• ETFs

Vanguard’s Hip New Asset Allocation ETFs

I used to be a renegade, I used to fool around
But I couldn’t take the punishment, and had to settle down
Now I’m playing it real straight, and yes I cut my hair
You might think I’m crazy, but I don’t even care
‘Cause I can tell what’s going on
It’s hip to be square

– Huey Lewis and the News, “Hip to be Square

While many ETF providers have been frantically fooling around trying to launch the next hot bitcoin or marijuana fund, Vanguard Canada has been playing it oh, so cool. Instead of chasing after the crowd, they’ve recently released a hip new set of game-changers in the form of three asset allocation ETFs:

Not only are these ETFs as simple as they come, their cost and construction are likely to give most robo-advisors a run for their money. Here’s why: Robo-advisors tend to charge around 0.50% each year (and that’s on top of the underlying ETF fees of around 0.20%) to invest your cash and rebalance your portfolio. Vanguard is now offering broad market exposure consistent with your goals and risk tolerances and automatic portfolio rebalancing for about 0.25% per year. This new breed of asset allocation ETFs may lead many investors to wonder what the rest of those robo-advisor fees are buying them in comparison.

Shortly after Vanguard released its tidy new trio of ETFs, my inbox began to overflow with emails from DIY investors clamoring for more info. Ask and ye shall receive! Below are my comments and (so you know for sure it’s me), some deeper analyses. Hankering for more straight talk on the subject? My colleague Dan Bortolotti has also written about them at Canadian Couch Potato.

Canadian vs. Global Equities

In all three ETF portfolios, Vanguard has allocated 30% of the equity mix to Canadian stocks, and 70% to global stocks. This is very similar to my model ETF portfolios, which allocate about 33% to Canadian stocks and 67% to global stocks. Over the long term, these small differences should have no more than a minimal impact on returns.

Global Equity Breakdown

Each ETF portfolio has the same global equity weights: 53.7% to U.S. equities, 35.7% to developed ex North America equities, and 10.6% to emerging markets equities (as of December 31, 2017). This is roughly the same global equity allocation as my model ETF portfolios.

The market capitalization for the underlying indices (as of December 31, 2017) also has the exact same weightings. This suggests that Vanguard is not trying to actively manage the global equity allocations, which is a good thing for us passive investors.

Source:  Vanguard Canada as of December 31, 2017

 

Global Equity Market Capitalization as of December 31, 2017

Asset ClassIndexMarket Cap (USD Millions)Market Cap (%)
Total$51,081,455100.0%
U.S. EquityCRSP U.S. Total Market Cap Index$27,452,97653.7%
Developed ex North America EquityFTSE Developed All Cap ex North America Index$18,222,19135.7%
Emerging Markets EquityFTSE Emerging Markets All Cap China A Inclusion Index$5,406,28810.6%

Source:  CRSP and FTSE Index Fact Sheets as of December 31, 2017

 

Global Bonds

There is one key construction difference between my model ETF portfolios and the Vanguard asset allocation ETFs. Vanguard’s offerings include an allocation to global bonds (which are hedged back to the Canadian dollar), while my models invest only in Canadian bonds. Whether this will make a material difference in future returns is yet to be seen. I don’t plan to lose sleep over it myself.

Foreign interest paid from the Vanguard Global ex-U.S. Aggregate Bond Index ETF (CAD-hedged) (VBG) will be subject to unrecoverable foreign withholding taxes when held in an RRSP or TFSA account.  In the fund’s latest annual report, 15% of foreign interest earned was withheld.  The fund’s current average coupon is 2.1%, resulting in an annual foreign withholding tax drag of about 0.32% (2.1% x 15%).

Foreign Withholding Taxes

For the developed ex North America equity allocation, I was pleased to see that Vanguard had decided to hold the Vanguard FTSE Developed All Cap ex North America Index ETF (VIU), instead of a combination of the Vanguard FTSE Europe ETF (VGK) and the Vanguard FTSE Pacific ETF (VPL). They had opted for the combo-holding for the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC), but this small holding change for the new funds should slightly increase their tax efficiency; VIU will only be subject to one level of unrecoverable foreign withholding taxes in tax-free and registered accounts.

To see how the overall foreign withholding tax drag would shake out in an RRSP or TFSA account, download my Vanguard Asset Allocation ETF model portfolio returns.

