“When a thing has been said and said well, have no scruple. Take it and copy it.”
If there’s an overnight success story to be savored from 2018, it would be Vanguard’s Asset Allocation ETFs. Since their launch earlier this year, their combined assets under management have already exceeded $800 million. What’s not to like about gaining access to a low-cost, self-rebalancing globally diversified portfolio with the click of a mouse?
So, no huge surprise: BlackRock Canada has noticed its rival’s success. Perhaps inspired by Anatole France’s words of wisdom, they’ve just launched a pair of matching iShares Asset Allocation ETFs of their own, with ticker symbols that are suspiciously similar to Vanguard’s.
What’s in a Name?
BlackRock is not new to the “fund-of-funds” game. They already had two balanced ETFs in their product lineup. But unlike Vanguard, they hadn’t generated much investor interest. After more than a decade, their two balanced ETFs had less than $150 million under management.
So – Abracadabra! – the old becomes new again. Instead of launching more ETFs, BlackRock took a slightly different approach: They simply changed the fund names, ticker symbols, management fees and investment objectives of their two existing balanced ETFs.
|Old Name and Ticker||New Name and Ticker
|iShares Balanced Income CorePortfolio™ Index ETF (CBD)||iShares Core Balanced ETF Portfolio (XBAL)|
|iShares Balanced Growth CorePortfolio™ Index ETF (CBN)||iShares Core Growth ETF Portfolio (XGRO)|
BlackRock’s new tickers come as no surprise; their XBAL and XGRO will be in direct competition with Vanguard’s VBAL and VGRO (Note: The ticker for each iShares Fund is expected to change on or about December 18, 2018). The MER for each Vanguard fund is 0.25%; the projected MER for each iShares ETF is around 0.21%.
Asset Allocations and Underlying Funds
XBAL’s long-term strategic asset allocation will be approximately 40% fixed income and 60% equities. XGRO’s strategic asset mix will be more aggressive, with 20% fixed income and 80% equities.
The chart below includes the target weight for each asset class within the fixed income and equity allocations. I’ve also included the underlying ETFs that XBAL and XGRO will initially hold to gain exposure to each asset class.
|Underlying ETF||Asset Class||iShares Core Balanced ETF Portfolio (XBAL)||iShares Core Growth ETF Portfolio (XGRO)|
|iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH)||Canadian Short Term Corporate Bonds||6%||3%|
|iShares Core Canadian Universe Bond Index ETF (XBB)||Canadian Bonds||26%||13%|
|iShares U.S. Treasury Bond ETF (GOVT)||U.S. Government Bonds||4%||2%|
|iShares Broad USD Investment Grade Corporate Bond ETF (USIG)||U.S. Corporate Bonds||4%||2%|
|iShares Core S&P/TSX Capped Composite Index ETF (XIC)||Canadian Stocks||15%||20%|
|iShares Core S&P Total U.S. Stock Market ETF (ITOT)||U.S. Stocks||27%||36%|
|iShares Core MSCI EAFE IMI Index ETF (XEF)||Developed Markets Stocks (ex North America)||15%||20%|
|iShares Core MSCI Emerging Markets ETF (IEMG)||Emerging Markets Stocks||3%||4%|
Following are some additional “under the hood” comparisons between our two contenders:
- Canadian/foreign equity split: XBAL and XGRO each split their equity allocation 25/75 between Canadian and foreign stocks. VBAL and VGRO have a 30/70 domestic/foreign stock split.
- Overweight US tilt: XBAL and XGRO underweight Canadian stocks by 3% and 4% respectively, relative to VBAL and VGRO. These “extra” assets are then fully allocated to US stocks, instead of being used to top-up US, international and emerging market equities alike. Vanguard allocates its VBAL and VGRO foreign equity allocations according to its current market capitalization; this makes Vanguard’s foreign equity weighting methodology arguably more “passive” than BlackRock’s.
- Underweight emerging markets: Relative to VBAL and VGRO, BlackRock also underweights emerging markets in XBAL and XGRO. The underweight is even more significant than what appears in the chart below, because Korean stocks are allocated to developed markets in VBAL and VGRO, whereas the same stocks are allocated to emerging markets in XBAL and XGRO.
- Fixed income allocations: Vanguard targets 60% domestic and 40% foreign bonds, while BlackRock targets 80% domestic and 20% foreign bonds. XBAL and XGRO do not currently have an allocation to non-US foreign bonds, whereas Vanguard does. Over time, I would not expect these differences in fixed income strategy to have a material impact on fund performance.
|Global Bonds (ex U.S.)||-||9.2%||-||4.6%|
|Developed Markets Stocks (ex North America)||15.0%||14.2%||20.0%||18.9%|
|Emerging Markets Stocks||3.0%||4.1%||4.0%||5.5%|
BlackRock plans to occasionally rebalance its portfolios (at their discretion). They do not expect to allow any asset class to deviate by more or less than 10% of its target weight.
For example, XBAL has a Canadian equities target weight of 15%, invested in the iShares Core S&P/TSX Capped Composite Index ETF (XIC). If XIC were to become more than 16.5% of the portfolio [15% + (15%/10)], BlackRock would likely sell a portion to bring the asset class back in line with its target.
Likewise, if XIC were to become less than 13.5% of the portfolio [15% – (15%/10)], BlackRock would likely sell a portion of any overweight ETFs, and use the proceeds to buy more shares of XIC.
