Wondering what an asset allocation ETF is? This post is for you.
Asset allocation ETFs offer investors a way to build a portfolio of stocks and bonds by buying a single and low-cost investment product.
In this post, you’ll learn about asset allocation ETFs and how to automatically rebalance your investment portfolio back to your target asset allocation mix without the extra brokerage commissions, tax considerations and effort.
If you’re ready, let’s get started:
What are Asset Allocation ETFs?
Exchange traded funds (ETFs) offer a convenient and low-cost way for investors to quickly build a diversified portfolio. An asset allocation ETF takes things a step further by allowing investors to invest in different asset classes through a single security.
For example, consider an investor looking to build a balanced portfolio with an allocation of 60% to equities, 30% to bonds and 10% to REITs.
To build a diversified portfolio using the traditional method, the investor would need to buy several stocks across different sectors, geography, company size and so on to make up the 60% allocation to equities.
And the same process will be repeated for the allocation to bonds and REITs.
With ETFs, the investor can simply buy 3 ETFs in each of the asset classes to gain instant diversification.
Rebalancing under the traditional method will be a nightmare, but still bearable with the portfolio built with 3 ETFs.
But what if you don’t even have to rebalance? That’s where an asset allocation ETF comes in.
An asset allocation ETF holds several securities (stocks and bonds) through a few ETFs in line with your desired asset allocation.
How Does Asset Allocation ETFs Work?
Asset allocation ETFs are built using several other ETFs. That is, an asset allocation ETF is an “ETF of ETFs”.
For example, XEQT with a 100% allocation to equities is made up of 4 different ETFs, each one representing its allocation to Canadian, U.S., international developed and emerging market equities.
Benefits of Asset Allocation ETFs
Many investors understand the need to rebalance their portfolio regularly. In practice though, it can be cumbersome.
An alternative for investors that want a more hands-off approach to investing may be using the services of robo-advisors. They are convenient and handle many of the investment decisions for managing a portfolio. But they come at a cost, usually 0.25% to 0.50% of the asset under management.
For DIY investors, an asset allocation ETF provides the best of both worlds: affordability and convenience.
Here are some of the benefits of investing using asset allocation ETFs:
- They are relatively cheaper than the other options like robo-advisors, target date funds and so on. And the investor will save on brokerage commissions paid to rebalance the portfolio regularly.
- Tax implication: Rebalancing by selling an asset class and buying another one may have some tax implications depending on the investment account where the portfolio is held. For non-registered accounts in Canada for example, the investor may have to deal with capital gains and losses. An extra headache that can be avoided with asset allocation ETFs
- More accessible: Asset allocation ETFs are easy to understand and setup, even for beginner investors.
- On going maintenance is easier. The ETF provider automatically rebalances the portfolio. This means the investor simply needs to keep adding new contributions without worrying about whether the portfolio’s asset allocation is still in line with their target.
Here’s a tip:
As you get closer to your investment goal or your time horizon shortens, it is expected that your risk tolerance should reduce. The focus would be on capital preservation and not growth.
At that point, it is prudent to consciously think about the level of risk your portfolio is exposed to and then take action to reduce it by switching to a more conservative asset mix.
Robo-advisors and target date funds will do this automatically, but DIY investors will need to do this on their own when the time comes.
Best Asset Allocations ETFs in Canada
Depending on your desired asset allocation mix, there are several asset allocation ETFs available to Canada investors.
Two of the biggest ETF providers, Vanguard and BlackRock (iShares) have a wide range of options.
Here are some of the best asset allocation ETFs available to Canadian investors, showing the allocation to equities and bonds and the management expense ratio (MER).
|ETF Name||Ticker||MER (%)||Equities/Bonds Allocation|
|Vanguard Conservative Income ETF Portfolio||VCIP||0.24||20% : 80%|
|Vanguard Balanced ETF Portfolio||VBAL||0.24||60% : 40%|
|Vanguard All-Equity ETF Portfolio||VEQT||0.24||100% : 0%|
|iShares Core Income Balanced ETF Portfolio||XINC||0.2||20% : 80%|
|iShares Core Income Balanced ETF Portfolio||XBAL||0.2||60% : 40%|
|iShares Core Equity ETF Portfolio||XEQT||0.2||100% : 0%|
|BMO Growth ETF||ZGRO||0.2||80% : 20%|
|BMO Conservative ETF||ZCON||0.2||40% : 60%|
U.S. Investors can check here for iShares’ asset allocation ETFs.
How To Buy Asset Allocation ETFs?
You can buy an asset allocation ETF the same way you would buy other stocks or ETFs through your brokerage.
We have a detailed post on how to start investing quickly for DIY and busy investors using asset allocation ETFs (link below).
But here are the basic steps:
- Open an account with a brokerage or use your bank: Online brokerages are a good option. Questrade, an online brokerage in Canada, will let you buy ETFs commission free, saving you even more in fees.
- Fund your account. You don’t need a huge sum of money to get started. Check this post on how to start investing with little money.
- Determine your desired asset allocation based on your investment goals. The investor questionnaire here is a good place to start.
- Choose an asset allocation ETF that matches the suggested asset allocation from 3 above.
- Buy the ETF and repeat each time you need to add new contributions.
Asset allocation ETFs are a relatively new and innovative investment product.
If you’re a DIY investor that is tired of wasting hours on monitoring the several securities within your portfolio, an asset allocation ETF may be the way to go. You can get started by choosing one of the best asset allocation ETFs in Canada above.
And if you’re an income-seeking investor that wants monthly dividends, check here for the best Canadian Bank ETFs.
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