Comparing Canadian Listed Asset-Allocation ETFs

There Are Too Many ETFs

It wasn’t that many years ago when I was barely aware that Exchange-Traded Funds (ETFs) existed. After a few years, the benefits of ETFs began to appear. They were a remarkably low-cost way to get broad-market exposure to the world’s investment markets. The iShares series of ETFs led the way early on, then owned by Barclay’s,  but TD was also an early, although highly limited, provider beginning in 2001  before winding down their ETF business in 2006. Of course, TD has since come back into a saturated ETF market.

 

Many DIY investors in Canada feel overwhelmed by the sheer number of ETFs available. There are over 900 listed on the Toronto Stock Exchange and many Canadians also like to purchase ETFs from the US market, too.

 

This reality makes choosing the right ETF a daunting task, especially when trying to come up with the right allocation, considering the cost (MER), and assessing the performance across providers.

 

Without a clear, systematic comparison, many investors may either procrastinate or make uninformed choices.

 

Enter the Asset-Allocation ETF

In early 2018, Vanguard launched the first of its Asset-Allocation (AA) ETFs in Canada. January 25 marked the seventh anniversary of that milestone. This was close to a revolution in ETFs because, for the rock-bottom Management Expense Ratio (MER) of 0.24%, you could get an instantly diversified portfolio covering thousands of stocks and bonds from around the world in one transaction.

 

Eventually, most of the other major ETF providers like iShares (now owned by BlackRock), BMO, and others, began to release their own set of AA ETFs, with a few tweaks to differentiate their offerings from Vanguard’s. I’m beginning to feel that the AA ETFs are proliferating to the point that it’s hard to know how to choose one anymore.

 

This situation has been bothering me for quite some time, actually, so I decided to take a closer look at what was available. Perhaps the best source is the list of model ETF portfolios offered by Justin Bender on his Canadian Portfolio Manager Blog site. In this blog post, I try to take a slightly different tack on examining the AA ETFs that are out there.

 

  • I include the ESG (Environmental, Social, and Governance) offerings by iShares (four AA ETFs) and BMO (one AA ETF).
  • I include TD, which offers three AA ETFs, two of which have somewhat unusual 30/70 and 90/10 equity/fixed-income allocations.
  • I note the MERs for each of the funds.
  • Historical and projected* returns are provided.

 

I hope that with this data, investors may feel a little more able to select an AA ETF for themselves.

 

Begin the Comparison

The solution I’ve chosen is a systematic comparison, which I intend to use to simplify decision-making and provide a greater degree of transparency.

 

 

To briefly explain, the columns on the left indicate the percentages that are allocated to equity versus fixed income, or if you prefer, stocks versus bonds. You can see that the most conservative or fixed-income heavy ETFs are listed on the top row while the most aggressive all-equity (100% stocks) options are at the bottom.

 

You will notice that only two issuers offer a 20/80 ETF. At the other extreme, every issuer offers a 60/40 ETF, including the ESG portfolios.

 

You may be unsure which asset allocation is right for you. One way to get a handle on answering that question is to take an online quiz or questionnaire. While not necessarily the final answer, it can be a helpful start. If you find your desired allocation to be “falling between the cracks” you can always combine two ETFs to reach your desired allocation. For example, let’s suppose you wanted a 70/30 allocation. You could put half your investments into VBAL and the other half into VGRO.

 

Let’s assume for the moment that you have identified your asset allocation. If you want a portfolio that considers ESG factors, your solutions are more limited, but perhaps other matters are also of importance. Maybe you want your investments to come from a Canadian financial institution, or perhaps you simply go for the lowest MER ETF. Regardless, this table can help you to narrow down your choices.

 

Data by Provider

As you can see, all the major providers offer competitive options for various risk profiles.

 

For cost-conscious investors, while the MERs are slightly different, they remain relatively consistent. For example, the most expensive ETFs are from Vanguard at 0.24%. On a $10,000 investment, that works out to $24 a year. The least expensive ETFs, offered by TD have an MER of 0.17%. That’s $17 per year, a difference of seven dollars. In other words, across these ETFs, the MER can probably be ignored.

 

While addressing MERs, let me point out how the MER works on an AA ETF. These ETFs are “fund of funds” products. In other words, underlying each ETF is a collection of ETFs, each of which can be bought separately, usually for a slightly lower MER than the AA ETF. However, the MER of the AA ETF is not stacked on top of the MERs of the underlying ETFs. Rather, the slightly higher MER includes the MERS of the underlying ETFs. Sure, you could theoretically save some money by buying the individual ETFs but for the price of a few dollars, you get rebalancing done by the fund managers (or their computers) and you don’t have to talk yourself into making the rebalancing decision when it might feel uncomfortable, for example, rebalancing into international developed markets when the US market is doing well.