Vanguard also plans to rebalance their portfolios from time to time (at their discretion).
BlackRock will not employ a currency-hedging strategy for the foreign equity portion of both ETFs. This means that Canadian investors will want foreign currencies like the US dollar, British pound and Japanese yen to appreciate relative to the Canadian dollar.
BlackRock will implement a currency-hedging strategy for its non-Canadian fixed income allocations. As the ETFs both hold US-listed bond ETFs (the iShares U.S. Treasury Bond ETF (GOVT) and the iShares Broad USD Investment Grade Corporate Bond ETF (USIG)), XBAL and XGRO will have to directly enter into currency forward contracts to offset the US dollar exposure of this fund.
Vanguard has a similar currency-hedging strategy in their asset allocation ETFs.
So, Vanguard or iShares? You Decide … We’ll Provide the Models
Time will tell which firm’s solutions will reign supreme … or whether there’s room for both in this big, wide world of opportunities. As single-ETF solutions continue to gain traction among DIY investors, I’ve decided to include both Vanguard and iShares Asset Allocation ETFs as additional model portfolios on my blog. I’ll also continue to update our 3-ETF and 5-ETF model portfolios. As with the current model portfolios, I’ve back-tested each of the funds’ performances using appropriate index returns minus fees. Going forward, I’ll update the data with actual fund performance as it is available.
Where does that leave us? If you ask me, it’s good to have a few good choices. Healthy competition helps keep costs under control. That’s good for you too, no matter which model you may choose.
– VBAL : AUM = 1,02 Billion $ Average volume exchange = 70 508
– XBAL : AUM = 310 Million $ Average volume exchange = 18 571
Do the assets under management (AUM) and the volume of transactions affect the liquidity and ease of sale of an ETF?
@Jean-Louis Bui: Generally, it’s the liquidity of the underlying holdings that determines the liquidity of the ETF. As VBAL and XBAL have similar holdings, they would be expected to have similar liquidity (the average volume or AUM are not good indications of an ETF’s liquidity).
Hi Justin, has there been any news on portfolio managers at iShares and Vanguard rebalancing their asset allocation ETFs “out of band” in light of the large drops in equities over the past weeks? Thanks.
@Stevo: I haven’t heard anything, but at the very least, they would be using new cash flows to top-up equities.
Do the management fees compound on these? I.e. is 0.2% the total management expense, or am I implicitly paying more because of the management expenses of the underlying etfs?
@Brant: BlackRock Canada does not double-dip on their fees, so the quoted MER is a good estimate of what you actual pay in fund expenses.
Hi Justin, thanks for the foreign withholding tax calculator. I just took it for a spin and was surprised to see that XGRO’s FWT is actually lower in TFSA/RRSP accounts than VGRO’s. This surprised me as I saw XGRO was using “wrapped” funds, whereas I thought VGRO was not.
Have any insight as to why VGRO has a slightly higher FWT? Thanks!
@Dave: XGRO has an expected FWT drag of 0.20% in a TFSA/RRSP, while VGRO has a FWT drag of 0.21% (so I would consider these drag to be essentially the same).
VGRO has some additional FWT tax drag on the foreign bond portion (VBU and VBG). As iShares Canada does not have any hedged Canadian-listed versions of GOVT/USIG, I can’t estimate whether any withholding taxes will apply on these US fixed income securities, so I’ve assumed 0% withholding tax on this portion (so XGRO’s overall FWT drag may be slightly understated).
Both XGRO and VGRO use a similar “wrap” structure.
Thanks for these great articles.
The BMO and Vanguard asset allocation ETFs are very appealing in their simplicity in regards to maintenance and range of options.
However, I am mindful of the tax efficiency issues regarding holding these in a taxable account due to the bond holdings.
In a scenario with investments in RRSP, TFSA and taxable accounts (roughly 50% in combined RRSP and TFSA / 50% in taxable), would holding a 60% stock / 40% bond ETF in all three accounts for the sake of ultimate management ease be “significantly” outweighed by the financial benefit of crafting a more tax-efficient DIY bundle of ETFs in just the taxable account (such as a combo of ZDB, VCN and XAW)?
Your elaboration on this would be greatly appreciated.
@GH: On a 60% stock / 40% bond ETF portfolio, I would estimate any potential premium bond tax drag to be under 0.10% per year on the overall portfolio (so on its own, it’s not as big of an issue as investors may believe). I’ll elaborate more on this topic in future blog posts.
Hi Justin. Thank you for writing this informative article! It has been very useful. New to investing in ETFs as a student and I was hoping to get some advice on whether there is a need to switch to XBAL/VBAL/XGRO/VGRO if I have a current ETF portfolio, consisting of XAW and VEE. Is there considerable overlap or would it be okay to invest in XBAL/VBAL/XGRO/VGRO additionally?
Thank you very much!
@Andrea: If you’re new to ETF investing, I would suggest starting with my Understanding ETFs video series (I will also be covering XAW and other global equity ETFs in two upcoming videos, as well as the new-ish asset allocation ETFs from Vanguard, BMO and iShares):
In your article above you mention that you will show your model portfolio’s alongside Vanguard and iShares Asset Allocation ETF’s, but when I click the link it takes me to your portfolio’s page but I do not see the Vanguard and iShares info. I am trying to decide if I should manage my own portfolio, or if I should use XBAL ir VBAL – I want to compare returns for each before I decide.
