A lot of investors are doing the precise right thing with their money today.
Before we get to that, it will be helpful for you to first hear about what these smart investors are not doing. They’re not buying resurgent cannabis stocks, GameStop shares , artificial-intelligence stocks, psychedelic pharmaceutical stocks or cryptocurrency. Not banks, not energy or mining, either. Also, they’re not holding money in cash, or taking the bunker approach with guaranteed investment certificates.
What these ace investors are, in fact, doing is buying record amounts of balanced exchange-traded funds, aka asset-allocation ETFs.
Balanced ETFs reached their three-year anniversary at the end of January and they’ve pulled in an impressive total of $8-billion or so. Next time someone starts questioning the ability of individual investors to manage their portfolios intelligently, you can spitball this factoid right back at them.
A balanced ETF is a fully diversified portfolio wrapped in a single product. Available in multiple versions for conservative, middling and aggressive investors, they blend bonds with stocks from Canada, the United States and the rest of the world. A lifetime’s successful investing could easily be based on pouring money into a balanced ETF for several decades.
Tons of attention has been paid lately to the speculative, short-term, make-a-buck mindset of individual investors these days. “I would say asset-allocation ETFs are on the other end of the spectrum of what you’re seeing in today’s market trends,” said Tim Huver, head of intermediary sales for Vanguard Investments Canada Inc., which introduced balanced ETFs to Canada in late January, 2018. “They embed our best thinking on portfolio construction with a long-term mindset.”
It’s gratifying to see a great new product emerge and investors embrace it, even when much more exciting things are happening. Vanguard says December and January were the two best-selling months for balanced ETFs. The industry took in a net $400-milion in December and $537-million in January. Four of the five best-selling months for balanced ETFs came in 2020.
Vanguard dominates balanced ETFs, with total assets of $5-billion. Other big players in the category include BMO ETFs, BlackRock’s iShares lineup and Horizons ETFs. Mackenzie Investments, Franklin Templeton and TD Asset Management are also players.
Common to all ETFs of this type are:
- Complete portfolio diversification: You augment with other ETFs or investments, but you really don’t need to.
- Low fees: Management-expense ratios that start at roughly 0.2 to 0.25 per cent
- Built-in rebalancing: If you buy a balanced ETF with a 70-30 mix of stocks and bonds, the fund managers will keep you more or less at those levels on a continuing basis.
Which asset-allocation ETFs are the hottest sellers in today’s hot stock market? Vanguard says the Vanguard Growth ETF Portfolio took in $134.5-million in January, the Vanguard All-Equity ETF Portfolio took in $85.6-million and the Vanguard Balanced ETF Portfolio took in $83.8-million. The Vanguard Retirement Income ETF Portfolio , launched in September, added $28.5-million.
Mr. Huver said inflows to these funds have come from both individual investors and advisers who want to put cash in client accounts to work without picking individual stocks. VEQT allocates money to the Canadian and U.S. stock markets plus international developed and emerging markets.
If you’re interested in balanced ETFs, compare them on:
- Fees: Most of these products contain a substantial weighting in bonds, which have low yields right now that can be eaten up by fees.
- Portfolio mix: You can find stock-bond mixes of 80-20, 70-30, 60-40, 50-50 and 40-60; the right blend depends on your age, investing needs and tolerance for big stock-market declines (more bonds = more downside cushioning)
- Holdings: Weightings for Canadian, U.S., international and emerging markets vary widely – find a mix that makes sense to you.
The biggest surprise in balanced ETFs recently is the lack of competition so far for VRIF, which holds a rough 55-45 mix of stocks and bonds and makes monthly distributions with a payout rate of roughly 4 per cent. For retirees wondering how to convert their savings into income for living costs, VRIF is right in your zone.
“By 2028, our research shows that retirees will own half of the financial wealth in Canada,” Mr. Huver said. “We think this is a product that is timely now and will serve a broad number of investors in the future.”
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