iShares Launches All-in-One ETF Portfolios | Canadian Couch Potato (2024)

Back in February, writing about the newly launched Vanguard’s asset allocation ETFs, I asked why it had taken so long for someone to create an ETF version of the traditional balanced index mutual fund. Now, just 10 months later, Canadian investors who want to build an ETF portfolio with a single trade can choose between two excellent options.

This month, BlackRock Canada launched two one-fund solutions of their own: the iShares Core Balanced ETF Portfolio (XBAL) and the iShares Core Growth ETF Portfolio (XGRO). Like the Vanguard products, these new funds hold several underlying stock and bond ETFs to create a fully diversified portfolio.

Unlike their Vanguard counterparts, however, the new iShares funds are not brand new products. Rather, they’re a reboot of two older funds: the iShares Balanced Income CorePortfolio Index ETF (CBD) and iShares Balanced Growth CorePortfolio Index ETF (CBN). These ETFs had been around since 2007, but they never gained meaningful assets, probably due to their relatively high fees (about 0.75%) and confused strategy (non-traditional indexes, sector funds).

The revamped versions are far more appropriate for Couch Potato investors, as they include only cap-weighted index funds covering the major asset classes. XBAL has a long-term target of 40% bonds and 60% stocks, while XGRO is more aggressive with 20% bonds and 80% stocks. The overall asset mix is broken down as follows:

Asset classXBALXGRO
Canadian bonds32%16%
US bonds8%4%
Canadian stocks15%20%
US stocks27%36%
International stocks (developed)15%20%
Emerging markets stocks3%4%
100%100%
Source: BlackRock Canada

According to the funds’ literature, “it is not expected that frequent changes would be made to [the ETFs’] long-term strategic asset allocation and/or asset class target weights,” which suggests there will be no tactical shifts based on market conditions. That’s good news, since these shifts usually add no value.

Popping the hood

Let’s take a look at how these two ETFs are built, including their individual components and the strategy used to combine them into a diversified portfolio.

The underlying ETFs used to get this exposure includes a combination of Canadian and US-listed funds:

Canadian bondsiShares Core Canadian Universe Bond Index ETF (XBB)
iShares Cdn Short-Term Corporate + Maple Bond Index ETF (XSH)
US bondsiShares U.S. Treasury Bond ETF (GOVT) *
iShares Broad USD Investment Grade Corporate Bond ETF (USIG) *
Canadian stocksiShares S&P/TSX Capped Composite (XIC)
US stocksiShares Core S&P Total U.S. Stock Market ETF (ITOT) *
International stocks (developed)iShares MSCI EAFE IMI Index ETF (XEF)
Emerging markets stocksiShares Core MSCI Emerging Markets Index ETF (IEMG) *
* = US-listed ETF

None of the foreign currency exposure is hedged on the equity side, so any appreciation in the Canadian dollar will negatively affect the ETFs’ returns, while a falling loonie will give them a boost. This is a good long-term strategy: the research is clear that in Canada equity portfolios with exposure to foreign currencies actually have lower volatility than those that try to hedge this risk.

On the bond side, however, all of the US-dollar exposure is hedged. This, too, is the right strategy to use with fixed income. (For more on why it’s important to hedge currency exposure in fixed income, listen to my recent podcast interview with Todd Schlanger, one of the architects behind Vanguard’s asset allocation ETFs.)

As for rebalancing, this will likely be done regularly using new cash flows, which are likely to be significant as the revamped ETFs attract new investors. If that’s not enough, BlackRock says the ETFs “would not be expected to deviate from the asset class target weights by more than one-tenth of the target weight for a given asset class.” In other words, if the target for Canadian bonds is 32%, the fund would be rebalanced if that asset class was over- or underweight by 3.2 percentage points.

iShares vs. Vanguard: How do they differ?

If you’re already familiar with Vanguard’s asset allocation ETFs, you’ve noticed that these new iShares offerings are quite similar to the Vanguard Balanced ETF Portfolio (VBAL) and the Vanguard Growth ETF Portfolio (VGRO), right down to the names and ticker symbols. But the iShares ETFs have a few differences in strategy:

No international bonds. The fixed income allocation of the iShares ETFs is made up of 80% Canadian and 20% US bonds, with no allocation to international bonds. The Vanguard asset allocation ETFs, by contrast, include a blend of Canadian, US and global fixed income.