Also, if I am comparing only Balanced portfolio’s (I am 40 years old), I feel obligated to at least compare to my bank’s recomendation of using their RBC Select Balanced Portfolio A. Do you have any thoughts on RBC Select Balanced Portfolio A vs XBAL or VBAL in terms of returns?
This is what I am seeing, but I am worried I am not doing proper comparisons:
RBC Select Balanced Portfolio A – according to morningstar – trailing total return for 10 years is 7.93%
XBAL – according to morningstar – trailing total return for 10 years is 7.85% (price) – they have a different % for NAV which I don’t really understand
VBAL – according to your backtesting article – 10 year return is 6.3%
Canadian Couch Potator portfolio – accoridng to your same backtesting article – 10 year return is 6.25%
So… it sems that the RBC Select Balanced Portfolio A or XBAL are the best options? Am I missing something?
@Denise: The ETF companies keep adding new products, so I’m going to be re-posting the hypothetical performance for the iShares/Vanguard/BMO asset allocation ETFs shortly.
When making these comparisons, you must ensure that you are using data from the same time period. The 7.93% 10-year return figure for the RBC Select Balanced Portfolio A (RBF460) is as of March 8, 2019. The 6.3% 10-year return figure for the back-tested VBAL returns is as of December 31, 2017.
Here are more accurate 10-year annualized performance figures, all as of February 28, 2019:
RBF460 = 7.59% (actual)
VBAL = 9.07% (hypothetical)
XBAL = 9.39% (hypothetical)
ZBAL = 9.55% (hypothetical)
Conclusion: RBF460 is expected to underperform a similar index strategy going forward, due to its higher fees (which are between 1.69% and 1.74% higher than VBAL, XBAL or ZBAL). Outperformance of an actively managed mutual fund is always possible, but not probable.
Awesome, thanks for this info, this is super helpful!
One more question about XBAL – above you say hypothetical return of 9.38%, but when I look at mornigstar for XBAL (http://quote.morningstar.ca/QuickTakes/ETF/etf_performance.aspx?t=XBAL®ion=CAN&culture=en-CA) I see the 10 year trainling return to be 7.56% (Price) and 8.47% (NAV) . Why do you use your hypothetical % for XBAL when there are actuals available? Is it because they have change the XBAL product so that the actual 10year is no longer applicable? Or is there something else that I am not understanding?
And… what is the difference between % (Price) and % (NAV)? Which one should I be looking at for my comarisons?
@Denise: XBAL and XGRO used to be CBD and CBN. CBD and CBN had completely different investment objectives and fees, so their past performance should be ignored:
Net asset value (NAV) is the one you should be looking at (all mutual funds and ETFs use this figure when calculating their fund performance).
I am bringing over all my investments into one RRSP account and planed to buy VBAL so i don’t have to worry about rebalancing my portfolio. Would you recomend VBAL, XBAL, or ZBAL? Which fund do you think is best?
@Denise: They’re all very similar. I’ll be posting videos in the near future about their various differences (which should provide you with enough information to make an informed decision).
Once you create an ETF portfolio, what would be a reasonable minimum cash amount to buy more shares? Thanks
@Tony: If you’re with a low commission brokerage like Questrade, there’s no minimum amount. If you’re with a brokerage that charges ~$10 per trade, I wouldn’t generally place a trade for less than $1,000.
Will you be discussing the BMO asset allocation funds in detail? Also, wondering if you will be publishing back-tested data for the new version of iShares revamped asset allocation funds?
If you have covered these already, could you provide the link to your articles.
Thank you so much for all your great work which benefits the DIY investing community greatly.
@Gail Bebee: I will be discussing the BMO AA ETFs in more detail, via the blog and my YouTube videos. I did publish back-tested data for the iShares AA ETFs as of December 31, 2018, but took it down as more and more AA ETFs were released (I was constantly updating my spreadsheets, and finally threw up my hands in frustration ;)
Once the fund providers get the new product launches out of their systems, I’ll repost more comprehensive documents.
Indeed more competition seems to drag the cost down. The CBD seems to have racked a MER of 0.75% and for the CBN a MER of 0.84%. By bringing Vanguard in the picture, we seems to have gains 0,5%. It stands to reason that the old fund were not as popular since manual rebalancing should cost less than 0,5% given a large enough fund (10k or more).
My CCPC is a lot larger than my RRSP and TFSA.
Which option has less tax drag for my 60/ 40 portfolio? 75% VGRO and 25% Cash/ GIC or 60% VEQT and 40% Cash/ GIC?
I know that I will be using one of those options but do not have clear numbers to show which would be better.
I would just keep a portion in high interest accounts for liquidity and was thinking of not using bonds.
Is there a resource around that one could use to figure these numbers out? I sort of feel badly bothering you.
@Cam: There won’t be any resources that can predict which of these options will be more tax-efficient (or which one will lead to a higher after-tax return).
60% VEQT + 40% Cash/GIC will likely be cheaper (and seems slightly easier to manage).
Hi Justin, do you still have the pdf available for the Vanguard Asset Allocation ETF returns as of Dec 31st, 2018. I was hoping to do a direct comparison with your model ETF portfolios that are posted (Dec 31st 2018) and implement one of the strategies in my RSP. I imagine there isn’t a significant difference either way, but I enjoy comparing the numbers.