Back-Testing Bonanza

If you’re curious whether these differences would have had a material impact on past returns, look no further. I’ve compared the past returns of three hypothetical Couch Potato Index Portfolios (which exclude global bonds and have a slightly higher allocation to Canadian stocks) to three Vanguard Index Portfolios. I’ve used FTSE indices for the Canadian stocks, global stocks and Canadian bonds, as well as a Bloomberg Barclays Index (hedged to CAD) for the global bonds.

Spoiler Alert: The returns are almost identical.

 

Conservative Index Portfolio

 

Asset Allocation: 40% Equities / 60% Fixed Income

Asset ClassIndexCouch Potato Index Portfolio (40EQ-60FI)Vanguard Index Portfolio (40EQ-60FI)
Total100%100%
Canadian EquitiesFTSE Canada All Cap Index ETF13%12%
Global EquitiesFTSE Global All Cap ex Canada China A Inclusion Index27%28%
Canadian BondsFTSE TMX Canada Universe Bond Index60%35.2%
Global Bonds (CAD hedged)Bloomberg Barclays Global Aggregate Bond Index (hedged to CAD)0%24.8%

*Portfolios are rebalanced annually

 

Source:  Morningstar Direct

 

Conservative Index Portfolio Performance: January 1, 2006 to December 31, 2017

Conservative Index Portfolio (40EQ-60FI)1 Year3-Year (Annualized)5-Year (Annualized)10-Year (Annualized)Since 2006
Couch Potato6.90%5.91%7.52%5.87%5.95%
Vanguard6.99%5.98%7.69%5.86%5.92%

Source:  Morningstar Direct

 

Balanced Index Portfolio

 

Asset Allocation: 60% Equities / 40% Fixed Income

Asset ClassIndexCouch Potato Index Portfolio (60EQ-40FI)Vanguard Index Portfolio (60EQ-40FI)
Total100%100%
Canadian EquitiesFTSE Canada All Cap Index ETF20%18%
Global EquitiesFTSE Global All Cap ex Canada China A Inclusion Index40%42%
Canadian BondsFTSE TMX Canada Universe Bond Index40%23.5%
Global Bonds (CAD hedged)Bloomberg Barclays Global Aggregate Bond Index (hedged to CAD)0%16.5%

*Portfolios are rebalanced annually.

 

 

Source:  Morningstar Direct

 

Balanced Index Portfolio Performance: January 1, 2006 to December 31, 2017

Balanced Index Portfolio (60EQ-40FI)1 Year3-Year (Annualized)5-Year (Annualized)10-Year (Annualized)Since 2006
Couch Potato9.05%7.55%9.69%6.27%6.50%
Vanguard9.21%7.67%9.91%6.30%6.49%

Source:  Morningstar Direct

 

Growth Index Portfolio

 

Asset Allocation: 80% Equities / 20% Fixed Income

Asset ClassIndexCouch Potato Index Portfolio (80EQ-20FI)Vanguard Index Portfolio (80EQ-20FI)
Total100%100%
Canadian EquitiesFTSE Canada All Cap Index ETF27%24%
Global EquitiesFTSE Global All Cap ex Canada China A Inclusion Index53%56%
Canadian BondsFTSE TMX Canada Universe Bond Index20%11.7%
Global Bonds (CAD hedged)Bloomberg Barclays Global Aggregate Bond Index (hedged to CAD)0%8.3%

*Portfolios are rebalanced annually.

 

 

Source:  Morningstar Direct

 

Growth Index Portfolio Performance: January 1, 2006 to December 31, 2017

Growth Index Portfolio (80EQ-20FI)1 Year3-Year (Annualized)5-Year (Annualized)10-Year (Annualized)Since 2006
Couch Potato11.21%9.19%11.85%6.54%6.92%
Vanguard11.43%9.36%12.11%6.61%6.94%

Source:  Morningstar Direct

 

So, once you’re done squinting at the two, nearly identical lines in the charts in the back-tested comparisons above, let me know if I can answer more questions. Otherwise, consider yourself hip to the news on these three new Vanguard asset class ETFs. For me, the take-home is: It’s about time somebody squared away this sort of offering.

