How to rebalance when some ETFs already do it themselves

How to rebalance when some ETFs already do it themselves

New ETFs from Vanguard rebalance themselves, but investors need to track their entire portfolio mix




Q. I have a portfolio of several ETFs, but I’m thinking of buying one of the new Vanguard asset allocation ETFs from now on. Can you advise on how I should be rebalancing if I don’t intend to get rid of my other ETFs?


A. Earlier this year, Vanguard launched a family of asset allocation ETFs, which allow you to build a diversified portfolio with a single product. Each of the three new funds holds seven underlying ETFs covering the global stock and bond markets in various proportions.

For example, the Vanguard Balanced ETF Portfolio (VBAL) has a target of 40% bonds and 60% equities. Other ETFs in the family are more conservative (40% equities) or more aggressive (80% equities). Whenever its allocation drifts too far from those targets, the fund manager will rebalance, which makes these products virtually maintenance-free for the investor. So, Marty, I can see why these one-fund solutions are attractive compared with owning a portfolio of multiple ETFs you need to rebalance yourself.

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However, the need to rebalance does not disappear if you use the new Vanguard ETFs for only part of your portfolio. If you invest only your new money in the asset allocation ETF and hang on to all of your existing holdings, your portfolio’s mix of stocks and bonds will still change as markets move, and from time to time you will still need to sell some of the winners to top up the losers.

In fact, you might need to make even more trades now. In the past, you were probably able to keep your portfolio in balance simply by adding new money to whichever ETF was furthest below its long-term target. During periods where stocks performed well, you could have added your new contributions to your bond ETF—or vice versa. That might have allowed you to avoid selling anything to rebalance. Now, with all of your new contributions going to a single balanced ETF, the rest of the portfolio might need more frequent attention.

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This would probably be manageable if your target asset mix matched one of Vanguard ETFs exactly: if you already use a mix of 40% bonds and 60% stocks, then adding VBAL to your portfolio would not complicate your rebalancing too much. You could simply ignore that holding and rebalance as you did before, confident that VBAL will look after itself.

But things get more complicated if your target is, say, 50% fixed income and 50% equities. None of the Vanguard asset allocation ETFs use that mix, so if you added one of them to your portfolio you would need to adjust the weight of your existing ETFs to compensate. The math isn’t something you can do in your head, so you’d probably need to build a custom spreadsheet to make the calculations. Who wants to do that?

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Marty, if you’re investing only in tax-sheltered accounts (RRSPs and/or TFSAs) and your goal is to simplify your investments, then you may want to consider selling your existing holdings and going all-in with one of the new Vanguard asset allocation ETFs. Sure, it will cost you a few trading commissions, but this one-time expense will reduce both cost and eliminate the need to rebalance going forward. And isn’t that the whole point of a one-fund solution?