I stumbled upon this blog today and I must say, thank you and great job. I have a 4 month old for whom I’d like start the RESP account. I am split between using TD e-series and Vanguard AA ETFs. Is it possible for you to share your thoughts on these two and which option you would prefer? Also, if you could give a brief overview on how you would transition from Vanguard AA ETFs towards safer investments i.e. GICs /bonds etc in future when my little on reaches age 14-15.
@John: if you are comfortable placing ETF trades, you can lower your product fees and avoid rebalancing by using the Vanguard AA ETFs (You will likely want to consider a low-cost discount brokerage, such as Questrade, for placing smaller RESP ETF trades).
This RESP article might help with your other questions: https://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-abcs-of-building-an-resp-using-etfs/article32474800/
Greetings from S.E.Asia,
Although I don’t share your enthusiasm for winters I am with you on the joys of these low ALL IN ONE ETF solutions. ?
Have you any thoughts on, or plans to address, Horizons 2 TRI (total return index) new entrants into the asset allocation, auto rebalancing ETF battle of the titans?
These Horizon products are of particular interest for the even lower MER’s (fees paid only on the consituent etfs) and tax deferment (low to no annual distibutions) in taxable accounts. Especially useful for those attempting to avoid tax creep while drawing down registered or corporate funds for instance.
Thanks for any comments you may have Justin and Dan.
@Jay Bee: I may decide to discuss these TRI asset allocation ETFs at some point in the future.
I am very new in the world of ETF, but have made the jumped and started buying ETF and using the CPM suggested portfolio.
I saw that the XAW ETF had holdings for ITOT, IEFA and IEMG. All those are US listed ETF. Those holdings seem to be similar to the XUU, XEC and XEF that are on the TSX.
Is it because the MER of XAW is below the combined XUU, XEC and XEF management fees? Also why would the ITOT and the XUU who follows the same index except one is sold on the TSX and the other NYSX so different in holding? Shouldn’t they be similar since they are both trying to imitate the index?
Thanks for your blog and posting. I truly appreciate the insights as I try to navigate this whole “new” world
@Duy: The MER of XAW is higher than the weighted-average MERs of XUU, XEF and XEC (but it’s easier to manage than 3 ETFs).
ITOT and XUU should have similar U.S. equity exposure – you should review their annual reports for a detailed breakdown of holdings (BlackRock Canada decided to not just hold ITOT in XUU for some reason, for which I can’t explain).
I’ll be releasing intro ETF video blogs shortly, so these should also help as you learn more.
Hi Justin, great write up, thank you! How have you determined that Vanguard is more passive?
I’ve seen you write comments like: “I prefer the Vanguard AA ETFs, as I find them to be less active in their methodology (i.e. the global equity weights are based on plain-vanilla market capitalization, not arbitrary weights).”
Aren’t the ETFs used in XGRO and VGRO all market-cap weighted ETFs?
@Alex: The allocations between US, international and emerging markets equities in XBAL and XGRO are not weighted according to their global equity market capitalization (even though the underlying stocks of the individual equity ETFs are weighted according to their float-adjusted market capitalizations).
If the foreign equities in XBAL and XGRO were market cap weighted, their US/Intl/EM allocations as of December 31, 2018 would be 25.0%/14.6%/5.4% (XBAL) and 33.4%/19.4%/7.2% (XGRO). This would be similar to holding XAW in place of the 45% and 60% foreign equity allocations in XBAL and XGRO (XAW is 55.6% US, 32.4% Intl, 12.0% EM).
Thanks Justin – that makes perfect sense! I’m not going to retire any time soon and my tax bracket can only stay the same or go up – Tax loss harvesting is not something I should be troubling myself. Instead enjoy the convenience offered by these Asset Allocation ETFs.
Thanks for the comparison of returns of XGRO and VGRO.
I used this to compare with the Model-ETF portfolio returns, which is made tax-efficient for the type of account. But I don’t see much of a difference in returns.
Is it fair to assume that these XGRO and VGRO are tax-efficient?
Also, with an Asset allocation ETF, we cannot practice tax-loss harvesting. Do you think this would make a huge difference between this 1 ETF portfolio instead and a 3-ETF/5-ETF folios?
Dheepak Jeevaraj: XGRO and VGRO are tax-efficient enough for most investors. Breaking the ETFs up and holding US-listed foreign equity ETFs in RRSPs can make a portfolio slightly more tax-efficient though.
Less tax-loss opportunities are expected to arise with XGRO and VGRO in taxable accounts (relative to holding the individual ETFs separately), but there is no guarantee that any tax loss selling opportunities will even arise for an individual investor.
Thanks Justin – that makes perfect sense! I’m not going to retire any time soon and my tax bracket can only stay the same or go up – Tax loss harvesting is not something I should be troubling myself. Instead enjoy the convenience offered by these Asset Allocation ETFs.
Just wondering why the new/refreshed Model Portfolios don’t show the estimated tax drag for various accounts, as the previous ones used to. Can we expect to see this in the future? May be useful in comparing returns of a 3 ETF or 5 ETF portfolio to an All-in-one portfolio. Perhaps we can expect to see a blog post on this topic in the future?
@Mark: I’m planning to release a foreign withholding tax calculator at the beginning of 2019 (so investors will be able to determine the estimated tax drag for themselves).
Looks like the new calculator is up! Thanks!
@Mark: You’re very welcome! :)
Great analysis, as always, Justin. I know you’ve highlighted them in the past, or at least I think you have, but it bears repeating here, I think.