 

 

 

By |2018-06-26T14:48:29+00:00February 8th, 2018|Categories: ETFs|56 Comments

56 Comments

  1. Dan September 1, 2018 at 2:54 pm - Reply

    Hi Justin,
    Great article. I am curious if you’ve calculated a gestalt difference in the cost of your model portfolios and the vanguard balanced portfolios. I realize we won’t know fully for some time and it would depend on the relative amount of the portfolio in different accounts, but as a “back of the envelope” calculation could you assume around 0.1% difference in management fees in all accounts, around 0.3% on US equities’ dividends from foreign withholding tax that could have been recovered in an RRSP, and then whatever your marginal tax is on the interest generated from fixed income being held in a non-registered account (for ease, lets assume a top marginal tax of 50%, if you had 40% of your assets in fixed income it would be roughly 50% tax on a roughly 3% annual interest on 40% of your assets = roughly 0.6% in taxes on assets in a non-registered account that could be avoided if you had held these in a registered account)? Am I missing anything major?
    Thanks,
    Dan

    • Justin September 5, 2018 at 12:17 am - Reply

      @Dan: Thank you for the suggestion – I may look at writing a simplified piece about the true cost of using the new Vanguard Asset Allocation ETFs (vs. DIY vs. using a competent advisor).

  2. Victor Rajkotwala July 24, 2018 at 7:35 pm - Reply

    Justin,
    How is the tax efficiency of the new Vanguard’s mutual funds VIC100, VIC200, VIC300, BIC400, in comparison to Vanguard’s asset allocation ETFs? Also, since the mutual funds are actively managed, I suppose the slightly higher MERs of 0.5% may be worth it.
    Thanks

    • Justin July 24, 2018 at 11:56 pm - Reply

      @Victor Rajkotwala: As the funds are new, there is no information available about their tax-efficiency (although since they’re more expensive than a plain-vanilla ETF, this would offset more of the ETF’s income, leading to higher tax-efficiency but with lower expected returns).

      Not sure how a more expensive actively managed fund may be worth it.

  3. Chris June 23, 2018 at 12:24 am - Reply

    Regarding the Global bonds low YTM. Also had this thinking but I think it’s not as big of a deal because it’s hedged. And the hedge will earn money based on the interest rate differential. So return will end up being similar, but with the benefit of less volatility. (But, there’s a higher MER, and foreign withholding taxes).

    • Justin June 26, 2018 at 2:50 pm - Reply

      @Chris: Thank you for the heads up. You’re correct regarding the irrelevance of the lower YTM on the currency-hedged international bond ETF (due to the “hedge return”). I’ve updated the post accordingly.

  4. Rainer May 26, 2018 at 11:37 pm - Reply

    Justin,

    Thanks for the awesome summary! Looking at the performance of 3 ETFs (VCNS, VBAL, VGRO), they seem to not differ by much.. With VGRO involving much more equities than the other two, should we not expect it be more volatile? I am new to ETF, if I am overlooking anything please pardon me.

    • Justin May 28, 2018 at 12:36 pm - Reply

      @Rainer: Bonds did very well over the measurement period, relative to equities, which is why there is not much difference in returns for various asset allocations. To assume that this will be the case over the next 20 years as well may not be realistic (bond yields are hovering just below 3%, while equities have expected returns between 6-8%).

  5. Davie215 April 23, 2018 at 11:49 pm - Reply

    Wonderful work, as is customary. This review motivated us to align and consolidate our (already) Global Neutral Balanced portfolio (now 73% Indexed in Equities) by rationalizing both our RRIFs and TFSAs with VCNS in the former and VGRO in the latter. Have always had a domino effect with our multiple accounts where juggling our ETFs really needed coordination to maintain the regional mix. With our latest changes, our accounts are more synchronized with each other.

    I wondered if there was a possibility of gaining individual year performance numbers on the three Vanguard funds, as your back-testing of the component ETFs in the mix was way more extensive than my drudgery of doing the same just for 2016 and 2017, as a prelude to considering the switches we have made?

  6. Mike April 12, 2018 at 2:15 pm - Reply

    Hi Justin,

    I discovered your blog through the Canadian Couch Potato blog. Thanks for sharing so much great info. My question is about your back-tested results, comparing Vanguard and the Couch Potato portfolio. It looks like the Vanguard funds would have produced a slightly higher return when comparing the returns of the Couch Potato portfolio from a shorter position, but when comparing the longest position (since 2006) the Couch potato portfolio fared slightly better. Can you please explain why that is? Thank you.

