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Welcome to hellish markets, balanced ETFs.

Born in better days for stocks, exchange-traded funds offering a fully diversified portfolio in a single package are undergoing their first bear market. The sixth and final installment of The Globe and Mail ETF Buyer’s Guide shows you how they have held up so far.

The news here is good. In fact, balanced ETFs have a lesson to teach us all. If you own any type of diversified portfolio that mixes stocks and bonds, your losses this year may not be as damaging as you think.

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Diversification works, people. Bonds were a bit wonky in the market plunge of early 2020, but they still saved portfolios from falling as much as the stock markets. The more bonds you had, the less your portfolio fell.

Almost all of the balanced ETFs covered here are “fund of funds,” which means they hold individual stock and bond ETFs from the same corporate family. Typically, there are seven or eight individual funds in a balanced ETF, comprising bonds and stocks from Canada, the United States and international markets (outside North America). Balanced ETFs have guidelines on how much of the portfolio to keep in each asset class and they rebalance periodically to ensure investors stay on target.

Automatic rebalancing is a big part of the appeal of balanced ETFs. It prevents investors from riding their stocks and equity funds higher in the kind of bull market we had until late February and letting bonds shrink as a percentage of the overall portfolio. If you said you wanted 40 per cent of your portfolio in bonds, a balanced ETF keeps you more or less at that level.

This installment of the ETF Buyer’s Guide includes information on rebalancing policies. Some funds have a set schedule, while others are more fluid and will respond after violent market moves.

Previous editions of the Buyer’s Guide covered established funds with a history of five years or more. This rule was tossed out here because of how popular balanced ETFs have become since they started to appear in early 2018. Five years is a far better slice of time to judge an investment than the recent past, but it’s clear that balanced funds have so far served investors well in a tough environment.

In previous installments of the 2020 ETF Buyer’s Guide, we looked at Canadian, U.S. and international/global equity funds, as well as bond funds, and a stress test on Canadian dividend ETFs.

Click here to download an Excel version of the guide.

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Notes: * Bond weighting may include a small amount of cash; Market data as of March 31. Sources: ETF company websites, Globeinvestor.com



Here’s a discussion of terms used in this edition of the ETF 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 in a balanced ETF.

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.

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 couple of percentage points off the target allocation – rebalancing takes care of this.

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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 Index tend to hold larger stocks.

Returns: Year-to-date total returns through March 31 offer an opportunity to monitor how balanced ETFs did during one of the most sudden and violent stock market downturns ever. The 12-month returns to March 31 offer a blended view of strong and weak market conditions.

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