What the heck are these magical ETFs?

From what I can tell, Vanguard basically said, “Look, we’ve always been market leaders when it comes to providing low-cost index investments. We’ve created some great ETFs that let investors quickly and cheaply invest in the Canadian stock market, the Canadian bond market, and other markets all over the world. Then these robo-advisors (see our Wealthsimple Review) come around and start packaging some of our ETFs (as well as our competitors’ ETFs) into “all-in-one” easy-peasy portfolios that they’ll rebalance for you. Heck – we can do that – and we can do it for substantially cheaper than they do it!”

These ETFs are set up so that they will always maintain their target mix of bonds and stocks. For example, if we look at the new Vanguard Balanced ETF Portfolio (VBAL), we see that if you invested $1,000, it would be split up as follows:

Vanguard ETFs
Source: Vanguard

Vanguard Canadian Aggregate Bond Index ETF: $235

Vanguard U.S. Total Market Index ETF: $226

Vanguard FTSE Canada All Cap Index ETF: $180

Vanguard FTSE Developed All Cap ex North America Index ETF: $150

Vanguard Global ex-U.S. Aggregate Bond Index ETF (CAD-hedged): $93

Vanguard U.S. Aggregate Bond Index ETF (CAD-hedged) $72

Vanguard FTSE Emerging Markets All Cap Index ETF: $44

From there, your investment money would flow into the smaller pieces that make up each of these ETFs. For example, when looking at the $226 that went into the Vanguard U.S. Total Market Index ETF, 2.8% of that money (or $6.33) would go to buy shares of Apple. Another $5.47 would go to purchase shares of Microsoft, and so on.

If US stocks go up in value and Canadian bonds have a rough week, then these ETFs will automatically sell a little bit of your investment in US stocks, and buy a little of Canadian bonds – so that the overall value will stay the same on a percentage basis. This is commonly known as “rebalancing” amongst couch potato index investors.

Vanguard Canada was proud to promote these new products saying:

“Investors and advisors are increasingly looking for simple yet sophisticated single-ticket investment solutions that provide well-diversified global equity and bond exposure within a low-cost ETF structure,” said Atul Tiwari, managing director for Vanguard Investments Canada Inc. “These ETFs address that need by providing a choice of three different risk profiles, regular rebalancing and they will be among the lowest cost solutions in their categories.”

“These new ETFs appeal to a variety of investors, offering a simplified and scalable solution for financial advisors, and a one-stop globally-diversified and transparent option for investors,” said Tim Huver, head of product, Vanguard Investments Canada Inc. “Another advantage to investors using these ETFs is that they can rely on Vanguard’s global investment experts to continuously assess their portfolio’s exposure and rebalance it back to its intended risk level.”

In addition to VBAL’s asset mix of roughly 60% stocks and 40% bonds, Vanguard also announced the Vanguard Conservative ETF Portfolio (VCNS) with the inverse mix of 40% stocks and 60% bonds, and the Vanguard Growth ETF Portfolio (VGRO) which consists of 80% stocks and 20% bonds. All three options exclusively use a mix of seven Vanguard ETFs to make up these new “all-in-one” options. Overall, Vanguard Canada now boasts 36 ETFs in the Great White North, and has $14 billion in assets under management. While still a small presence relative to Canada’s massive mutual fund industry, the growth of ETFs has been nothing to sneeze at over the past few years.

Are robo-advisors already being disrupted?

Much like robo-advisors offered investors a different option on the investment/advice continuum relative to fee-based financial advisors that help investors set up an ETF portfolio (I’m not going into a traditional advice/mutual fund model comparison here because frankly no one in Canada should be using this model anymore – it’s off the continuum!) and the old route of DIY index investing that relied on rebalancing two or more ETFs through a discount brokerage such as Questrade, we can now see these new products offer yet another point on the continuum. This point could best be described as the middle ground between true DIY investing (where you buy and sell several ETFs in order to give yourself a balanced, diversified portfolio) and robo-investor models that build that index ETF portfolio for you while offering various types of advice and other features.

If you’re more familiar with the Tangerine Investment Funds, Vanguard basically took that model, refined it, and offered it for much cheaper. BUT, you still have to open a discount brokerage account to access the product. It’s entirely possible that we will now see Canadians open an RRSP with Questrade or Virtual Brokers, and only purchase one ETF for twenty years, and then switch to a different ETF as they get closer to retirement and want to dial down the risk. Your entire investment journey from 18 years old to retirement might entirely consist of robotically purchasing two ETFs – and that’s a pretty cool option!

Now, all of that being said – it is worth reiterating that these three new ETFs are NOT magic. They might be the right choice for many investors, but they are simply a great new option along the continuum of DIY investing and paying someone else to manage your money.

