As many of you know, we deploy a hybrid investing strategy where we invest in both dividend paying stocks and index ETFs. This strategy provides us with a predictable monthly dividend income as well as asset and geographical diversification. Lately I have come to appreciate the all-in-one ETFs – so much that I have been recommending new investors to start off with these all-in-one ETFs rather than buying individual dividend paying stocks. I typically suggest building up an investment portfolio that consists of a solid selection of ETFs before venturing to the world of individual dividend stocks. What I really like about these ETFs is that they are simple. Since they are all-in-one ETFs, there’s no need to re-balance regularly. Furthermore, these ETFs provide investors with a complete global indexed portfolio, so you get both asset and geographical diversification.
Although we don’t use these all-in-one ETFs like VGRO, VBAL, XGRO, XBAL, ZGRO, ZBAL, etc. in our dividend portfolio, we have been looking to simplify our kids’ RESPs. We started to wonder, which all-in-one ETF is the best for our kids? VGRO vs. XGRO vs. ZGRO, which one would come out ahead? And VBAL vs. XBAL vs. ZBAL, which one would come out ahead?
Table of Contents
- Our Old RESP Portfolios
- Problems with the old RESP Portfolios
- RESP Asset Allocation – Original Plan
- Vanguard All-in-One ETFs – VGRO, VBAL, VCNS
- iShares All-In-One ETFs – XGRO, XBAL, XCNS
- BMO All-In-One ETFs – ZGRO, ZBAL, ZCON
- All-In-One ETF Comparisons
- RESP Asset Allocation – New Plan
Our Old RESP Portfolios
When Baby T1.0 was born, the Canadian Couch Potato’s model portfolios used a five ETF fund approach for constructing a balanced investing portfolio. Back then, there were no ex-Canada ETFs trading in the Canadian stock exchange available. This meant we had to utilize ETFs traded in the US stock exchange, like VTI and VXUS.
When Baby T2.0 was born, ex-Canada ETFs like VXC and XAW were available. We originally went with VXC because I liked Vanguard but after comparing VXC vs. XAW in detail, we switched from VXC to XAW.
Baby T1.0’s RESP
- Vanguard FTSE Canada Index ETF (VCE.TO) – 30%
- Vanguard Total Stock Market ETF (VTI) – 25%
- Vanguard Total International Stock Market ETF (VXUS) – 30%
- BMO Equal Weight REIT Index ETF (ZRE.TO) – 10%
- Vanguard Canadian Short-Term Bond Index ETF (VSB.TO) – 5%
Baby T2.0’s RESP
- Vanguard Canada All Cap ETF (VCN.TO) – 35%
- iShares All Country ex-Canada ETF (XAW.TO) – 60%
- Vanguard Canada Bond Index (VAB.TO) – 5%
For both of these RESPs, the idea is to have a high international exposure. Since both kids are still young, I have decided to hold a small percentage in bonds.
Problems with the old RESP Portfolios
While I liked the multiple-ETF approach, we started to encounter a few problems, mostly with Baby T1.0’s RESP. Because VTI and VXUS are traded in USD, when we purchase these stocks, we have to exchange between CAD and USD. To avoid the 2% Questrade exchange rate, we would utilize Norbert’s Gambit. However, this became quite tedious, especially whenever we wanted to rebalance the portfolio.
Furthermore, since the two portfolios are still small in dollar amount, whenever we receive distributions from the ETFs, it is not possible to DRIP additional shares. In other words, the only time we can dollar cost average is whenever we make a deposit to the RESPs, or when we receive the government grants, like the BC Training and Educational Savings Grant.
RESP Asset Allocation – Original Plan
Given that kids typically start their postsecondary education when they are 18 or 19 years old, this means RESPs have a much shorter investing time frame compared to retirement savings. So as our kids get close to the postsecondary age, it makes sense to allocate a higher percentage of the RESP portfolio toward fixed income.
Given the interest rates are so low, my original plan was to be aggressive for the first 10 years (90% equities, 5% bonds) for each child. We would increase the fixed income allocation as they get closer to postsecondary education age.