Horizons’ own synthetic asset allocation ETFs, in which its Schedule I chartered bank in National Bank of Canada serves as the counterparty to the ETFs in a contractual arrangement with the funds to deliver the investment return of the underlying ETFs net of fees (as I understand it), deserve strong mention here again. They’re particularly attractive for non-registered accounts, or just accounts where investors would prefer to have all-in growth + dividend accrue to the NAV (an old, but novel, concept!). :)
Justin, thanks! Is it fair to say an Asset Allocation ETF is as good an option as your 3 ETF model portfolio in an RESP? from your model portfolio data, seems to me they would be expected to produce similar returns, and the Asset Allocation route has the advantage of being an ‘easy day’ with respect to no rebalancing. simple is good. other considerations would be ETF purchase costs depending on one’s online brokerage, and a small MER difference b/w AA/3 ETF.
do you think there is a clear winner b/w Vanguard vs iShares AA options? they seem so close that it may just boil down to personal preference. …i’ll stop overthinking them soon…
Cheers, Pete C.
@Pete C: I think that the asset allocation ETFs may be better options for RESP accounts (than the 3-ETF option). I’ve started including them in my clients’ RESPs (as it’s cheaper and easier to invest smaller amounts of cash).
I prefer the Vanguard AA ETFs, as I find them to be less active in their methodology (i.e. the global equity weights are based on plain-vanilla market capitalization, not arbitrary weights).
Happy New Year Justin, appreciate all this great info. i have a question please — do your Model ETF portfolio performance returns for the Vanguard and iShares Asset Allocation ETFs (at https://cdn.canadianportfoliomanagerblog.com/wp-content/uploads/2018/12/CPM-AA-ETF-Model-Portfolios-2018-11-30.pdf) account for all foreign withholding taxes, or do the model numbers represent pre-tax returns? I’m considering an asset allocation ETF versus holding 3-4 individual ETFs in an RESP, but have been hesitating b/c i’m not sure i understand Asset Allocation ETF withholding taxes enough yet. Thks, Pete.
@Pete C: Happy New Year! The hypothetical past returns of the asset allocation ETFs attempt to adjust for a portion of the foreign withholding taxes (by using net dividend indices), but it’s not perfect.
There’s no way to cost-effectively get around foreign withholding taxes in an RESP (even if you invest in US-listed foreign equity ETFs), so this should not be a concern for you.
For what it’s worth, VBAL and VGRO would respectfully have about 0.15% and 0.18% tax drag from non-recoverable foreign withholding taxes in an RESP.
Thanks for pointing that out. I see now, XGRO dec 24 17.81, dec 27 18.21
why is google, and yahoo displaying it as “18.21+1.36 (+8.05%)” ?
Why such the difference in gain today for VGRO and XGRO (dec27)
VGRO 23.11 CAD +0.63 (2.80%)
XGRO 18.21 CAD +1.36 (8.05%)
being very similar etfs, why such the difference?
@Brad: The last price for VGRO today was $23.11, which was up $0.63 from its previous day’s close of $22.48 (so as you said, a percentage gain 2.80%).
The last price for XGRO today was $18.21, which was up $0.40 from its previous day’s close of $17.81 (so the percentage gain was 2.25%, not 8.05%).
Hey Justin, I read somewhere on your blog that ZDB and BXF are not directly comparable because the former is a long term bond and the latter is short term. How do you decide which bond ETF to choose? Should the investor who may need the money in a few years choose BXF, while the investor who does not have plans of withdrawing the money choose ZDB?
@Sd: If you require the money in a few years, BXF would generally be a better choice than ZDB (as it has a lower duration). An investment savings account or a 3-year GIC (as long as you definitely do not require the funds before this time) would also be suitable options (as long as you stay within the CDIC limit of $100,000 per issuer/account type).
I would like to know what would be the best account (TFSA, RRSP or taxable accounts) in terms of taxation to hold one of these ETFs (VGRO / XGRO).
@Silva: The best account to hold almost any investment is a tax-deferred or tax-free account (i.e. TFSA, RDSP, RESP RRSP, LIRA, RRIF, LIF, etc.). Even though there is a small amount of unrecoverable foreign withholding taxes applicable in these account types, the amount is nothing compared to the income taxes that investors would pay on the investment income each year if the ETFs were held in a taxable account.
Once you run out of TFSA or RRSP contribution room, you can then consider holding VGRO or XGRO in a taxable account.
Great post, thanks. Glad to see iShares revamp these products and undercut Vanguard slightly on fees. With slightly lower fees and greater US allocation these might deliver slightly greater returns over time. CCP stated that you had the historical returns comparison for AA Vanguard and iShares models, somewhere on your site? Apologies if I’ve missed that in plain site.
@Dale Roberts: The hypothetical returns are available on the model ETF portfolio page of my blog (Step 2 > ASSET ALLOCATION ETFS)
Sorry that my question was not clear.
My question is whether Vanguard and/or Blackrock will automaticallybreinvest the distributions from the underlying ETFs to buy more units of the asset allocation ETF for the client.
@Jim S: You can generally set-up dividend reinvestment plans (DRIPs) on these funds, so that the majority of the distributions are reinvested in new units (you would just need to contact your specific brokerage to find out how to set this up).
Vanguard and BlackRock are not expected to do this automatically for you.
