'We’ve moved from single-mandate, single exposures – almost a building block approach with the products being created – to more “one ticket” solutions,' says Tim Huver, head of product at Vanguard Investments Canada in Toronto.handout
Balanced funds have long been mainstays in the portfolios of Canadian investors. They offer simple, one-stop asset diversification between equities and fixed income.
But now an even simpler suite of balanced products is available. Vanguard introduced its Asset Allocation Exchange-Traded Funds earlier this year. They have already proven to be a hit with investors, attracting nearly $1-billion in assets under management.
There are three funds to choose from, with the main differentiation being the mix between stocks and bonds. The Vanguard Conservative ETF Portfolio VCNS-T is 40 per cent equity, 60 per cent fixed income. The Vanguard Balanced ETF Portfolio VBAL-T is 60 per cent equity, 40 per cent fixed income. And the Vanguard Growth ETF Portfolio VGRO-T is 80 per cent equity, 20 per cent fixed income.
All three funds are continuously assessed and rebalanced to maintain their proscribed weighting. Each fund invests in a mix of seven Vanguard ETFs that track major international benchmarks. The funds’ global nature provides direct diversified exposure across geographies and sectors. They also reflect the preference of Canadian investors for a “home bias” by overweighting the domestic market.
And perhaps the funds’ biggest selling point? Ultra-low cost – an annual management fee of just 0.22 per cent.
For more on the Vanguard Asset Allocation ETFs, I spoke with Tim Huver, head of product at Vanguard Investments Canada.
How did this product come about – did you see a potential niche in the market?
We saw a number of different trends in the industry. If you look at the Canadian mutual fund industry, the balanced category is one of the largest in the market – accounting for about 46 per cent of total assets. So we do understand that Canadian investors have a strong interest in investing in balanced products. We saw an opportunity on the ETF side to really provide a broadly diversified portfolio across asset classes, at a cost of 22 basis points, which is a very compelling offering.
What are some of the other advantages?
First of all, you can align your risk tolerance to the portfolios that we’ve launched. As well, all the rebalancing is done within the product. We will do the rebalancing for you – so it’s a “set it and forget it” approach. There have been “paper model portfolios” – that is, investors constructing their own portfolios based on ideal models. But what we saw from many investors was a desire for a “unitized solution” to that model portfolio. Also, since the financial crisis, and with recent market volatility, we’ve seen investors moving toward more broadly diversified portfolios, with an understanding of how that manages volatility and provides better risk-adjusted returns.
How are they being used by investors – as an element of a larger portfolio, or as a more comprehensive solution?
For many investors, just one of these funds can serve as an entire portfolio. For the 22 basis points you can get diversification across 25,000 underlying assets. For others, it can be the core of a portfolio and they can build satellites around that core as they see fit. They can make particularly great sense in a retirement account, and education and tax-free savings accounts.
How do you find they are being bought – through advisors, or direct by investors?
I think it’s both. We’re seeing strong adoption through the online discount brokerage channel – so self-directed investors gravitating toward this product. In the advisor space, we’re seeing a shift in the value proposition from stock picking or fund picking to more holistic financial planning. So, the advisor can concentrate more on things like tax and estate planning, or behavioural coaching. Asset-allocation products like these can form the core of a client portfolio, and enable advisors to change the value proposition for their clients. This can be especially true with advisors using a fee-based structure, where managing a book with low-cost investments makes particular sense.
Are you finding these funds to be a good fit with robo-advisor systems?
That can be true. Many of the robo offerings have a hybrid approach, where it’s not completely technology-driven, and there is a level of advice being provided. So, while the ultimate solution selected may look similar in terms of the vehicle and the asset allocation, we in no way feel this is a replacement for advice. There’s quite a bit of added value that advisors provide – including some of the areas like estate and tax planning.
What might be coming next in terms of the asset allocation ETFs – are you considering adding to the ones you currently offer?
We’ve been very pleased with how investors have gravitated toward this product. We will continue to expand the range in this space. It’s part of the natural evolution of the market. We’ve moved from single-mandate, single exposures – almost a building block approach with the products being created – to more “one ticket” solutions. So, I think products like these asset allocation ETFs represent an interesting area for us.
This interview has been edited and condensed.