    -Mike

    • Justin April 13, 2018 at 4:58 pm - Reply

      @Mike: The difference is caused by global bond performance vs. Canadian bond performance over those periods.

  7. Jeremy March 19, 2018 at 3:27 pm - Reply

    Justin,

    I just pulled my money over from a brokerage and decided this approach:
    -Maximized TFSAs and RRSPs with VBAL
    -Used your taxable model portfolio for taxable accounts

    Jeremy

  8. Jon February 21, 2018 at 10:44 pm - Reply

    Hi Justin
    How does vanguard VBAL FUND compare to TD E series portfolio when both MER and FWT and calculated…how much difference in cost between these options? (excluding any cost for ETF TRADES).This would be in a RRSP. Thanks for info and insight for Canadian investors trying to navigate and educate ourselves.

    • Justin February 22, 2018 at 1:39 am - Reply

      @Jon: VBAL would have similar foreign withholding tax implications as a TD e-Series portfolio (with the exception that VBAL has a portion in VBG, which withholds about 15% of the bond coupon interest – this would only be expected to add about a 0.04% drag overall though).

      So the TD e-Series portfolio would be about 0.15% more expensive per year (in terms of MER and FWT) than VBAL.

  9. Dave February 19, 2018 at 9:40 pm - Reply

    My parents are 80 and 89 year old pensioners in good health. Through a recent inheritance from a long-lost relative, they now have ~$1M cash coming their way, and I (long time Vanguard investor living in the USA) am trying to help them invest the money in the most hands-off way possible that will generate a bit of income to supplement their $30K pension income (they have no other significant savings, and (luckily) no debts).

    Your comments above indicate these ETFs might not be the best option, but given that they have 0 investment experience, and given their already-low income, might they be an OK option at least? I also have the option of a wealth management guy I know and trust who will make a nice Canadian-only portfolio for 0.25%, and which would give my parents a face to talk to. But I do like the overall stock/bond/international/domestic balance of these new Vanguard ETFs.

    Opinions welcome!

    • Justin February 19, 2018 at 11:10 pm - Reply

      @Dave: As I am unfamiliar with your parent’s financial situation and risk tolerance, I cannot provide any specific advice.

      However, if they are unable to manage their own portfolio, you may want to encourage them to seek professional assistance.

  10. Marc February 17, 2018 at 9:56 pm - Reply

    Does holding US$ ETFs in an RSP (at TD Direct Investing), such as what is being described in your model portfolios still require the Norbit gambit strategy?

    I was under the impression that you can now open a US$ RSP component to complement the CAD$ RSP so that all trades and income settle in US dollars.

    The only issue at the moment is when it comes time to convert the plan to a RIF because there isn’t a US$ RIF just yet. I did hear that it’s on the way soon though.

    Thoughts?

    • Justin February 19, 2018 at 11:13 pm - Reply

      @Marc: You have always been able to buy US-listed securities at your discount brokerage and accept their inflated FX rate (they force the currency conversion), or you can convert the currency cheaper using Norbert’s gambit.

  11. Philip February 13, 2018 at 3:04 am - Reply

    I invest the 3 ETF couch potato. I can see the attraction of these funds, but I have one concern. What happens when I want to draw down after retirement and at that time equities are doing badly but bonds are doing well? I can’t just cash in my bonds while waiting for equities to recover, I have to cash in both bonds and equities. Am I missing something?

    • Justin February 13, 2018 at 4:26 pm - Reply

      @Philip: During retirement, you will likely want to break up the fund so that you can manage the portfolio for your specific cash flow needs.

  12. jamie February 12, 2018 at 4:30 pm - Reply

    Hello Justin. Like so many others, I want to thank you and Dan for your generous, hard work. Just one quick question: why aren’t Horizons’ total yield indexes more popular for margin accounts and TFSAs.? Are their inherent added risks significant enough to offset their advantages?

    • Justin February 12, 2018 at 6:29 pm - Reply

      @jamie: You’re very welcome!

      In TFSA accounts, the swap fees on the Horizons ETFs offset any foreign withholding tax savings from investing in swap-based ETFs (so most investors will not hold them here). For taxable accounts, the counterparty risk and taxation risk of the swap-based ETFs should be weighed by each investor (as their tax situations and risk profiles would be different).

