Asset allocation ETF

An asset allocation ETF (exchange-traded fund) typically combines equity and bond ETFs into a one-fund portfolio.Vanguard Canada, The research behind our asset allocation ETFs, September 5, 2018, viewed January 3, 2019.Canadian Couch Potato, Vanguard’s One-Fund Solution, February 5, 2018, viewed January 2, 2019Justin Bender, Vanguard’s Hip New Asset Allocation ETFs, February 8, 2018, viewed January 3, 2019.Justin Bender, Breaking News, Familiar Ground: iShares Asset Allocation ETFs, December 13, 2018, viewed January 2, 2019Canadian Couch Potato, iShares Launches All-in-One ETF Portfolios, December 24, 2018, viewed January 3, 2018. The asset allocation varies for each product, with well established funds including "all-equity", "growth" (80% equities) "balanced" (60% equities), "conservative" (40% equities) and "income" (20% equities) profiles. Those with a 'balanced' mix are the ETF equivalent to balanced mutual funds and are sometimes known as balanced ETFs.
The stock and bond components of asset allocation ETFs are diversified by geography, i.e. they offer global diversification.BlackRock, Amendment No. 2 to the prospectus of the iShares Funds, December 11, 2018, viewed January 12, 2019. They invest in several other ETFs from the same providers to build up complete portfolios containing thousands of stocks and bonds. The constituent ETFs are passively managed; more specifically they are capitalization-weighted index ETFs. Asset allocation ETFs are rebalanced by the providers to keep the asset allocation in line with the policy of the funds.See the providers' websites for details about their rebalancing strategies.
The management fees on asset allocation ETFs are about 0.2%, much cheaper than any other one fund solution in Canada, and cheaper than robo-advisors.Johnathan Chevreau, Everything an investor needs in a single ETF: Vanguard launches gamechanging balanced single-ETF portfolios with low fees, MoneySense, February 1, 2018, viewed January 3, 2019Rob Carrick, Have Vanguard's new balanced ETFs made robo-advisers obsolete? , The Globe and Mail, May 29, 2018, viewed January 4, 2019. Investors only pay the management expense ratio (MER) of the balanced ETFs, not that of the underlying funds, i.e. there is no "double-dipping".Rudy Luukko, Vanguard launches three ETF portfolios, Morningstar, February 2, 2018, viewed January 4, 2019.
==Available products==
===Well established funds===
As of September 2023, eleven such ETFs are available on the Toronto Stock Exchange (TSX), have been around for over a year, have over $50M in assets, and are regularly discussed on the Financial Wisdom Forum:
Ticker (TSX)	Fund name 	Provider 	Stocks (%)	Bonds (%)
VCIP 	Conservative Income ETF Portfolio 	Vanguard Canada 	20 	80
VCNS 	Conservative ETF Portfolio 	Vanguard Canada 	40 	60
VBAL 	Balanced ETF Portfolio 	Vanguard Canada 	60 	40
VGRO 	Growth ETF Portfolio 	Vanguard Canada 	80 	20
VEQT 	All-Equity ETF Portfolio 	Vanguard Canada 	100 	0
XCNS 	Core Conservative Balanced ETF Portfolio	Ishares (BlackRock)	40 	60
XBAL 	Core Balanced ETF Portfolio 	Ishares (BlackRock)	60 	40
XGRO 	Core Growth ETF Portfolio 	Ishares (BlackRock)	80 	20
XEQT 	Core Equity ETF Portfolio 	Ishares (BlackRock)	100 	0
ZBAL 	Balanced ETF 	BMO 	60 	40
ZGRO 	Growth ETF 	BMO 	80 	20
The directly competing Vanguard, Ishares and BMO products offer the same overall stock:bond split. For example, VBAL, XBAL and ZBAL all contain 60% equities and 40% bonds. Vanguard, Ishares and BMO will hedge the currency exposure of foreign bonds, but not of foreign stocks.
Where they differ is on how the stocks and bonds are allocated by geography. Here is how the Vanguard and Ishares products compared as of January 2019:
* for stocks, the Vanguard products have a slightly higher home country bias, with 30% domestic and 70% foreign content, versus 25/75 at Ishares
* the proportion of US stocks is greater in the Ishares products
* for bonds, the Vanguard products have more foreign content (60% domestic/40% foreign) than the Ishares ones (80/20)
* the Ishares ETFs have no international (developed ex-US) bonds
* Ishares overweights corporate bonds, whereas Vanguard does not 
Despite these differences, backtesting by Justin Bender indicates the competing products from Vanguard and Ishares would have performed very similarly over a 20 year period.
Vanguard has indicated that the home bias of their asset allocation ETFs may decrease over time.Vanguard Research, Vanguard asset allocation ETFs: A simple yet sophisticated approach to portfolio construction, August 2018, viewed January 11, 2019 The ex-Canada stocks and bonds will be allocated according to market weights.
===New funds===
The asset allocation ETF category is growing rapidly. Sticking with the top-three providers by assets under management:
* On February 15, 2019, BMO launchedBMO Asset Management Inc., BMO Asset Management Inc. Launches Three Asset Allocation ETFs, A New Way to Access BMO ETFs, February 15, 2019, viewed March 3, 2019. the BMO Conservative ETF (ZCON) with 40% equity and 60% fixed income
* In August 2019, Ishares launched the iShares Core Income Balanced ETF Portfolio (XINC) with 20% equity and 80% fixed income
These products have the potential to make it to the "well-established" list above, but have not gathered $50M or more yet.
For other recent offerings, the general advice on the FWF is to wait a year or so to invest in any new ETF, to see if the new product gathers assets and trading volume.
