If you can handle stock market downturns and have 10-plus years until you need your money, then there’s a type of ETF you should definitely take a look at.
The growth version of balanced exchange-traded funds, also known as asset-allocation ETFs, typically hold 80 per cent of their assets in stocks and 20 per cent in bonds. If you’re in your 20s or 30s, it might just be what you’re looking for. Same goes if you’re older but have a proven ability to keep your hands off the sell button when stock markets tank like they did earlier this year.
A reader who describes herself as entering retirement age is also interested in the growth version of the balanced ETF. Her concern: Are these ETFs, with their 20-per-cent bond weighting, too tame?
She’s looking specifically at the Vanguard Growth ETF Portfolio (VGRO) and comparing it with the Vanguard All-Equity ETF Portfolio (VEQT), a related product that has no bonds and instead offers balance through a blend of different stock indexes. “Isn’t VEQT an even better vehicle to pursue aggressive growth over 10-15-20 years?” she asked.
I think not.
In a Q&A I did in the summer with Kurt Reiman, chief investment strategist for BlackRock Canada, he noted that a 60-40 portfolio over the past 20 years outperformed the S&P 500. You lost a bit of the upside with a portfolio like this, but it excelled in down stock markets by limiting the damage. Looking ahead, low bond yields raise questions about whether a 70-30 or 80-20 portfolio mix might make more sense. All stocks might theoretically make even more sense than that, given how little bonds are expected to add to returns for diversified portfolios.
A Gen Z investor could afford to be an all-stocks test pilot. Someone approaching retirement is much less of a candidate. Even for someone looking at a longer time horizon, like this reader, the urgency of stock market declines is more pronounced for people close to or in retirement. This means heightened risk of succumbing to the temptation to sell in a downturn to preserve a fast-shrinking portfolio.
Holding some bonds in a portfolio, 20 per cent or even more, would take the edge off a stock market crash. For that reason, VEQT seems a risk level too far for someone entering retirement age.
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Rob Carrick