      I don’t personally use these products (as I can’t calculate the actual risk, so I prefer to avoid it).

  13. Alan February 12, 2018 at 3:45 am - Reply

    Any idea on the Dividend Yield and Frequency?

  14. Alan February 12, 2018 at 3:19 am - Reply

    What dividend yield will they distribute and how often?

    • Justin February 12, 2018 at 2:32 pm - Reply

      @Alan: The annual distribution yield for the funds will likely be between 2-2.5% (after fees and foreign withholding taxes). I’m assuming the funds will have a quarterly distribution frequency.

  15. Ken Pearce February 11, 2018 at 10:05 pm - Reply

    Hi Justin,

    I have maxed out my TFSA and RRSP accounts with ETFs (CCP and CPM portfolios) and I am sitting on some idle cash. In this column you don’t recommend these new Vanguard products for non registered accounts and in the comments you suggest it is because of the bond allocation which i still find a bit confusing. Are there other better options for non registered ETF investing?

    Thanks,
    Ken

  16. Herman A. van den Berg February 11, 2018 at 9:38 pm - Reply

    Thanks for the very timely information on the new Vanguard ETFs. What do you make of the Morningstar.ca article, “Amid market plunge, some ETFs traded at steep premiums” (http://cawidgets.morningstar.ca/ArticleTemplate/ArticleGL.aspx?culture=en-CA&SAL=false&id=847876)? Perhaps one should wait for a bit more trading volume before considering Vanguard’s new ETFs?

    • Justin February 12, 2018 at 1:31 am - Reply

      @Herman A. van den Berg: I wouldn’t be too concerned with these articles. As always, investors should not be buying or selling ETFs when the market is just opening or closing (generally within 30 minutes of the open or close). If an ETF has an extremely wide bid-ask spread (i.e. more than 5 cents), investors should consider holding off on trading it.

  17. Brian February 10, 2018 at 5:25 pm - Reply

    Justin
    As usual, wonderful and precise information. Thank you.
    I am not the usual long term investor, given that I am 71 with a health problem.
    I have GICs coming due from trading down from a home sold two years ago in the amount of about 500k.
    I was thinking the Vanguard VGRO may be the answer for non reg account. 80/20% hoping the bond tax situation would be not too bad and FWT could be recovered. No room anywhere else. We will not need this money. It will be a legacy for kids and Gkids. We are beyond managing the portfolio and re-balancing.
    Your suggestion please.
    Cheers
    Brian

    • Justin February 12, 2018 at 1:28 am - Reply

      @Brian: You may want to discuss your estate planning with your children and other professionals. As you mention that you and your spouse are beyond managing the portfolio and re-balancing, you may need to seek additional help going forward.

  18. Shawn February 9, 2018 at 9:06 pm - Reply

    Hey Justin,

    Thanks for the great insight. As soon as these new ETFs were announced I was very much looking forward to new blog entries from both you and Mr. Bortolotti. No questions this time around just wanted to show my appreciation for taking the time to educate the amateur investor on a regular basis. Have a fantastic weekend!

    PS For any millennials out there when you hear the song “Hip To Be Square” is anyone else reminded of American Psycho? Christian Bale rocked that role. 🙂

  19. Hank February 9, 2018 at 4:49 pm - Reply

    I have been keeping my “Powder Dry” waiting for a correction and as a result have about $900K sitting in a 2.3% High Interest savings account.. What ETFs would you put your money in, in a taxable account, if it were your money. I am 73 and my TFSA and RRIF are maxed out and I have a DB pension that pays out $28K annually and I still work.

    Your thoughts?

  20. Brian February 9, 2018 at 4:13 pm - Reply

    For me, and other retirees who count on income from their investments, which of the three, if any works best. If their is a balanced global income out there, that pays monthly income, so I don’t have to sell off portions yearly, I would appreciate hearing about it.

  21. Ian February 9, 2018 at 3:43 pm - Reply

    Hey Justin,
    Great write up! I just started your RRSP 80/20 plan last month with about 70k invested. But am thinking about switching to the VGRO, as it is automatically rebalanced. Would tax efficiency be roughly the same or no?

