This blog post is adapted from my French column with the newspaper Les Affaires.

New Vanguard’s asset allocation ETFs

The February launch of Vanguard’s asset allocation ETFs made a big splash among market observers in the passive fund world. In his March column, my colleague from Les Affaires Yves Bourget expressed serious reservations about them. I encourage you to read his excellent paper – it’s full of useful information. That will give you the chance to weigh two different views on these products that, in my opinion, deserve your attention. Here are my 10 reasons to love these funds:

1. These are index funds

Life is full of unexpected events. If you are investing to plan for your financial future, why add to the randomness? With an index fund, you know you will earn the market’s rate of return and not more – but not less either. This is a bit like spending the night at a Holiday Inn: it probably won’t make you say “wow”, but you’ll get exactly what you were promised.

2. They address three specific risk profiles

As Mr. Bouget explains in his column, the three funds have exactly the same composition; only the allocation between stocks and bonds varies, depending on the profile: conservative, balanced or growth. In addition, the Vanguard Canada website offers a questionnaire to assess your tolerance for risk which may help you to choose which of these three funds is best for you.

3. Their simplicity

Asset allocation ETFs are built using seven stock and bond ETFs, each covering a specific market segment. The strategy is straightforward, and management is not based on any predictions. Plus, Vanguard is committed to maintaining this same asset allocation in the future.

4. Their modest fees

When you go fishing, it’s important to not let the worm eat the fish. I calculate the expected return on a balanced portfolio with 60% stocks and 40% bonds to be around 5% at the moment. But, if you agree to fees that are too high, you will probably be relieved of a significant portion of the return on your portfolio. In this context, the modest 0.22% fees these three ETFs charge give new meaning to the word “invest.”

5. Diversification by security

The new ETFs hold a mind-boggling total of 25,000 securities – about 10,000 stocks and 15,000 bonds. Each security has such a small allocation that five Enrons could happen at the same time in your portfolio without causing long-term losses.

6. Diversification by sector

Each of the ten stock market sectors are well represented, such that the portfolio is partially hedged against a crisis that could impact a particular market sector (recent examples are the 2000-2002 dot-com crash and the 2008 financial crisis).

7. International diversification

Are you concerned about foreign policy? Are you alarmed by protectionism, populism, unfair tariffs levied on Canadian products? You have good reason to be, and the best defence against political risks is international diversification. Vanguard’s asset allocation ETFs invest in close to 50 countries. What could be better?

8. You are not locked in

Unlike many investment products, these ETFs have no restrictions whatsoever on divestment. You’re not satisfied? Place a sell order with your broker and you’re done. No exit fee, no resale restrictions. Period.

9. The psychological benefit

My colleagues and I often notice that investors tend to behave in a disciplined manner when an investment vehicle incorporates popular asset classes into an “all-in-one” solution. On the other hand, when the portfolio is comprised of individual funds or, even worse, individual securities, human nature makes us want to churn the portfolio. For example, if emerging market shares are listed as individual components and they underperform for a few years, many people would be tempted to throw in the towel and sell them, probably at the wrong time. However, when emerging market shares are incorporated into a balanced fund, you only see the performance that really counts, which is the overall performance of the portfolio.

10. The bond risk is worth it

Mr. Bourget warns us against bond risk. He is right that bonds, even of the highest quality, carry risks. I would nevertheless like to put this risk into context. Firstly, Mr. Bourget’s column mentions that the three bond funds included in the Vanguard asset allocation ETFs had losses of between -4% and -7% from July 2016 to February 2018, which is correct. However, this calculation only takes into account the decline in share value of these funds. If you take the funds’ interest income into account, the loss is reduced to a range of between -1% and -2%.

Now let’s take a peek at our history book. Bonds lost money on average in one of every nine years. Since 1926, the worst annual loss recorded for U.S. bonds was 5.1% in 1994. By contrast, stocks lost money in one of every three years and a bear market can erase a third of their value in a few months. So, bonds are risky, but much less than stocks. Last point, the risks incurred by bondholders are worth it: they tend to pay a higher interest rate than short term investments by a margin of at least 1%. Bond risk is therefore rewarded.


The Vanguard asset allocation funds are neither perfect nor devoid of risk. And I won’t argue with the notion that investors can build a portfolio themselves that is better suited to their situation by selecting individual asset class ETFs, so long as they have the required knowledge. But for all those who do not have the knowledge, the time or the desire to go to all the trouble, I would challenge anyone to come up with a more attractive alternative.

Vanguard Canada’s asset allocation funds at a glance:

  Vanguard Conservative ETF Portfolio Vanguard Balanced ETF Portfolio Vanguard Growth ETF Portfolio
Bonds 60% 40% 20%
Canadian bonds 35% 11%
U.S. bonds (foreign currency risk hedged) 11% 7% %
International bonds (foreign currency risk hedged) 14% 10% 5%
Stocks 40% 60% 80%
Canadian equities 12% 18% 24%
U.S. equities 15% 23%
International equities 10% 15%
Emerging market equities 3% 4% 6%


iY. Bourget, “Les nouveaux FNB de répartition d’actifs Vanguard : la simplicité, mais à quel coût?”,
-+ Les Affaires, March 10, 2018.