Below is our original RESP asset allocation strategy:
|Index||0-10 Yrs||10-15 Yrs||15-18+ Yrs|
I decided not to allocate 60% in bonds for the last column because I believe that interest rates will continue to stay very low for many years. In order for the portfolio to continue growing, it makes sense to have a balanced approach and hold 60% equities and 40% bonds. Since this is a plan, nothing is set in stone. We are always open to adjust the percentages as we see fit.
And as you can see from the intent of this post, we have decided to change our RESP strategy by considering the transition to the all-in-one ETFs.
Vanguard All-in-One ETFs – VGRO, VBAL, VCNS
Below are the three Vanguard all-in-one ETFs that we are considering for reconstructing our RESPs. All of these Vanguard all-in-one ETFs have the same MER of 0.25%.
|Vanguard All-In-One ETFs||Ticker||Asset Allocation||Distribution Yield|
|Vanguard Growth ETF Portfolio||VGRO||80% Equities / 20% Fixed Income||2.33%|
|Vanguard Balanced ETF Portfolio||VBAL||60% Equities / 40% Fixed Income||2.18%|
|Vanguard Conservative ETF Portfolio||VCNS||40% Equities / 60% Fixed Income||2.14%|
Vanguard Growth ETF Portfolio (VGRO)
Vanguard Growth ETF Portfolio seeks to provide long-term capital growth by investing in equity and fixed income securities. The fund will maintain a long-term strategy asset allocation of equity (approximately 80%) and fixed income (approximately 20%) securities.
VGRO holds the following underlying Vanguard funds:
- 32.8% Vanguard US Total Market Index ETF
- 24.2% Vanguard FTSE Canada All Cap Index ETF
- 16.9% Vanguard FTSE Developed All Cap ex North American Index ETF
- 11.7% Vanguard Canadian Aggregate Bond Index ETF
- 6.2% Vanguard FTSE Emerging Market All Cap Index ETF
- 4.5% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 3.7% Vanguard US Aggregate Bond Index ETF CAD-hedged
Vanguard Balanced ETF Portfolio (VBAL)
Vanguard Balanced ETF Portfolio seeks to provide long-term capital growth with a moderate level of income by investing in equity and fixed income securities. The fund will maintain a long-term strategic asset allocation of equity (approximately 60%) and fixed income (approximately 40$) securities.
VBAL holds the following underlying Vanguard funds:
- 24.7% Vanguard US Total Market Index ETF
- 23.7% Vanguard Canadian Aggregate Bond Index ETF
- 18.4% Vanguard FTSE Canada All CAp Index ETF
- 12.6% Vanguard FTSE Developed All Cap ex North America Index ETF
- 8.5% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 7.3% Vanguard US Aggregate Bond Index ETF CAD-hedged
- 4.8% Vanguard FTSE Emerging MArket All Cap Index ETF
Vanguard Conservative ETF Portfolio (VCNS)
Vanguard Conservative ETF Portfolio seeks to provide a combination of income and moderate long-term capital growth by investing in equity and fixed income securities. The fund will maintain a long-term strategy asset allocation of equity (approximately 40%) and fixed income (approximately 60%) securities.
VCNS holds the following underlying Vanguard funds:
- 35.3% Vanguard Canada Aggregate Bond Index ETF
- 16.3% Vanguard US Total Market Index ETF
- 13.5% Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
- 12.4% Vanguard FTSE Canada All Cap Index ETF
- 11.3% Vanguard US Aggregate Bond Index ETF CAD-hedged
- 8.0% Vanguard FTSE Developed All Cap ex North America Index ETF
- 3.2% Vanguard FTSE Emerging Market All Cap Index ETF
iShares, being another financial institution that offers index ETFs, has similar all-in-one or multi-asset ETFs. Interestingly, these ETFs have very similar ticker symbols as the Vanguard ones. The nice thing about these iShares All-In-One ETFs is that the management fee of 0.20% is a little cheaper than the Vanguard ETFs.
