Balanced ETFs take some vagueness out of common portfolio-building terms

The three most meaningless words in portfolio-building are conservative, balanced and growth.

These terms are commonly used to describe portfolios designed for risk-averse, middle-of-the-road and risk-tolerant investors, but what exactly do they mean in terms of how portfolios are built and how they perform in up-and-down markets, similar to what we saw in 2018? For answers, let’s look at a new type of exchange-traded fund that emerged in 2018 – the balanced ETF.

These funds hold a mix of stock and bond ETFs designed to appeal to the balanced investor, but also – by adjusting the mix – to conservative and growth investors as well. The transparency of ETFs makes it super easy to see what mix of stocks and bonds they hold, and how they have performed on a comparative basis.

Balanced ETFs are now offered by ETF brands that include Vanguard, Horizons and iShares, which has just rebooted some existing balanced products that were overlooked by investors. The Vanguard balanced ETFs were listed for trading in late January, which means they were around in both strong and weak periods for the markets this year. Let’s see what these three balanced ETFs can tell us about what conservative, balanced and growth mean to actual investors.

• The Vanguard Conservative ETF Portfolio (VCNS): Holds 60 per cent bonds, 40 per cent stocks. The stock charts available on Globeinvestor.com show the unit price for this ETF was down 1.3 per cent from its inception date of Jan. 25 through mid-December.
• The Vanguard Balanced ETF Portfolio (VBAL): Holds 60 per cent stocks and 40 per cent bonds. The unit price fell 2.9 per cent from Jan. 25 through mid-December.
• The Vanguard Growth ETF Portfolio (VGRO): Holds 80 per cent stocks, 20 per cent bonds. The unit price fell 4.3 per cent from Jan. 25 through mid-December.

The year-to-date numbers for these three ETFs give us only a basic idea of how they blend risk and returns. Ideally, you’d want five years of data. Still, we can see some definite patterns emerging. Conservative portfolios can still lose money in rough markets, but the declines will be notably less than both balanced and growth portfolios. Balanced portfolios definitely live up to their name with returns that slot in halfway between conservative and growth portfolios. Growth portfolios will sting in down markets, though you’ll presumably outperform in bull markets.

Balanced funds may not be what you’re looking for in an investment, but they’re one of the most investor-friendly developments in years in the financial industry. These ETFs offer well-build portfolios in a convenient package, and they help take some of the vagueness out of the three most meaningless words in portfolio-building.