Canada’s Best All-in-One ETFs

Whether you want income, balance or growth, these top one-ticket solutions deliver convenience and performance at a fraction of the cost of mutual funds

Andrew Willis 20 November, 2020 | 4:28AM

Gold trophy

There are a lot of costs and challenges involved with running your own portfolio of individual stocks. You need to pick the right stocks, at the right time, watch them, and then sell them at the right time. And even if you’re picking winners, you’re paying for the privilege in fees and what’s most valuable: your time.

Luckily, there are ETFs out there that will do all of the above, at just a fraction of the costs you would pay with most actively managed mutual funds.

What’s an All-in-One ETF?
These funds are also called ‘one-ticket’, ‘single-ticker’, ‘asset-allocation’ or ‘balanced’ ETFs. They aim to provide peak efficiency and convenience for retail investors, at a cost more effective than trying to buy the underlying holdings and rebalancing them yourself.

“The idea itself is not new – they are essentially balanced funds,” notes Ian Tam, Morningstar Canada’s Director of Investment Research. “What’s innovative about these ETFs is the fact that they typically use low-cost index components to represent each asset class, allowing the investor a broad exposure with minimal costs.”

Something for Everyone
One reason these products are so popular is that they offer something for every portfolio, risk appetite and time horizon.

“They are an easy to use single-ticker holding that provides a balanced exposure and can be used as an entire portfolio or the main building block of an investor’s portfolio,” says Mark Raes, Head of Product ETFs and Mutual Funds for BMO Global Asset Management.

“The rebalancing is done within the product, so it is a true “set it and forget it” approach to investing,” adds Vanguard Canada’s head of product, Scott Johnston.

And it’s cheaper. “The median asset-weighted net expense ratio for allocation mutual funds in Canada is 1.97% - these ETFs come at a significantly lower cost to investors. Remember though, the components of the all-in-one are index funds, and hence you will be receiving index-like returns, which can be a good thing.” 

Those low costs don’t necessarily mean less alpha, says Mark Noble, executive vice-president of ETF strategy at Horizons ETFs, “Historically, most of the performance variance (ie: drivers of returns) come from asset allocation as opposed to security selection.”

And investors are loving it, notes Johnston, “These ETFs are one of the fastest-growing segments of the ETF market, having grown to over $4.5 billion in just over two years.”

Conservative
“Investors with shorter time horizons would be the most likely candidates for a conservative all-in-one ETF,” says Tam. “For example, if you are nearing retirement, or are saving for a particular goal like tuition or a downpayment on a home in the near term, having a higher exposure to bonds makes sense since the risk of suddenly losing a portion of your portfolio due to say, a pandemic, would be lower. This is crucial as you near the time that you withdraw your investment.”

For income investors, most of the ETFs below offer a 12-month trailing yield of around 2% as of November 17th – except for the offering from Horizons (which is by design). Another thing to note about the approach from Horizons is the lower fixed income allocation.

Here they are, ranked by Morningstar Quantitative Rating (MQR) and Management Expense Ratio (MER):

  MQR  MER  Asset Allocations 
Horizons Conservative TRI ETF Portfolio (HCON)  Silver 0.15%   

Canadian Equity 6.91%, U.S. Equity 29.36%, International Equity 10.74%, Fixed Income 49.17% *As of Oct 31, 2020

iShares Core Conservative Balanced ETF (XCNS)  Silver 0.20%
Canadian Equity 10.31%, U.S. Equity 19.59%, International Equity 12.99%, Fixed Income 53.25%
 
Vanguard Conservative ETF Portfolio (VCNS)  Silver 0.20%
Canadian Equity 11.62%, U.S. Equity 16.42%, International Equity 11.59%, Fixed Income 58.66% *As of Oct 31, 2020

BMO Conservative ETF (ZCON)  Neutral  0.20%


Canadian Equity 9.93%, U.S. Equity 18.26%, International Equity 12.31%, Fixed Income 58.01% *As of July 31, 2020

Source: Morningstar Direct, as of November 17, 2020.

“Our ETFs have higher equity allocations than other strategies, which follows a strategic view that a greater proportion of returns over the next decade will come equities, particularly in an environment of ultra-low interest rates and increased longevity needs for portfolios,” says Noble, explaining Horizons’ higher yield.

Balanced
“Balanced ETFs are for those that have a medium-term investment time horizon,” says Tam. “A good ‘gut check’ would be to understand what happened to a 60/40 asset allocation during prior market turbulence to see if this is right for you. As an example, in the wake of the financial crisis, Canadian-domiciled balanced funds fell roughly 24% from peak to trough, while a pure equity index like the S&P/TSX Composite fell by closer to 43%. This year during the pandemic sell-off, balanced funds on average fell about 13% while the index fell by 22%. If this is too risky for you, then perhaps pivoting to a more conservative asset mix might be a better call.”

