Is it possible to over-sell the benefits of one of the handiest investment products to come along in years?
I wondered about this when a reader recently asked whether he was too old to invest in balanced exchange-traded funds. Balanced ETFs are fully diversified portfolios of bonds and Canadian, U.S. and international shares bundled into a single fund. There are balanced ETFs for conservative, balanced and aggressive investors. Pick your profile, pick your ETF and let it ride.
But what if you’re a senior who is well into retirement (this reader withheld his age) and is much more interested in income than growth? With their differing blends of stocks and bonds, balanced ETFs are more about growing portfolios over the long term than about delivering a steady stream of dividend and interest income. The Vanguard Conservative ETF (VCNS), with a mix of 40 per cent stocks and 60 per cent bonds, has a yield based on recent distributions of just 1.6 per cent.
A relatively new balanced ETF, the Vanguard Conservative Income ETF Portfolio (VCIP), sounds like it might be of interest to income-seeking seniors. Vanguard says the objective of this fund is to provide a “combination of income and some long-term capital growth.” But with 80 per cent of the assets in bonds, it’s hard to see this balanced fund producing much income. These days, the FTSE Canada Universe Bond Index has a yield to maturity of only about 2.3 per cent.
Alternatives to a balanced ETF for an income-seeking senior include diversified monthly income funds such as the BMO Monthly Income ETF (ZMI) and the iShares Diversified Monthly Income ETF (XTR). ZMI’s yield was about 4.4 per cent in mid-May, while XTR was about 5.5 per cent. Both lack the simple construction of balanced ETFs – ZMI’s holdings include covered call funds, while XTR has high yield bonds.
Another balanced ETF alternative for the income-seeker is the Canadian dividend ETF, which offers tax-advantaged dividend income in a non-registered account. Dividend ETFs blended with guaranteed investment certificates are a sort of DIY balanced fund for the income-hungry investor.