|iShares All-In-One ETFs||Ticker||Asset Allocation||Distribution Yield|
|iShares Core Growth ETF Portfolio||XGRO||81.08% Equities / 18.874% Fixed Income / 0.19% Cash||2.43%|
|iShares Core Balanced ETF Portfolio||XBAL||60.97% Equities / 38.65% Fixed Income / 0.37% Cash||2.49%|
|iShare Core Conservative Balanced ETF Portfolio||XCNS||42.06% Equities / 57.66% Fixed Income / 0.28% Cash||2.00%|
iShares Core Growth ETF Portfolio consists of the following underlying iShares funds:
- 38.43% iShares Core S&P Total US Stock
- 19.47% iShares S&P/TSX Capped Composite
- 19.28% iShares MSCI EAFE IMI Index
- 11.99% iShares Core CAD Universe Bond Index ETF
- 3.89% iShares Core MSCI Emerging Markets Index ETF
- 3.05% iShares Core CAD Short Term Corporate Bond Index ETF
- 1.85% iShares Broad USD Investment Grade Corporate Bond ETF
- 1.85% iShares US Treasury Bond ETF
- 0.10% CAD Cash
- 0.10% USD Cash
iShares Core Balanced ETF Portfolio consists of the following underlying iShares funds:
- 28.75% iShares Core S&P Total US Stock
- 24.72% iShares Core CAD Universe Bond Index ETF
- 14.74% iShares S&P/TSX Capped Composite
- 14.23% iShares MSCI EAFE IMI Index
- 6.42% iShares Core CAD Short Term Corporate Bond Index ETF
- 3.80% iShares Broad USD Investment Grade Corporate Bond ETF
- 3.71% iShares US Treasury Bond ETF
- 3.15% iShares Core MSCI Emerging Markets
- 0.20% USD Cash
- 0.13% CAD Cash
iShares Core Conservative Balanced ETF Portfolio consists of the following underlying iShares funds:
- 37.07% iShares Core CAD Universe Bond Index ETF
- 19.52% iShares Core S&P Total US Stock
- 10.45% iShares S&P/TSX Capped Composite
- 10.16% iShares MSCI EAFE IMI Index
- 9.16 iShares Core CAD Short Term Corporate Bond Index ETF
- 5.76% iShares US Treasury Bond ETF
- 5.68% iShares Broad USD Investment Grade Corporate Bond ETF
- 1.93% iShares Core MSCI Emerging Markets
- 0.28% CAD Cash
- 0.18% USD Cash
BMO All-In-One ETFs – ZGRO, ZBAL, ZCON
Being one of the financial institutions in Canada that offer ETFs, it wasn’t a surprise to see BMO offering similar all-in-one/multi-asset ETFs. Again, the tickers are all very similar to the Vanguard and iShare equivalent. The BMO all-in-one ETFs have the same low MER of 0.20% as the iShare all-in-one ETFs.
|BMO All-In-One ETFs||Ticker||Asset Allocation||Distribution Yield|
|BMO Growth ETF||ZGRO||81.04% Equities / 18.91% Fixed Income / 0.05% Cash||2.63%|
|BMO Balanced ETF||ZBAL||61.51% Equities / 38.26% Fixed Income / 0.23% Cash||2.64%|
|BMO Conservative ETF||ZCON||41.54% Equities / 58.19% Fixed Income / 0.27% Cash||2.65%|
BMO Growth ETF (ZGRO)
BMO Growth ETF holds the following underlying BMO ETFs:
- 37.05% BMO S&P 500 Index ETF
- 20.26% BMO S&P/TSX Capped Composite Index ETF
- 16.21% BMO MSCI EAFE Index ETF
- 13.22% BMO Aggregate Bond Index ETF
- 7.52% BMO MSCI Emerging Market Index ETF
- 3.77% BMO Government Bond Index ETF
- 1.92% BMO Mid-Term US IG Corporate Bond Hedged to CAD Index ETF
- 0.05% Cash
BMO Balanced ETF (ZBAL)
BMO Balanced ETF holds the following underlying BMO ETFs:
- 28.11% BMO S&P 500 Index ETF
- 26.76% BMO Aggregate Bond Index ETF
- 15.38% BMO S&P/TSX Capped Composite Index ETF
- 12.30% BMO MSCI EAFE Index ETF
- 7.63% BMO Government Bond Index ETF
- 5.71% BMO MSCI Emerging Markets Index ETF
- 3.88% BMO Mid-Term US IG Corporate Bond Hedged To CAD Index ETF
- 0.23% Cash
BMO Conservative ETF (ZCON)
BMO Conservative ETF holds the following underlying BMO ETFs:
- 40.71% BMO Aggregate Bond Index ETF
- 19.01% BMO S&P 500 Index ETF
- 11.60% BMO Government Bond Index ETF
- 10.33% BMO S&P/TSX Capped Composite Index ETF
- 8.34% BMO MSCI EAFE Index ETF
- 5.89% BMO Mid-Term US IG Corporate Bond Hedged to CAD Index ETF
- 3.86 BMO MSCI Emerging MArkets Index ETF
- 0.27% Cash
All-In-One ETF Comparisons
Let’s compare all of these all-in-one ETFs and see which ones come out ahead. Just so we are comparing apples to apples, I will compare all the growth ETFs, all the balanced ETFs, and all the conservative ETFs side-by-side.
