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The Vanguard Balanced ETF Portfolio was the 20th bestselling exchange-traded fund in the first half of 2021, which seems a middling achievement.

Actually, though, it’s notable if you recall the narrative that emerged more than a year ago about how the 60-40 portfolio was dead. Bond yields were too low to justify the risk of falling bond prices when interest rates began to rise. As a result, investors were encouraged to look at shifting their asset allocation from the old default of 60 per cent stocks and 40 per cent bonds to a 70-30 or even 80-20 mix.

The investors who put $418-million in the Vanguard Balanced ETF Portfolio (VBAL-T) in the first six months of the year must have missed that memo. Only two asset allocation ETFs, also known as balanced ETFs, made the list of top 20 sellers in the first half. One was strictly for aggressive investors, the Vanguard All-Equity ETF Portfolio (VEQT-T), while the other was VBAL, with its 60-40 mix.

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A 70-30 asset allocation ETF is available – the Horizons Balanced TRI ETF Portfolio (HBAL-T). But with $109-million in assets, it hasn’t been as popular as VBAL, at $1.9-billion. Part of the reason may be that HBAL is a total-return product that pays no income. Instead, the share price is based on a combination of asset price increases plus income like dividends.

In any case, HBAL has been the better performer in the past 12 months: Its total return of 22.9 per cent compares with 16.5 per cent for VBAL. Does this suggest that 60-40 is out of sync with current market conditions? The answer depends on your market outlook for the next year or two.

Bonds have been a drag on returns this year, but not dramatically. The 12-month decline for the FTSE Canada Universe Bond Index comes to all of 2.4 per cent. Bonds have actually come back a bit lately because investors are worrying less about inflation. But if inflation does prove a stubborn problem, interest rates will have to rise significantly from current levels. That would be bad for bonds.

The only way we avoid at least modestly higher interest rates in the next 18 months is if the economy’s pandemic recovery stalls. That doesn’t seem likely right now, which means bonds and, in turn, 60-40 portfolios, seem vulnerable.

Here’s the counterargument that supports 60-40: Stocks at some point are going to take a rest from the fast pace of increases over the past year or so. If a correction occurs, bonds are going to take away some of the sting. As ever, the question with bonds and asset allocation is how much upside you’re willing to forgo to take the edge off the down side.

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