 

Vanguard

 

As noted, Vanguard was first out of the gate, so they have return information going back five years. I want to bring your attention to the column on the right, Expected Return, 10 Years +. These return figures are based on the Projection Assumption Guidelines issued by the Institute of Financial Planning and the FP Canada Standards Council™. I used the expected returns as applied to the asset allocation for each of these funds at the end of 2024 and reduced the return by the MER. These figures are the projected returns you are likely to experience over the long term, when you might find a 12% loss one year followed by a 25% gain the next. Figures for 1, 3, and 5 years are interesting and may be helpful for comparison with the other issuers’ ETF performance, but I wouldn’t put too much stock in them.

 

iShares

 

As you can see, recent performance has not been dramatically different. The same can be said about the long-term projected returns. It may be of interest to note that the different ETF providers use different indices to track their underlying investments. For example, for their respective underlying Canadian equity ETFs, Vanguard uses an index provided by FTSE, while the iShares offering follows the S&P/TSX Capped Composite.

 

In addition, Vanguard targets 30% of its equities to Canada while the iShares equities are closer to 25% Canadian.

 

iShares ESG

 

Despite the modestly higher MERs (0.25% vs 0.20% for the standard iShares offering), the ESG versions have 1- and 3-year records that are superior. This is no doubt due in part to the ESG factors that tilted these portfolios in ways that emphasized high performers in the last few years, particularly the tech sector stocks, which tend to be environmentally cleaner. Another factor is that iShares lacks an Emerging Market Equity ETF that meets the desired ESG criteria for inclusion in these ETFs.

 

BMO (Bank of Montreal)

 

You will note that there are two 60/40 AA ETFs listed here. The row highlighted in green indicates it is the ESG version. Notice that it outperforms its non-ESG equivalent in the same 1- and 3-year periods but has a lower expected long-term return. As with the iShares ESG versions, there is no allocation to an ESG Emerging Markets ETF, which means that more of the investment gets allocated to Canada, the US, and developed International markets.

 

Mackenzie

 

I don’t think Mackenzie gets talked about very much as an investment option. However, they have among the lowest MERs at 0.18% and they appear to be just as competitive as the other major ETF providers. You will note that these ETFs are relatively recent to the market as none have a five-year record, and their all-equity ETF, MEQT, hasn’t been around long enough to have a three-year record.

 

TD ETFs

 

TD’s series of ETFs deserve inclusion for no other reason than their quirky 30/70 and 90/10 asset allocations. Also worth noting is that they have the lowest MER of the bunch. None of TD’s offerings have been around long enough to have a five-year record of returns. If you are the kind of investor who wants to have a slightly different asset allocation than the standard, then TD’s ETFs may be for you. I must say, TD’s 90/10 ETF, TGRO reminds me of Warren Buffett’s directions to his executor that the investment assets received by his wife should be invested 90% in equities and 10% in fixed income. Never mind for the moment that Buffett’s US-centric investing philosophy means that 90% should go into an index fund that tracks the S&P 500 while the remaining 10% should go into a fund that tracks short-term U.S. Treasury bonds.

 

Let’s Compare

 

Since the 60/40 portfolio was the only ETF portfolio that was available across the issuers and has often been considered the “default” allocation, I thought it worthwhile to compare the expected returns for each 60/40 ETF.

 

The projected performance across these similar allocations tends to converge, but ESG-focused options from iShares and BMO may have extra appeal, not for their expected performance but for the way that they invest. When you look across the range of issuers, you do not see one that stands out dramatically, except perhaps for Mackenzie’s offering, which at 5.18% is higher than the average expected return of 5.11% across the seven ETFs.

 

Taking the Next Step

The systematic approach provided by Asset-Allocation ETFs gives DIY investors the simple tool they need to confidently select an ETF that aligns with their financial goals. And don’t think that this is fine for you in the beginning but once your portfolio gets to $500,000, you need to graduate to individual ETFs or even individual stocks. In my opinion, the availability of these ETFs “solves” investing. All you need to do is to buy one that you find suitable, start investing, and keep going.

 

I encourage you to explore the provided tables and think about whether any of the reviewed ETFs fit your investment needs. There are always more to choose from!

 

* Calculations made using the Institute of Financial Planning and FP Canada Standards Council™ Projection Assumption Guidelines (2024).

 

This is the 277th blog post for Russ Writes, first published on 2025-01-27

 

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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.

 

Photo by Markus Winkler