Growth ETFs – VGRO vs. XGRO vs. ZGRO
While all three of these growth all-in-one ETFs have similar strategies and approaches, there are some small differences in exposures and holdings. When it comes to Canadian exposure, XGRO has the lowest exposure at 19.63% while VGRO has the highest at 24.2%. XGRO has the highest US exposure while ZGRO has the highest international exposure. If we look at ex-Canada exposure by grouping US and international exposures together, XGRO is the highest at 61.2%, ZGRO at 60.44% and VGRO in third at 55.9%.
For fixed income, VGRO provides a better global exposure to bonds while both XGRO and ZGRO have a higher exposure to Canadian bonds. Interestingly, both XGRO and ZGRO have exposures to corporate bonds while VGRO doesn’t. However, since bonds only constitute less than 20% of the overall ETF, the difference is minuscule.
Because of the different exposures and holdings, these growth all-in-one ETFs have different distributions. ZGRO came out ahead at 2.63% with XGRO in the middle at 2.43% and VGRO in third at 2.33%.
Considering XGRO and ZGRO have the lowest MER fee at 0.20%, I think I’d pick one of them over VGRO.
Therefore, if I had to pick one to use for our kids’ RESPs, I’d definitely pick XGRO because of the higher US and international equity exposure.
Balanced ETFs – VBAL vs. XBAL vs. ZBAL
Once again, these three balanced all-in-one ETFs have slightly different exposures and holdings. Similar to the growth all-in-one ETFs, the iShare ETF, XBAL came out ahead for US exposure. XBAL also has the highest overall exposure to ex-Canada equities at 45.85% with ZBAL trailing slightly behind at 45.79%. VBAL has the highest Canadian exposure while XBAL has the lowest.
For fixed income, I was a little surprised that ZBAL has such a high exposure to Canadian bonds and very little exposure to US & international bonds. Given that the balanced all-in-one ETFs have around 40% allocation to bonds, I believe having a high exposure to Canadian bonds and a very low exposure to US & international bonds isn’t a good idea.
When it comes to distributions, ZBAL was the highest at 2.64%, XBAL in the middle at 2.49%, and VBAL in the third at 2.33%.
Both XBAL and ZBAL have the lowest MER at 0.20% while VBAL has a slightly higher MER of 0.25%. If you have a $500,000 portfolio, the 0.005% MER difference would mean an extra MER fee of $250 every year. In other words, although there’s a bit of difference in MER, the actual dollar difference should be quite small considering the portfolio value.
If I had to pick one to use for our kids’ RESPs, I would pick XBAL because of the higher exposure to international equities and a decent amount of exposure to US & international bonds.
Conservative ETFs – VCNS vs. XCNS vs. ZCON
Just like their counterparts, these conservative all-in-one ETFs have slightly different exposures and holdings. XCNS provides the highest exposure to US and international equities while VCNS provides the highest exposure to Canadian equities. ZCON has the highest exposure to Canadian bonds and a very low exposure to US & international bonds. Meanwhile VCNS has the highest exposure to US & international bonds and XCNS has the highest exposure to Canadian bonds.