    • Justin February 9, 2018 at 3:56 pm - Reply

      @Ian: If you’re holding US-listed foreign equity ETFs in an RRSP account, these would be more tax-efficient than VGRO. If you are holding Canadian-listed foreign equity ETFs, the tax-efficiency would be roughly equivalent in an RRSP account to VGRO.

  22. Noah February 9, 2018 at 4:02 am - Reply

    Hi Justin,

    Thanks so much for the analysis. I’m not sure I understand why the tables in the tax withholding section gives different returns than the charts here? I also see different numbers in the model portfolios. So for example, if i look at 60/40, the 10yr return is 6.26 CCP TFSA and 6.03 vanguard.

    Thanks again!

    • Justin February 9, 2018 at 2:18 pm - Reply

      @Noah: The returns in the blog chart are index returns before fees, the PDF report is index returns after expected ETF fees.

      In the blog, I’ve compared a Couch Potato-like “index” portfolio against a Vanguard “Index” Portfolio before fees. The point was to show that adding global bonds or changing the mix between Canadian and global stocks slightly is not expected to make much of a difference to returns.

      • Steven February 16, 2018 at 10:45 pm - Reply

        Hi Justin,

        Thanks for all the information! It’s amazing. Just want to make sure I understand this properly. If fees were factored in, is it reasonable to reduce the estimates from your table as follows (for the 80 / 20 split):

        Vanguard: 6.94 – 0.25 MER = 6.69%
        Couch Potato: 6.92-0.11 MER = 6.81%

        Still not a big difference I know. I am looking to make the switch from robo-advisor to DIY (Questrade) for registered accounts and want to make sure I make the right decision and don’t feel the need to change again later.

        Thanks!
        Steven

        • Justin February 19, 2018 at 11:15 pm - Reply

          @Steven: Please keep in mind that these are hypothetical figures (I could substitute different indices to back-test and make either portfolio look better or worse).

          If you’re new to investing and looking for a one-fund solution, the new Vanguard ETFs may be appropriate (it wouldn’t be that big of a hassle at a later date to sell the fund and replace it with more ETFs if you decided to).

  23. Ken Wilson February 9, 2018 at 1:45 am - Reply

    So the 64 dollar question is… if you were to enter the market now with substantial new funds (say a hundred K+), would you bother with a couch potato setup that required maintenance or simply buy the appropriate Vanguard offering? The post would seem to indicate that the Vanguard offering is the best ‘hands off’ solution.

    Thanks.

    • Justin February 9, 2018 at 2:10 pm - Reply

      @Ken Wilson: I believe you’ve answered your own question. If you’re looking for a low-cost hands-off solution, the Vanguard Asset Allocation ETFs are a great option for registered and tax-free accounts. If you’re looking to optimize every last basis point in fees, foreign withholding taxes and regular taxes, putting more effort into your portfolio management could lead to better results (that’s assuming the investor does everything correctly).

  24. Sue February 8, 2018 at 11:52 pm - Reply

    Hi Justin,
    In a taxable account, to use VGRO as the example, if the potential tax drag is O.1% and the MER is 0.25% and FWT of 0.17% does it appear that the all in cost approximates 0.52% for this ETF. Would you recommend this ETF in a taxable account or consider XAW as an alternative if you were getting FI from a GIC or ZDB and didn’t require Canadian exposure? For an investor who would pay commissions to buy and sell, not using Questrade. Thanks so much for all the analysis you do. Quite impressive considering the short time frame since these ETF launched.

    • Justin February 9, 2018 at 2:23 pm - Reply

      @Sue: The foreign withholding tax drag of VGRO in a taxable account would be about 0.01% (not 0.17% – that’s for RRSP and TFSA accounts) – this is not the issue with holding VGRO in a taxable account.

      I would not recommend any of these ETFs for taxable accounts, due to the premium bond issue of the underlying bond ETFs. A 3-ETF portfolio, using ZDB as the bond component would likely make more sense (depending on the size of the taxable account and the cost of trading commissions).

      • sue February 9, 2018 at 8:38 pm - Reply

        thank you – a great explanation that is very helpful

  25. Miwo February 8, 2018 at 8:43 pm - Reply

    Hi Justin,

    You are correct. I am not versed in bonds as I originally wanted to stay with laddered GICs in my fixed income portion. However, the ability to have a Global Asset Allocation with Vanguard is too enticing for me now.