Justin, a very informative post. Are the distributions from the underlying ETFs automatically reinvested or are they left as cash? Is the answer the same for all
@Jim S: I would assume that the majority of underlying fund distributions would be paid in cash (this has been the case for VBAL and VGRO this year). The exception to this would be reinvested capital gains distributions (i.e. “phantom distributions”) – these are generally not paid out in cash, but are still taxable (they show up on your T3 but not your account statement) and increase the cost base of your ETF.
I’ve learned a great deal by reading your blog, so thanks for all of the information you share on here Justin! Do you have the calendar year returns for your model portfolio’s available somewhere instead of just the trailing returns?
@Brian: I’m glad you’ve been learning a lot by reading the blog. I don’t post calendar year returns for the model portfolios on the blog – is there a certain year that you were looking for (or a reason for requiring calendar year returns)?
It seems that the mer for xgro and xbal would be 18% compared to 25% of vgro and vbal.
Does it look more lucrative and beneficial to buy ishare etf compared to vanguard etfs?
How does the difference in allocation make the vanguard etf better comparing the mer rates.
Following Is the statement from ishare regarding the details and met rates.
@DRS: The MER for XGRO and XBAL is expected to be 0.21% (0.18% is the management fee, not the management expense ratio).
I prefer a more plain-vanilla index approach (such as the Vanguard AA ETFs, which weight their foreign equities according to their market capitalization). Vanguard also weights their foreign bonds according to their market capitalization.
Is anyone concerned that they these funds do not hedge the foreign equities? With the dollar at $.75 US, appreciation of our dollar is going to hurt these funds. If our dollar goes to $.85 US these funds will lose ~13% on the foreign equities due to currency. Hopefully once the net assets of these funds increase a hedged version will be released.
I own VGRO. Is this also a concern for the Vanguard Asset Allocation funds?
If so, what are the alternatives at this time?
Yes, both these Vanguard and iShares funds are unhedged on the foreign equities. They will both suffer losses if the Canadian dollar gets stronger.
Justin, your Comparison PDF (Nov, 30/18) is great – good job. Any chance you can add the Horisons Portfolios to it for a more comprehensive overview ?
@Hans: I would only include the Horizons Portfolios if I was comfortable with their investment strategy.
Why arent Horizons all in ones part of the comparison ?
@Hans: I generally prefer broad-market ETF strategies. The Horizons AA ETFs have included other less diversified holdings, such as a NASDAQ-100 ETF and a EURO STOXX 50 ETF.
In my opinion, Horizons should have launched simple tax-efficient AA ETFs, comprised of just HBB, HXT, HXS and HXDM.
Would these ETF’s make more sense for a non-registered account compared to VBAL/VGRO because of the lack of international bonds?
@M: Why would the exclusion of global (non-US) bonds in XBAL/XGRO be more beneficial in a non-registered account (relative to holding VBAL/VGRO)?
Thank you very much for the insight, Justin.
@Prasanta: You’re very welcome – thanks for reading :)
I refreshed my browser and more comments appeared which answered my question.
Thank you Justin for reviewing these!!
@Miwo: You’re very welcome!
I wonder if we have to think about tax loss selling between these funds?
I am planning to star to use VGRO in my taxable accounts now.
I wonder if the ETFs described above could be considered suitable options for tax loss harvesting in non-registered accounts? (Ie VGRO vs XGRO, VBAL vs XBAL)
@Ian: The monthly tracking error of the back-tested AA ETF returns (using index data minus fees) since January 1998 was very low for the pairs (0.21 for VBAL/XBAL and 0.274 for VGRO/XGRO).
However, you’re not as likely to have as many tax-loss harvesting opportunities with these asset allocation ETFs (relative to holding individual equity ETFs that follow different regions, which can go down at different times).
The bonds are expected to dampen the volatility within the AA ETFs, so this will also decrease the occurrence of any tax loss harvesting opportunities.
As a DIY investor I split my investment between TFSA and RRSP based on tax implication and return.
With these all-in-on ETFs, what type of account would be best, registered or unregistered account?
@PP Gal: These all-in-one ETF are better for investors who would like to avoid thinking about asset location (as you just hold the same ETF across all accounts). If you’re interested in learning more about asset location, please refer to my blogs on the topic:
Thanks for the information, Justin. I’m hoping t migrate to this model. [Is anyone else here going to do the same?]
“That’s good for you too, no matter which model you may choose”.
Indeed. And about time too.
@John: I’ve already started using VBAL/VGRO in my personal accounts, and with clients in their RESP accounts.
Just curious, why are you using both VBAL and VGRO? Are you using them separately in different account types or the same account? I assume different, but now I’m thinking that perhaps you’re using them both in the same account to slowly adjust the percent allocation of equities and bonds as you age?
I ask because that’s been a common question among those interested in these all in 1 ETF, where they both have set Bond allocations and if we want to start getting more conservative, the common question is do we sell the entire VGRO position and start VBAL or do you simply start adding a bond ETF to VGRO as you age and then later on you can start buying VBAL only.
Interested in your thoughts on this. Thanks!
FYI, I am currently using VGRO in my RRSP.
@Vito: I typically use VBAL and VGRO in smaller RESPs, TFSAs or RRSP accounts (I’ve only used them in very small non-registered accounts for children of our clients).
As you approach retirement, you could start building a GIC ladder into the mix (or as you said, add to a bond ETF over time).
without getting into too much of your personal detail, 2 things that stood out to me was the words, “small” and “non-registered” account. Does that mean that you would only invest in VGRO/VBAL in larger sums if they were in registered accounts instead? Essentially why the small and non-registered?