Since not all bonds are created equal, it is interesting to note that XCNS hold both Canadian and US corporate bonds. Meanwhile, ZCON holds US corporate bonds and government bonds.
Holding a higher percentage of bonds means the ETFs should have lower volatility while providing regular income (i.e. distribution). VCNS has a one-year-return of 7.07% and a 2.14% distribution yield; ZCON has a one-year-return of 8.48% with a 2.65% distribution yield. At the time of the writing, XCNS does not provide a one-year-return rate but has a distribution yield of 2.00%, which is the lowest of all three conservative ETFs. Since XCNS holds more equities, I’d expect XCNS to have a slightly higher one-year-return than ZCON. In other words, when the market is performing well, XCNS should outperform the other two ETFs.
For me, it was a little bit harder to pick which conservative all-in-one ETF to hold for our kids’ RESPs. I like the idea of holding some corporate bonds for higher yield, but corporate bonds typically mean higher risk than government bonds. After a bit of reviewing and comparison, I think the best conservative all-in-one ETF to hold is VCNS because of the higher exposure to US & international bonds.
RESP Asset Allocation – New Plan
It was interesting to see that the iShare all-in-one ETFs came out ahead for two out of the three types of ETFs compared. Even for the conservative all-in-one ETF, some people may prefer XCNS because of the higher exposure to equities.
After a bit of discussion and research, we have decided to switch from the multi-ETFs approach a one fund ETF approach. This will allow us to leave the RESPs completely passive, other than when we contribute new cash or when we get government grants and need to buy more shares. Holding one single ETF should also allow us to enroll in DRIP and buy additional share(s) whenever there’s a distribution.
With this new approach, we need to change our RESP asset allocation and figure out which all-in-one ETF to hold when the kids are at different stages of their RESP investment timeline.
Again, given the interest rates are so low, I personally don’t think it makes sense to hold a conservative all-in-one ETF when the kids are 15 or older. However, things may change in the future so I won’t shut that door just yet.
Below is our new RESP strategy:
|Index||0-10 Yrs||10-15 Yrs||15-18+ Yrs|
With this new RESP all-in-one ETF holding strategy, from 0-10 years, we’d hold around 80% in equities and 20% in bonds. I decided to do a mix of XGRO and XBAL so we’d hold around 26% in bonds when the kids are between 10 and 15 years old. Then when they are older than 15, we’d hold XBAL only and have about 40% exposure to bonds. This age tiered approach should help stabilize the portfolio value by reducing exposures to market volatility.
Update: We ended up changing our strategy again and decided to go 100% stocks for both RESPs. Find out more here with my all equity ETF comparison.
While it can be very difficult to choose and compare between these all-in-one ETFs, I think the iShare all-in-one ETFs have come out ahead for investors seeking growth and balanced approach. For conservative investors, I think VCNS is a good all-in-one ETF to hold. Since the ETF companies have a tendency to adjust these ETFs slightly or create new ETFs, the winning ETF may be different in the future.
After a bit of review and discussion, Mrs. T and I have decided to transition both of our kids’ RESPs over to use these all-in-one ETFs. We plan to start off with XGRO for both kids, then do a mix of XGRO and XBAL once they are teens, then transition completely to XBAL as they get closer to university age.
If you’re new to investing, I think the iShares all-in-one ETFs are great for building up your investment portfolio. The iShares growth and balanced all-in-one ETFs have lower MERs and seem to have a higher exposure to international equities. However, if you decide to pick another ETF, you should still see a performance that mimics the market performance. Best of all, by investing in these ETFs, you can take advantage of the commission free ETF trading some discount brokers are offering.
I personally think these all-in-one ETFs are a good way to get started with investing. Once you have a sizable portfolio, you can then venture into the world of individual dividend stocks if you choose to.
Dear readers, what’s your thoughts on these all-in-one ETFs? Do you hold any? Which one do you like better? Vanguard, iShares, or BMO?