More corporate bonds. The Vanguard ETFs use only broad-market bond funds, which include mostly government bonds and a smaller amount of corporates. The new iShares funds tilt more toward corporate bonds by adding XSH as about 20% of the Canadian fixed income allocation, and by splitting the US component equally between Treasury bonds and corporates. This makes the iShares funds slightly more risky than their Vanguard counterparts, though all of the bonds are investment grade (no high-yield bonds).

A different mix of Canadian, US, and international equities. XBAL and XGRO allocate a greater share to US stocks (45% of the overall equity allocation) compared with their Vanguard counterparts (40%). The share allotted to Canadian stocks is correspondingly lower at 25% of the overall equity target, compared with 30% in the Vanguard funds.

In both the iShares and Vanguard products, overseas stocks make up about 30% of the equity allocation, but emerging markets make up a smaller proportion in XBAL and XGRO compared with VBAL and VGRO.

Here is the approximate breakdown in each fund:

Equity asset classXBALVBALXGROVGRO
Canada15%18%20%24%
US 27%24%36%32%
International (developed)15%14%20%19%
Emerging markets3%4%4%5%

Lower fee. iShares has always been very competitive on fees, and with these new ETFs they have undercut Vanguard by four basis points: the new funds both have a management fee of 0.18%, compared with 0.22% for VBAL and VGRO. (This includes the fees on the underlying ETFs: there is never any double-dipping on fees in “funds of funds.”) Once taxes are added to that management fee, expect the MER of the iShares funds to be about 0.20% or 0.21%.

Before you buy

I’ve done my best to help investors compare the strategies of the iShares and Vanguard all-in-one ETFs, which leads to the obvious question: which one is a better choice?

Based on what we know about their strategies and costs, I have no strong preference for one over the other. They are all excellent products, and they’re likely to perform very similarly over time, with any variance being the result of randomness and not any structural feature.

If you’re doing more comparison shopping, here’s an important thing to be aware of: because XBAL and XGRO are new mandates for ETFs with a relatively long history (their predecessors were launched 11 years ago), their past performance history is entirely meaningless. As of November 30, 2018, for example, XBAL’s webpage reports an annualized return of 7.41% over the last 10 years. But this performance was what the old CBD racked up with a completely different strategy, so it has zero relevance going forward.

If you’re interested in seeing how the XBAL and XGRO strategies would have performed in the past (using index data minus the ETFs’ current fee), my colleague Justin Bender has backtested both the iShares and Vanguard asset allocation ETFs and published the results on his Model ETF Portfolios page.

Justin’s backtest suggests you can spare yourself any hand-wringing over the iShares vs. Vanguard decision. Over the 20-year period ending November 30, the performance of the comparable ETFs was within a couple of basis points in both returns and volatility.

Avoid a New Year’s surprise

Just one more caveat: if you’re attracted to XGRO and you’re planning to invest in a taxable account, do not buy this ETF until January 2019. That’s because the new mandate of the fund resulted in significant capital gains being realized as the old holdings were sold and replaced. When ETFs and mutual funds realize gains, they pass these along to unitholders at the end of the year. That means if you buy these ETFs in late December, you’ll pay taxes on the capital gains realized before you owned the units—it’s like being handed the bill for dinner at a restaurant even though you showed up after dessert.

iShares has estimated that the capital gains distribution for XGRO will be a whopping 6.84% of its net asset value. If that number is accurate, a $10,000 purchase (about 500 shares) could result in a capital gain distribution of $684, half of which would be taxable at your marginal rate. You can avoid this tax trap by waiting until the new year to purchase the ETF. (iShares does not expect there to be a similar capital gain distribution for XBAL.)

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iShares Launches All-in-One ETF Portfolios | Canadian Couch Potato (2024)

FAQs

Does the couch potato portfolio work? ›

While the Canadian Couch Potato portfolio won't beat the market, it is unlikely to drastically underperform it either. It's intended to capture the long-term average market return, which combined with steady contributions can set investors up for a solid retirement.