Above to your reply to Silva you mention how its always best (and I agree) to max out your registered accounts first, then can consider your non-registered accounts.
Also, I literally just came across this; on January 29th, 2019 Vanguard Canada just launched 2 new additions to the Asset Allocation all in one ETFs. They added VCIP (Very Conservative Income Portfolio) where the asset allocation are 20/80% Stocks/Bonds and VEQT (All Equity Portfolio) with 100% Stocks.
This now goes back to my original question about adding an increasing amount of bond allocation as one ages. I suppose one can start with VEQT when really young, then move onto VGRO (maybe in your 40-55 year old range), then VBAL (55 to 65), then VCIP (65+ years) ? But the ultimate question still has me scratching my head, even if the above strategy is sound, does one simply start buying the next age phase ETF without selling the previous age phase ETF (ie. VGRO to VBAL to VCNS) OR should one sell the previous age phase ETF and with the proceeds start buying the new age phase ETF and continue with each subsequent age phase?
I hope that makes sense.
I am anticipating a new blog entry about these 2 new ETFs? :)
@Vito: I’ve started purchasing VBAL in my own RRSP, but it’s mostly been out of personal laziness. For my clients with larger RRSP accounts, I tend to use US-listed ETFs (but they’re paying fees for me not to be lazy ;)
Same goes for larger non-registered accounts: If I can reduce the product costs and increase the tax-efficiency of my clients’ larger non-registered assets, I’m going to do this (and not simply hold VBAL or VGRO). If it’s a $10,000 non-registered account for a client’s daughter who is in a low marginal tax bracket, trying to lower product costs or increase tax-efficiency is likely going to add minimal value (so I wouldn’t bother).
My comment to Silva is assuming that it makes sense in your personal situation to contribute to an RRSP first, and not a TFSA.
You may be overthinking your future product decisions – VEQT/VBAL/VGRO/VCNS were just released. They might not even be in existence in the future when you start to make your portfolio more conservative as you approach retirement. Just choose what is best for you now out of what products are currently available (or you will be stuck in the dreaded analysis paralysis). I can tell you that our PWL portfolios have changed a lot over the past 10 years (not much in overall investment philosophy, but certainly in the underlying products). Cheaper and more tax-efficient ETFs have come out, so we’ve had to make custom decisions for each client on whether it makes sense to switch.
That makes perfect sense, and I agree I went through the Paralysis phase a couple years back, but I’ve eventually made the decision to go with a 3 ETF portfolio with my TFSA and VGRO within my RRSP.
Just one follow up that has me thinking. You said that the current ETF may not even exist down the road. Does that happen? I mean, if that was the case and VGRO didn’t exist, what does that mean in terms of my RRSP account? Does my brokerage collapse the account and sell off my ETF or does that simply mean an investor can no longer buy them but the ones they already have can be sold off whenever as any usual trade?
Thanks Justin, I appreciate the explanation.
@Vito: It sounds like you’re doing a great job with your TFSA/RRSP portfolio management :)
To answer your other question, sure – ETFs are terminated or merge with other ETFs all the time. Just look at the recent example of the RBC Canadian, US, international and emerging markets ETFs (RCAN, RUSA, RINT, REEM) – they’re all being merged into existing iShares ETFs (with taxable consequences, in most cases, for taxable investors):
If Vanguard decided to shut-down VGRO at some point in the future, all existing investors would receive the net asset value per share (or could sell the ETF before the termination date). This is not really an issue in an RRSP (where there would be no tax consequences of the closure).
“This is not really an issue in an RRSP (where there would be no tax consequences of the closure).”
Nor in a TFSA I gather?
With the release of VEQT, I plan to have this portfolio in my Canadian Corporate Accounts as well as personal taxable account.
VEQT 60% + ZDB 20% + GIC 20%
This might give me a nice balance of tax efficiency and easy to implement.
Do you see any major errors with this general approach?
I recognize that I will not have the lowest fees and greatest tax efficiency. But I want something simple that I can do long term.
@Cam: I don’t see any major issues with this approach. Foreign dividend income is generally less tax-efficient in a corporate account (vs. a personal), so I tend to hold foreign equities in personal, and Canadian equities in corporate (but this is really getting pretty granular).
Wow. Thank you for the quick reply.
I see many ppl trying to get every last tax point and fee point when they do it themselves.
I just want good enough so that I don’t mess it up with making it complicated.
I am not great with detailed things.
Thank you for all your info.
My portfolio is as follows.
– TFSA holds VGRO
– Taxable account will also be VGRO. I hold 1 year expenses in Tangerine HISA.
– My CCPC is Justin’s 3 fund portfolio until I get tired of tax loss selling and then will stick it into VGRO/ VBAL as well.
Clearly I am a fan of Vanguard’s asset allocation models.
Not at all surprised by these iShares options. As suggested, great for competition. And great for investors.The projected MER for the iShares options can’t be a bad thing for us Canadians. Don’t have a big problem with rebalancing at iShares discretion. I would like to see the threshold at 5%. I like the percentage of Canadian equities versus the Vanguard version. Is a great economical way to purchase and rebalance this number of investments. I was restricting myself to 3 ETFs,, without fixed, to reduce unnecessary costs and complexity. Now have great packaged options. Well done Justin. Keep us posted.