===ESG funds===
Investors concerned about environmental, social and governance (ESG) issues have options in the asset allocation ETF space. This includes:
*BMO Balanced ESG ETF (ZESG)
*Four offerings from Ishares, with equity proportions from 40% to 100%
These ETFs differ significantly from mainstream asset allocation ETFs in several respects, such as percentages of equity regions, equity sector percentages, number of stocks included (diversification), and type of fixed income.Canadian Couch Potato, Inside the iShares ESG Asset Allocation ETFs, November 23, 2020, viewed November 25, 2020. 
See the ESG portfolio screening article for a general discussion about ESG investing.
==Advantages==
* Ultimate simplicity
* Behavioral benefits: 
# the volatility of balanced ETFs is less than that of most of the underlying components, helping nervous investors stay invested during equity bear marketsDanH post in topic "Vanguard Launch of Balanced Asset Allocation ETFs", Financial Wisdom Forum, February 1, 2018, viewed January 4, 2019; 
# enforces discipline by preventing investors from tweaking their portfolios in reaction to the newsAndrew Hallam, Why your returns may be better with all-in-one ETFs than individual funds, The Globe and Mail, September 16, 2019, viewed June 11, 2020.
* No rebalancing needed
* Reduce the number of trades
* Buy a single fund across all accounts (if desired)
==Drawbacks==
* MER will be slightly higher than the weighted average of the constituent ETFs, for example the Vanguard products cost 5 to 7 basis points more than the underlying ETFs
* Not as tax-effective as simple index portfolios consisting of 3-5 ETFs, if using multiple accounts
* Except for XBAL and XGRO, no pre-authorized contributions and automatically reinvested distributions (as opposed to what is possible for mutual funds), although some discount brokers might offer to reinvest distributions
==Usage and suitability==
Asset allocation ETFs have the same potential uses as balanced mutual funds, and more. With the wide ranges of asset mixes now available, they can suit investors with very diverse risk profiles, ages or portfolio sizes.
===New investors and small accounts===
* Ideal for novice investors
* Ideal for small accounts, including registered ones (such as Registered Retirement Savings Plans, Tax-Free Savings Accounts, or Registered Education Savings Plans)
===Larger accounts and more experienced investors===
* Also appropriate for larger accounts, if the advantages listed above are thought to outweigh the drawbacks
* Simplify the portfolios of older investors who are concerned about potentially becoming cognitively impaired in the futureShakespeare post in topic "Vanguard Launch of Balanced Asset Allocation ETFs", Financial Wisdom Forum, February 2, 2018, viewed January 4, 2019, or are losing interest in portfolio managementAltaRed, post in topic "Vanguard Launch of Balanced Asset Allocation ETFs", Financial Wisdom Forum, February 2, 2018, viewed January 4, 2019
* Interesting option for non-registered accounts that might eventually be transferred to a spouse at cost (see Death and taxes: spousal rollovers)
==Initial implementation==
# Open an account at a discount brokerage, if not already done
# Select one of the well established ETFs listed above based on your desired asset allocation (see also portfolio design and construction, and investment policy statement). Online questionnaires such as Vanguard's may help.
# Calculate how many whole units you can buy with currently available funds, based on the current ask price (when doing the calculation, don't forget to subtract the commission from available funds first)
# Enter a limit order at the ask price (or a few cents above)
# Check that your order has been filled
# If using a non-registered account, record your initial adjusted cost base for tax purposes
==How to handle distributions and new contributions==
ETFs pay their distributions in cash, not in additional units. Therefore, cash will accumulate into the brokerage account and will need to be reinvested to avoid creating a drag on returns over the long term. Also, new funds will periodically become available to contribute to the account, if the investor is in accumulation mode. There are several (non-mutually exclusive) strategies to handle these distributions and new contributions in a way that minimizes trade commissions:
* Use a brokerage that does not charge commissions to purchase ETFs
* Wait until available cash is enough that the commission will be less than 0.5-1% of the amount of the new purchase
* In the mean time, cash can be parked in a fund-based investment savings account
* Use a synthetic dividend reinvestment plan (DRIP) if offered by the broker
==Notes==
==See also==
* Simple index portfolios
==Further reading==
*
*
*
==References==
==External links==
===Articles and blog posts===
* Vanguard, iShares or BMO? A side-by-side comparison of the new all-in-one diversified ETF portfolios, The Globe and Mail, February 2019
*Vos placements en formule tout inclus (Stéphanie Grammond, La Presse, March 10, 2019)
*Choosing your ideal Vanguard asset allocation ETF, Canadian Portfolio Manager blog, August 29, 2019
*Home bias in the Vanguard asset allocation ETFs, Canadian Portfolio Manager blog, August 20, 2019
* How to set up a hands-off ETF portfolio (addresses asset allocation ETFs), Canadian Couch Potato blog, February 2020
*Asset Allocation ETF Showdown: Vanguard vs. iShares, Canadian Couch Potato blog, December 2020
*Inside the iShares ESG Asset Allocation ETFs, Canadian Couch Potato blog, Nov. 2020
*Inside the BMO Asset Allocation ETFs, Canadian Couch Potato blog, January 2021
===Videos===
* Asset Allocation ETFs: Vanguard vs. iShares (VBAL, VGRO, VEQT, XBAL, XGRO, XEQT), Justin & Shannon Bender youtube channel
* Asset Allocation ETFs: BMO vs iShares (ZCON, ZBAL, ZGRO), Justin & Shannon Bender youtube channel
* How to Choose Your Asset Allocation ETF, Justin & Shannon Bender youtube channel
* Sustainable Investing with the iShares ESG ETF Portfolios, Justin & Shannon Bender youtube channel
Category:Getting started
Category:Equities
Category:Bonds
Category:Portfolio design and construction
Category:Mutual funds and ETFs
Category:Investment management