Should you put all your money in one ETF? ›

Investing in an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single financial company. As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (up to a point) if some stocks within the ETF fall.

Is it smart to only invest in ETFs? ›

So if you're happy with a portfolio that performs comparably to the stock market as a whole, then sticking to S&P 500 ETFs alone isn't a bad idea. However, if you assemble a portfolio of individual stocks that perform better, you might enjoy a 12% or 15% return over time -- or more.

What percentage of portfolio should be in one ETF? ›

"A newer investor with a modest portfolio may like the ease at which to acquire ETFs (trades like an equity) and the low-cost aspect of the investment. ETFs can provide an easy way to be diversified and as such, the investor may want to have 75% or more of the portfolio in ETFs."

What are the disadvantages of couch potatoes? ›

Sitting for long hours is associated with several health issues including a higher risk of cardiovascular disease. You might also experience poor mood due to prolonged sitting. It can also become difficult to regulate your blood pressure when you are an active couch potato.

What are the returns on couch potato investment? ›

The Scott Burns Couch Potato Portfolio is a Medium Risk portfolio and can be implemented with 2 ETFs. It's exposed for 50% on the Stock Market. In the last 30 Years, the Scott Burns Couch Potato Portfolio obtained a 8.16% compound annual return, with a 8.73% standard deviation.

What are the cons of all in one investing? ›

Cons of All-in-One ETFs

Investors don't control which stocks or bonds are included in the fund or their allocated percentages. This means that if you want to adjust to a higher-risk fund or change your investment strategy, you will need to sell all your investments.

How many S&P 500 ETFs should I own? ›

SPY, VOO and IVV are among the most popular S&P 500 ETFs. These three S&P 500 ETFs are quite similar, but may sometimes diverge in terms of costs or daily returns. Investors generally only need one S&P 500 ETF.

Is 20 ETFs too many? ›

However, it's important to balance diversification and complexity. Holding too many ETFs can limit gains and make it harder to manage, while holding too few can increase risk. Aim for around 10 to 20 diversified ETFs that align with your goals and risk tolerance.

Why shouldn't you just invest in the S&P 500? ›

Similarly, the index is made up of only stocks. When the stock market is experiencing a general downturn, there are no other asset classes (like bonds and REITs) to counterbalance that loss. This is why investing only in the S&P 500 does not help the investor minimize risk.

Why I don't invest in ETFs? ›

Commissions and Expenses

Every time you buy or sell a stock, you might pay a commission. This is also the case when it comes to buying and selling ETFs. Depending on how often you trade an ETF, trading fees can quickly add up and reduce your investment's performance.

Is there a downside to investing in ETFs? ›

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

What is a lazy portfolio? ›

A Lazy Portfolio is a collection of investments that requires very little maintenance. It's the typical passive investing strategy, for long-term investors, with time horizons of more than 10 years. Choose your investment style (Classic or Alternative?), pick your Lazy Portfolios and implement them with ETFs.

How long should you hold ETFs? ›

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

What is the 70 30 ETF strategy? ›

This investment strategy seeks total return through exposure to a diversified portfolio of primarily equity, and to a lesser extent, fixed income asset classes with a target allocation of 70% equities and 30% fixed income. Target allocations can vary +/-5%.

Is it worth investing in a good sofa? ›

Buying a sofa is one of the most important investments you're likely to make for your home. In the living room it's a piece for lounging, reading, eating, entertaining, watching TV, and even napping, so it makes sense that we take the time to invest in one that's going to last for years to come.

What is the couch potato portfolio strategy? ›

The couch-potato portfolio is an indexing strategy that requires only annual monitoring and rebalancing but offers significant returns in the long run. Couch potato portfolios invest equally in two assets, common stocks, and bonds (via index funds or ETFs), and maintain this 50/50 split year in and year out.

Are lazy portfolios good? ›

Lazy portfolios are designed to perform well in most market conditions, making them the perfect choice for long-term investors.

What percent of Americans are couch potatoes? ›

We found that 50% of people say they spend 7 or more hours a week on their sofa.

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