Taking a simple approach to investing does not make you a simpleton.
So keep an open mind about some exchange-traded funds that are set to begin trading on Thursday on the Toronto Stock Exchange. A lot of new offerings in the smoking-hot ETF business these days are about trying to make clients feel smart by helping them invest in hot sectors or novel strategies. The three new balanced ETFs from the low-cost investing giant Vanguard wow you with a beautiful simplicity.
Each packs a globally diversified portfolio covering stocks and bonds into a single fund – a "one-ticket" solution, as they say in the investing biz. Balanced funds have long been a favourite in the mutual fund world. Now the ETF business has a low-cost version of its own.
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The Vanguard Conservative ETF Portfolio (VCNS-TSX) has a 40/60 mix of stocks and bonds, respectively, the Vanguard Balanced ETF Portfolio (VBAL-TSX) has a 60/40 mix and the Vanguard Growth ETF Portfolio (VGRO-TSX) is 80/20. Each has a management expense ratio that should come in around 0.24 per cent, less than one-quarter the cost of the average comparable balanced mutual fund.
Each of the three Vanguard funds invests in seven of the company's own ETFs covering Canadian, U.S. and international bonds, as well as the shares of large, medium and small companies in Canada, the United States and in both developed and emerging markets around the world (there are no additional costs for the underlying ETFs).
The portfolios are rebalanced frequently to keep the target mix intact.
Vanguard's new ETFs are built on the idea that a good part of investing success is based on having a well-diversified, global mix of stocks and bonds. Atul Tiwari, head of Vanguard Investments Canada, contrasts this approach against what he described as the "headline-grabbing niche ETFs" being issued these days.
"Vanguard's philosophy is that investors are better served by taking a longer-term view in their portfolios and investing in less risky, less esoteric products," he said.
Balanced funds accounted for 51 per cent of mutual fund industry's $1.5-trillion in assets at the end of last year, more than any other category of fund by far. Investors love them, and so do advisers. Can balanced ETFs break into this lucrative market?
BlackRock's iShares franchise has for years offered a pair of TSX-listed balanced products – the iShares Balanced Income CorePortfolio Index ETF (CBD) and the iShares Balanced Growth CorePortfolio Index ETF (CBN). Both are small in size, comparatively expensive and more elaborate in construction than Vanguard's new products. There are a few other balanced-like ETFs today, but they're primarily designed to kick out monthly income. The Vanguard balanced funds will make quarterly cash distributions that have in the past two years yielded 1.8 per cent to 2 per cent.
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Vanguard sees three markets for its new ETFs – investors looking for a simple but effective portfolio-building tool, advisers who want the same thing so they can devote more of their time to financial planning rather than managing investments, and anyone who wants a solid portfolio core that they can tweak with a few additional funds, stocks or other securities.
Have you been scoping out ETFs as an investment for your registered retirement savings plan, but feeling crushed by the job of selecting a few from among the 600 or so variants listed on the TSX? As long as you plan to let your money compound for at least five years, and preferably 10 or more, the new Vanguard balanced ETFs are an ideal entry point.
In fact, they're simple enough to steal some business away from robo-advisers. For a fee of roughly 0.5 of a percentage point, plus another 0.2 of a percentage point or so in product fees, a robo-adviser will manage a personalized mix of ETFs for you. The Vanguard balanced funds basically do the same job at a lower cost.
One proviso with the Vanguard funds, as with all ETFs, is that you will generally have to pay brokerage commissions of $7 to $10 to buy or sell shares. National Bank Direct Brokerage, Qtrade, Questrade, Scotia iTrade and Virtual Brokers are online brokers that offer some version of zero-cost ETF investing.
The biggest drawback to Vanguard's balanced ETFs just might be their straightforwardness. In a bull market like we're in today, a cult of complexity rules. People who buy into this thinking are going to regret it when the bull market fades and basic principles such as diversification reassert their value.