@Curt: I would assume that iShares and Vanguard will try to use new cash contributions and ETF distributions as much as possible to top-up any underweight asset classes (they would likely only be forced to rebalance the portfolio if there was a very quick stock market move, either up or down.
Thanks for the article Justin!
I know you and Dan have extensively covered foreign withholding taxes for US and International Equities. But with products such as the Vanguard and now iShares all-in-one funds, what would be the expected impact of foreign withholding taxes on the US Bonds and International Bonds portions of these portfolios?
You mentioned that you would be including both of these as model portfolios on your blog, I don’t think they are up yet, but perhaps we can expect to find that information there?
@Mark: The foreign withholding taxes on the US bonds is expected to be nil, as the US generally does not withhold any taxes on interest income from US fixed income securities.
I discussed the foreign withholding tax implications of the foreign (non-US) bonds in the Vanguard Asset Allocation ETFs here (approx. 0.32% per year):
The Asset Allocation ETF model portfolios are available in the Model ETF Portfolios section of my blog (you may need to clear your browser’s cache to view the new button):
Thanks very much for this analysis – I know you answered Mark’s question about fixed income, but what about the equity portions? The ITOT is US listed, correct? So does that mean its share of dividends are not subject to withholding taxes if held in an RRSP or is recoverable if in a taxable account? Is that the same for IEMG too? XEF holds securities directly, so there would only be one level of withholding taxes?
If all of this is true, then iShares’ offerings sound more tax efficient than Vanguard’s. I’d love to hear from you your thoughts on this.
@BartBandy: Unfortunately, the fund-of-funds structure of XBAL and XGRO takes away any tax benefit in an RRSP from holding US-listed foreign equity ETFs as the underlying products (like ITOT and IEMG). ITOT would still have 15% unrecoverable withholding tax levied on its US dividend, and IEMG would have two layers of withholding taxes levied (the first of about 10% on dividends paid to the US, and a second layer of 15% on net dividends paid from the US to Canada). As you mentioned, XEF holds the underlying stocks directly, so only one layer of withholding taxes would be unrecoverable. Estimates of the unrecoverable foreign withholding taxes can be found in our white paper (you’ll have to use the column where ITOT and IEMG are held in a TFSA though):
Awesome, thanks for the quick reply. I’ve learned lots from your posts and replies to questions like mine!
After reading that, I think I understand but would you mind confirming? There will be no differences in tax withholding for XBAL vs VBAL if held in a TFSA or RESP for all but 1 component. i.e. same withholding for:
-all bond holdings (none)
-canadian stocks (none)
-us stocks (one layer unrecoverable 15%)
-emerging markets (two layers unrecoverable ~10% from country of origin + 15% from usa)
The witholding will be different for the developed market stocks between XBAL and VBAL, specifically VBAL will have two layers unrecoverable (from country or origin + 15% from USA) XBAL will only have one layer unrecoverable (from country of origin, since XEF holds (most) developed stocks directly).
Therefore XBAL will be slightly more tax efficient than VBAL when held in a TFSA or RESP?
Thanks for all your work.
@Na: Your understanding is correct except for developed markets (ex North America) stocks. VBAL holds VIU (which holds the underlying stocks directly), so only 1 layer of foreign withholding taxes is lost. XBAL holds XEF (which also holds the underlying stocks directly), so again, only 1 layer of foreign withholding taxes is lost. So XBAL and VBAL are ~equivalent in terms of tax-efficient of their underlying foreign equity holdings.
VBAL holds a US-listed global (ex US) bond ETF, which is not exempt from US foreign withholding tax. XBAL only holds US-listed US bond ETFs (which are generally exempt from US foreign withholding tax), so VBAL is slightly less tax-efficient in this regard (as discussed in one of my comments below).
My apologies for not looking properly at the Vanguard one before and seeing VIU there. I assumed it was like VXC (Vanguard FTSE Global All Cap ex Can ETF) which holds VGK and VPL and now I wonder why VXC isn’t holding VIU. Is there a way to find what other fund of funds holds VIU?
Thanks for clarifying the bond difference (again) too. I’m glad I asked and thanks again for your help.
@Na: No apologies necessary – it’s an easy thing to miss (I’m assuming Vanguard hasn’t switched VGK/VPL in VXC to VIU yet, as the fund would realize capital gains in the process). You can review a fund-of-fund’s annual reports to determine what individual ETFs they hold.
What about withholding taxes on ITOT and IEMG? Those are US listed, so would the dividends from those escape withholding taxes if these portfolios are held in an RRSP or recoverable if in a taxable account? Does this make these portfolios more tax efficient than Vanguard’s?
sorry for the double post.
@BartBandy: No worries at all – your second comment provided me with the opportunity to also discuss recoverable foreign withholding taxes in a taxable account ;)
@BartBandy: The majority of the foreign withholding taxes on ITOT, XEF and IEMG would be recoverable in a taxable account – with the exception of the first layer of withholding tax on IEMG.
So from an equity standpoint, the iShares AA ETFs would have similar tax-efficiency to the Vanguard AA ETFs (I guess you could argue that the iShares AA ETFs would be slightly less tax-efficient in an RRSP or TFSA, as they hold a higher portion of foreign equities than the Vanguard AA ETFs).
Excellent analysis as always, Justin! Thanks!
@Mark: You’re very welcome – thanks for reading! :)
Justin thanks once again for a detailed, informative article
@Terry O’Malley: You’re very welcome – please let me know if you have any additional questions :)