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Strategy Lab How TD Bank just missed an open goal with its managed ETF portfolios

Andrew Hallam is the index investor for Strategy Lab. Globe Unlimited subscribers can view his model portfolio here and read more in the series online here.

TD has the ball in front of an open goal. The goalie lies on the grass, enjoying a sandwich break. TD just needs to shoot. But then, the big green player decides to get fancy. TD pulls the ball onto its foot before bouncing it up and down.

Of course, that sounds foolish. But Toronto-Dominion Bank just did something similar. They recently launched some Managed ETF Portfolios. Each fund contains individual ETFs. TD's Managed Portfolio prospectus says, "The portfolio adviser uses strategic asset allocation to seek to achieve the fundamental investment objective of the Portfolio." It's unclear how much TD will alter the allocations, year to year. But any amount of strategic allocation would be like dancing with the ball when the net is clearly open. Vanguard's researchers Joseph Davis, Roger Aliaga-Diaz and Charles Thomas published a report that looked at popular metrics used to predict stock-market returns. They examined price-to-earnings ratios; cyclically adjusted price-to-earnings ratios; trailing dividend yields; corporate earnings growth trends; and a consensus of predicted earnings growth. They then looked at five different measurements of economic fundamentals, followed by three different multivariable valuation models.

They concluded that, "Stock returns are essentially unpredictable at short horizons … this lack of predictability is not surprising given the poor track record of market-timing and related tactical asset allocation strategies."

TD Bank should have created a "couch potato" ETF. No Canadian fund company has bothered to make that move. That's a pity. It would be cheap to manage, profitable and popular for investors. Like a classic DIY couch-potato portfolio, TD could have used just three ETFs: a Canadian stock ETF, a global stock ETF and a Canadian bond ETF. Once a year, they could rebalance. No speculating. No monkey games.

That might sound too easy. But it beats playing footsie. Two years ago, I wrote about six blended iShares ETFs. They included a Balanced Income Core Portfolio (CBD), a Balanced Growth Core Portfolio (CBN), a Conservative Core fund (XCR), a Growth Core fund (XGR), an Alternatives Completion fund (XAL) and a Global Completion fund (XGC). Like TD's Managed ETF Portfolios, each represents a complete portfolio in a single ETF.

But iShares stumbled over their feet. Instead of sticking to a constant allocation, they danced around. They played forecasting games with a cloudy crystal ball. Two years ago, I showed how couch-potato portfolios gave each of them a beating over the previous five years.

Not a single thing has changed. In fact, simple couch-potato portfolios have continued to pull ahead. But not everybody wants to DIY. Many people would love to have a couch-potato ETF. Tangerine's blended portfolios of index funds show how they might perform. They cost 1.07 per cent a year. That isn't cheap by index fund standards. But Tangerine's humility is a potent little weapon. They don't juggle their holdings based on speculation. They just rebalance once a year. That's why they continue to stomp their fancy iShares cousins.

The best-performing blended iShares fund over the past five years was the Balanced Growth Core Portfolio. The stock-heavy fund has just 14.8 per cent in bonds. It averaged 7.76 per cent annually over the five years ending Feb. 28, 2017. Yet it only beat one of Tangerine's blended index funds. It beat Tangerine's Balanced Income Fund, which averaged 5.36 per cent annually over the same time period. But it contains just 30 per cent in stocks. It has 70 per cent in bonds.

Tangerines other index funds made the iShares funds look silly. So how could TD raise the bar to beat Tangerine? Simple. Create low-cost couch-potato ETFs. These funds would win because they would cost even less.

That's the open goal that TD Bank just missed.

iShares versus Tangerine

Fund/PortfolioSymbolThree-Year ReturnsFive-Year Returns
iShares Balanced Income Core PortfolioCBD-T5.29%5.77%
iShares Balanced Growth Core PortfolioCBN-T6.18%7.76%
iShares Conservative Core fundXCR-T3.35%3.27%
iShares Growth Core fundXGR-T5.20%5.68%
iShares Alternatives Completion fundXAL-T5.19%5.47%
iShares Global Completion fundXGC-T5.86%7.27%
Tangerine Balanced Income4.74%5.36%
Tangerine Balanced6.43%8.29%
Tangerine Balanced Growth7.42%9.88%
Tangerine Equity Growth8.18%10.92%

Sources: iShares Canada; Tangerine.ca 

Returns after fees to Feb. 28, 2017.

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