Robo-advisors will be quick to point out that if you use these new products to build your investment portfolio there will be no one around to answer your TFSA vs RRSP questions. No one will hold your hand when the markets are crashing and your instincts are telling you to sell all of these weird acronyms with red dollar signs behind them. Vanguard won’t offer to do your tax-loss harvesting for you, give you insurance recommendations, or determine your investor risk profile. Don’t kid yourself – there is a lot of value in these features. If you combine that with the ease of use robo-advisors have focused on, I personally believe that is still a winning package for many Canadian investors. You also have to factor in that if you’re the type of investor that really enjoys automating everything, you can simply set up an automating contribution to come out of your bank account the day after payday, and that money will be invested without any transaction fee. Investors can’t do that with these Vanguard ETFs – and if they don’t understand how transaction fees work, the discount brokerage costs could easily make these ETFs more expensive overall than using a robo-advisor.

Just like a robo-advisor can’t be looked at as a complete replacement for a committed, motivated, knowledgeable, full-service financial advisor (I’m still skeptical of how many of these are out there for folks with a portfolio of less than half a million bucks), these Vanguard all-in-one portfolios can’t be looked at as a replacement for what a robo-advisor offers. If you need help with determining if you should contribute to a TFSA or RRSP this year, or if the work of setting a discount brokerage account and buying ETFs listed on the stock market still intimidates you – then check out our robo-advisor article, because robos are going to be the better and less stressful choice for you. I cannot emphasize enough how cutting .25% in fees IS NOT helping you if it prevents you from getting started at all!

All of that being said, because robo-advisors all employ some degree of an indexing philosophy in building their portfolios, on average, their investment returns should come out as being very similar to these new Vanguard portfolios when you compare “investment risk apples to apples”. So, if you’re satisfied that your personal finance knowledge is on point, and that you were really only into Canadian robo-advisors for the automated rebalancing – then you are the prime target for these new products.

Could I still cut fees further?

It is possible that you could slice a few small slivers of fees off of your overall MER if you were willing to purchase ETFs individually and rebalance them yourself.

If you were able to purchase ETFs for free (see our discount brokerage comparison for more information) you would avoid much of the drag transaction costs cause. In that situation, you could reduce your fees to somewhere in the neighbourhood of .15% (saving .09%).

So on a $100,000 investment portfolio, the difference would be roughly $100 per year. If you look at the compounded effect this would have over 30+ years of investing (assuming you keep regularly contributing) this difference could add up to $5,000+. The problem with that number is that it doesn’t take into account the transaction costs that could pay every time you sell some units of an ETF(s) in order to get back to your target balance. If you’re like me, and have a small enough portfolio at this point that you can re-balance just by adding a bit more in one category than in another – you can eliminate this cost. At a certain point, however, your assets will have grown enough that when you go to rebalance you will have to sell some of one ETF in order to buy enough of another ETF in order to make it balance. When you do this, these transaction costs have to be factored into the total overall amount you are paying to invest.

All that to say – the real-life amount that you will save by balancing your own individual ETFs instead of going with these “all-in-one” Vanguard portfolios will likely be far less than $5,000.

Then you have to factor in opportunity cost. The more I write about Canadian personal finance and talk to Canadians about money, the more I realize what a massive opportunity cost is involved in rebalancing your own portfolio. Admittedly, I was totally blind to this phenomenon for a long time. Just because a few personal finance nerds on the internet think that it’s easy to open up a discount broker account and buy and sell a few ETFs every few months while doing some fractional math – doesn’t mean that it will be easy for you. The hardest part is likely to be countering the fact that you have been told from the day you began to learn about the concept of money, that money is complicated, and that as a Canadian, you needed expensive help to manage it. Countering those built-in mental hurdles is hard and can be stressful. This is likely why we’ve seen the explosion of robo-advisors in Canada and why you’re seeing a ton of ads on TV for companies like WealthsimpleBMO SmartfolioPortfolio IQ, and Tangerine Investment Funds right now.

So while it’s safe to say that while these new Vanguard “all-in-one” ETFs leave the tiniest morsels of meat on the investing fee bone, the real question is, how badly do you want those last vestiges, and what are you willing to give up in order to get them in terms of time and opportunity cost?

Overall, it’s always better to have more choices, and these three “complete-portfolio-within-an-ETF” products from Vanguard immediately become excellent options for many Canadian investors. Kudos to a great company for coming up with another cheap, efficient product.

Kyle Freelance Contributor

Kyle is a high school humanities teacher by day, and freelance personal finance author by night. He has been published in academic journals, and has also co-authored the book "More Money for Beer and Textbooks". In his free time Kyle likes to limp up and down a basketball court and pretend to be a tough guy in a boxing ring.


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