  MQR  MER  Asset Allocations 
iShares Core Balanced ETF Portfolio (XBAL)  Gold 0.20%   

Canadian Equity 14.40%, U.S. Equity 29.18%, International Equity 18.41%, Fixed Income 35.13%

Horizons Balanced TRI ETF Portfolio (HBAL)  Silver 0.16%


Canadian Equity 9.71%, U.S. Equity 40.97%, International Equity 15.06%, Fixed Income 29.42% *As of Oct 31, 2020

Vanguard Balanced ETF Portfolio (VBAL)  Silver 0.25%
Canadian Equity 17.22%, U.S. Equity 24.74%, International Equity 17.50%, Fixed Income 39.37% *As of Oct 31, 2020

BMO Balanced ETF (ZBAL)  Neutral  0.20%
Canadian Equity 14.90%, U.S. Equity 27.22%, International Equity 18.31%, Fixed Income 39.45% *As of July 31, 2020

Source: Morningstar Direct, as of November 17, 2020.

Growth
“Generally speaking, if you are young and have a long career ahead of you or if you don’t need to withdraw your money for more than 10 years, having an aggressive allocation will treat you better in the long run,” says Tam.

“Investors with longer time horizons and higher risk tolerances can consider higher equity weights,” says Raes.

Horizons once again isn’t having much of the fixed income game here – in fact, none of it. “HGRO is 100% equities (as opposed to 80/20%),” notes Noble, “We also use the NASDAQ-100 as a much bigger weight for U.S. equity allocation reflecting our view that increasingly this is a more important U.S. equity benchmark that historically has a better Sharpe ratio [risk-adjusted returns] than the S&P 500.”

Not included in the chart but worth a mention is the Vanguard All-Equity ETF Portfolio (VEQT), another all-equity ETF solution with over 10,000 holdings – and a Canadian equity allocation greater than all of the offerings below nearing 29.67% as of October 31, 2020.

  MQR  MER  Asset Allocations 
iShares Core Growth ETF Portfolio (XGRO)  Silver 0.20%   

Canadian Equity 18.68%, U.S. Equity 38.41%, International Equity 24.37%, Fixed Income 16.97%

Vanguard Growth ETF Portfolio (VGRO)  Silver 0.25%


Canadian Equity 23.18%, U.S. Equity 33.21%, International Equity 23.32%, Fixed Income 19.67% *As of Oct 31, 2020

BMO Growth ETF (ZGRO)  Neutral  0.20%  

Canadian Equity 19.78%, U.S. Equity 36.16%, International Equity 24.32%, Fixed Income 19.15% *As of July 31, 2020

Horizons Growth TRI ETF Portfolio (HGRO)  - 0.17%  

Canadian Equity 15.85%, U.S. Equity 56.06%, International Equity 21.41%, Fixed Income 0% *As of Oct 31, 2020

Source: Morningstar Direct, as of November 17, 2020.

Special Mentions

The ‘Four Percent Rule’ ETF
Vanguard deserves a special mention for its newest ETF, the Vanguard Retirement Income ETF Portfolio (VRIF). They took an extra step to simplify the investing process for one-ticket investors by addressing when to sell and go cash. “VRIF uses a total return approach and targets 40% of the annual payout to be achieved through capital appreciation and the selling of holdings within the portfolio,” notes Johnston.

Tax Masters
One of the biggest pitfalls for Canadian investors is U.S. withholding taxes in taxable accounts, including TFSAs. Every time a U.S. stock or ETF pays out a dividend, Uncle Sam takes a cut (up to 30%!) – regardless of whether you’re an American or not. But taxes paid are returns lost. Luckily, Horizons has come up with a clever synthetic structure to avoid this skimming.

“The ETFs held within our TRI ETF portfolios all belong to our family of tax-efficient Total Return Index ETFs.  These ETFs are all ETFs that provide exposure to a total return version of an index so that index returns are comprised of capital appreciation and the compounded value of any immediately reinvested dividends.  However, the ETFs themselves are held within a corporate class where any taxable distributions can likely be offset within the corporation so that the ETF would not be expected to pay out any taxable distributions,” adds Noble. “This can result in significantly better tax-deferral benefits and potentially better after-tax returns.”

Securities Mentioned in Article

About Author

Andrew Willis

Andrew Willis  is Content Editor for Morningstar.ca. Follow him on Twitter @AndrewWillisCDN.

 

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