Q. My husband and I have been reading about the all-in-one exchange-traded funds (ETFs), specifically those from Vanguard. The Vanguard Growth ETF Portfolio (VGRO) looks appealing given the asset allocation and rebalancing this type of ETF provides. Our question is, would it be a poor decision to sell all our ETFs (Canadian, U.S., foreign, bonds) and transfer everything to VGRO? It would make life a little easier, but my concern is that as we draw down our RRSP we would lose the ability to look at several ETFs and determine which is best to sell at the time we withdraw money from our RRSPs.
–Cathy and Brian
A. All-in-one ETF portfolios have so many positive attributes, especially for do-it-yourself investors: they are extremely well-diversified, super-cheap and easier to manage than a portfolio of multiple holdings. Ironically, one of their biggest downsides is that they appear too simple to many investors. It’s almost like they’re too good to be true. But, Cathy and Brian, I can assure you it’s a perfectly good strategy to use an all-in-one ETF in your RRSP*, even if you are drawing down the account to generate income.
Let’s start by addressing your concern about losing the ability to choose which ETFs to sell to fund your regular withdrawals. If you hold multiple funds, it’s true, you can combine your withdrawal plan with your rebalancing strategy. For example, if you need to withdraw $25,000 from the RRSP, you should look to see which asset class is most overweight in the portfolio, and then trim that holding. If you’re overweight stocks, then you should sell some stocks to free up the $25,000. If you’re overweight bonds, then you should trim a bond holding instead.
This is pretty straightforward, and it prevents you from having to sell stocks immediately after a bear market. Cathy and Brian, I think this is what you mean when you say you like to “determine what is best to sell at the time we withdraw money from our RRSPs.”
The thing is, if you hold an all-in-one ETF, the only thing that really changes is that the fund manager is doing this for you. During a bear market, the manager of the ETF may be continually selling bonds (“selling high”) in order to buy more stocks to maintain the fund’s target asset mix. And if new money is flowing into the ETF during a bear market, most of those cash flows will be used to purchase equities (“buying low”). This is the same kind of rebalancing you would be doing if you held multiple ETFs, except it’s being done much more frequently, and someone else is doing all the heavy lifting.
So, there is nothing wrong with using an all-in-one ETF in an RRSP and periodically selling units in order to make your regular withdrawals. However, Cathy and Brian, it’s worth commenting on the choice of VGRO. This ETF has a target of 80% stocks and 20% bonds. If you are retired and drawing down your RRSP* for income, a portfolio of 80% stocks is likely to be much too aggressive. You may want to think about combining this ETF with a ladder of GICs.
Here’s an example: say you are withdrawing about $25,000 per year from the RRSP (or RRIF). You might build a five-year ladder of GICs with $25,000 in each rung, for a total of $125,000. Then you could hold the remaining balance of the account in an all-in-one ETF. This makes your portfolio significantly more conservative and sets aside five years of withdrawals in safe investments so you can ignore short-term market moves.
Each year, one of those GICs will mature and you can withdraw the $25,000. Then you can sell $25,000 worth of the ETF and buy a new five-year GIC to renew the ladder. This just involves a couple of simple transactions and no decision-making about which fund is “best to sell.”
So, Cathy and Brian, if you agree that an all-in-one ETF would make your life easier, I don’t think you should be reluctant to simplify your RRSP*. Just make sure you use an asset allocation that is appropriate to your financial plan and your risk tolerance.
Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.
MORE BY DAN BORTOLOTTI:
- How moving to the U.S. affects your Couch Potato strategy
- Should millennial Couch Potatoes consider an all-equity portfolio?
- Maintaining your asset allocation while you draw down funds from a RRIF
- “Do I really need to rebalance my investment portfolio?”