balanced asset allocation ETF. What’s more, you can avoid one of the common pratfalls of overweighing your portfolio with Canadian securities and instead take a global approach, again helping improve your portfolio’s balance.1

You’ll also be exposed to both cyclical and defensive sectors, ensuring that your portfolio is designed to perform well in a variety of economic conditions.

The fixed income/equity balance is of importance, as this has the potential to bolster your portfolio with both security and reliable income, while also adding growth potential and inflation protection.

 

It’s worth stating that a portfolio’s strategic asset allocation will more than likely have a higher impact on its performance than even the individual stock selection, as the graphic above indicates. 2

That’s because opting for a conservative, balanced, and or growth portfolio and investing in asset classes based on your preferences will play the determining role in how to allocate your investment.

Whatever your investment goals, an approach predicated on strategic asset allocation can help you reach them.

8 Reasons to look at Asset Allocation ETFs 

  1. Simplified Investing: An all-in-one investment solution that provides instant market exposure
  2. Broad Diversification: Holds a basket of ETFs that in themselves hold many securities
  3. Professionally Constructed: Leverage the asset allocation experience of industry professionals
  4. Automatic Rebalancing: This keeps one’s investment portfolio on track to risk and return objectives Continue Reading…