    I tend not to invest for tax efficiency alone but prefer simplicity more nowadays. Likely holding VGRO will make me review my portfolio much less and that is a wonderful concept.

    Your blog is wonderful and your information is greatly appreciated.

    Much thanks Justin!

  26. Miwo February 8, 2018 at 7:46 pm - Reply

    Hi Justin,

    Thank you for this review! I have a CCPC and would like to hold the VGRO in it long term. I recognize there is a balance of higher taxes but also the issue of keeping it very simple. Although you do not recommend holding this is in a taxable account, could you give an general approximation of my loss by holding VGRO versus splitting this up into more tax efficient options.

    I tend to keep cash in my CCPC as laddered GICs as well so I figure the tax efficiency of VGRO must be better than those.

    • Justin February 8, 2018 at 7:55 pm - Reply

      @Miwo: I may take a look at this in the future, but if I had to take a guess, I would say it would add a drag of about 0.10% on VGRO.

      GICs are very tax-efficient in taxable accounts (so you may be missing the logic of the premium bond taxation issue).

  27. Dave February 8, 2018 at 5:20 pm - Reply

    Hello Justin,

    Great article as usual.
    I would guess holding each ETF in a taxable account is more tax
    efficient , except for the bond, part

    Equities: VUN, VIU, VEE, VCN
    Bonds: ZDB or BXF

    Cheers
    Dave

    • Justin February 8, 2018 at 5:33 pm - Reply

      @Dave: Thanks!

      The foreign withholding tax implications of holding the Vanguard Asset Allocation ETFs or the underlying Vanguard equity ETFs is identical (all foreign withholding taxes on VUN and VIU would generally be recoverable, whereas the first level of tax on VEE would be unrecoverable). This would only amount to an overall drag of about 0.01%-0.02% per year on the funds (same goes for the individual equity ETF holdings).

      The tax-inefficiency of holding the Vanguard Asset Allocation ETFs in a taxable account is due to the underlying bond ETFs that have a higher average coupon relative to their average yield to maturity (i.e. premium bonds). That is why I wouldn’t recommend holding these new ETFs in a taxable account (as you mentioned, ZDB or HBB would be better candidates for bond ETFs taxable accounts).

      • Heather March 9, 2018 at 2:37 pm - Reply

        Thanks for the information, I enjoy reading about ETFs and the tax implications for TFSA, RRSP, and Non-Registered. I have the Couch Potato account with e-series, and am wondering about tax implications with respect to TFSA and non-registered (I have the same Couch Potato balance in both TFSA and non-registered, as TFSA is maxed out). Could you provide some tax information about e-series? I’m just a bit too chicken to switch to Questrade, even with lower MER. Portfolio currently at about 80k with this TFSA and non-reg account.

        Thanks for the consideration!

        • Justin March 11, 2018 at 10:12 pm - Reply

          @Heather: The foreign withholding tax implications for US equity and international equity TD e-Series Funds are similar to the US and international equity ETFs in my model ETF portfolios (XUU and XEF).

  28. Ryan February 8, 2018 at 4:34 pm - Reply

    Hi Justin, thanks for the historical analysis. From a cost perspective it seems the CCP 3-ETF portfolio is the way to go given the MER of 0.14% (Balanced) versus VBAL’s ~0.25%. Other than the global bond exposure and foreign withholding tax advantage, the main difference would be you have to re-balance CCP yourself. Are there any other material differences I’m missing? Thanks, Ryan

    • Justin February 8, 2018 at 4:52 pm - Reply

      @Ryan: Depending on your portfolio value and the number of trades you place in a year (and the cost of these trading commissions), the CCP 3-ETF portfolio may still be more expensive than a one-fund solution. For example, a 0.11% difference in fees on a $50,000 is equal to $55 per year. If you’re paying $10 per trade and rebalancing your portfolio each year (as well as reinvesting new cash contributions), this could easily put you underwater).

      No other material differences. VEE includes China A shares, while XAW doesn’t (but this is likely to change this year, when MSCI begins to add China A shares to its emerging markets indices).

      • Ryan February 8, 2018 at 5:55 pm - Reply

        Wonderful thank you. For a portfolio in the $200k-300k range using QT to buy commission free, CCP looks like the way to go.

        Great to hear re:XAW and China A shares. Looks like that’s been in the works for a few years.

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