2023 Globe and Mail ETF Buyer’s Guide Part Six: Asset allocation funds

There’s a simple, three-word answer to your questions about which investments to use in the new first home savings account: asset allocation ETFs – they’re all you need to build wealth in an FHSA, as well as in a tax-free savings account, registered retirement savings plan, registered retirement income fund, non-registered account and any other accounts you have.

Exchange-traded funds are excellent low-cost portfolio building blocks, but there are 1,000-plus funds to choose from on the TSX alone. Asset allocation ETFs bundle roughly six to 10 stock and bond ETFs into single portfolios suitable for conservative, middle-of-the-road and aggressive investors.

The rise of asset allocation ETFs is one of the greatest advancements for individual investors of the past five years. But while investors have put billions of dollars into these products, they’re still underutilized. A lot of money sitting in individual ETFs, and stocks as well, would be better off invested in a cheap, well-diversified asset allocation ETF.

The sixth and final instalment of the 2023 Globe and Mail ETF Buyer’s Guide will acquaint you with the choices available. Key points of comparison include fees, returns, top holdings and the mix of stocks, bonds and, in a couple of cases, cryptocurrency.

The ETFs presented here are “funds of funds,” which means they hold individual stock and bond ETFs from the same corporate family. Each fund has a guideline on how much of the portfolio to keep in each asset class and how often to rebalance back to those levels.

The full menu of asset allocation ETFs includes conservative, balanced, growth and all-equity versions. Because they appeal to the broadest swath of investors, we focus here on balanced and growth funds.

Click here to download an Excel version of the guide.

Notes: Bond weighting may include a small amount of cash. Market data as of April 25, 2023. Returns to March 31, 2023. Source: Rob Carrick; Globeinvestor.com, TMX Money, ETF company websites

Here’s a discussion of terms used in this edition of the ETF Buyer’s Guide:

Assets: Shown to give you a sense of how interested other investors are in a fund.

Management expense ratio: The MER is the main cost of owning an ETF on a continuing basis; published returns are shown on an after-fee basis. The MERs shown here include the cost of the underlying funds. There is no double-dipping.

Trading expense ratio: The TER is the cost of trading commissions racked up by the managers of an ETF as they make adjustments to the portfolio of investments; add the TER to the MER for a full picture of a fund’s cost.

Dividend distribution frequency: Noted for investors who want regular income from dividends and bond interest. Some funds are more suited to this purpose than others.

Stocks/bonds split: Shown as of the most recent portfolio update on ETF company websites. It’s normal for the actual split to drift a little bit from the targeted asset allocation – periodic rebalancing takes care of this.

Top three weightings: “Canadian broad bond” means a bond ETF that includes both government and corporate bonds; the “total stock market” exposure some ETFs have means large, medium and small companies; the S&P 500 and S&P/TSX Composite tend to hold larger stocks.

Returns: Total returns are shown – price changes plus dividends and bond interest.

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