Q: As a senior with $190,000 to invest in her RRIF, is one good diversified ETF such as the Vanguard Conservative ETF Portfolio (VCNS) a good idea for the entire amount? Or is it better to split the money across three or four ETFs? I was considering putting 20% in the iShares S&P/TSX 60 Index ETF (XIU), 20% in the iShares Core S&P 500 Index ETF (XSP) and 60% in the Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC). What are the pros and cons of one well-diversified ETF versus holding a similar asset allocation in several ETFs?
— Bernie C.
A: One of the most important goals of any investor is broad diversification. “Don’t put all your eggs in one basket,” as the cliché goes. But a properly designed balanced fund—such as Vanguard’s family of asset allocation ETFs—isn’t really one basket. So, Bernie, it’s perfectly fine to put all of your nest egg into a fund such as the Vanguard Conservative ETF Portfolio (VCNS).
First, a quick refresher on VCNS and its sister funds. Early in 2018, Vanguard launched a family of three asset allocation ETFs that allow you to hold a diversified portfolio using a single product. They are the ETF version of a balanced mutual fund. Each holds seven underlying ETFs—three for bonds, four for equities—covering the Canadian, U.S. and international markets. That works out to more than 12,000 individual bonds and stocks from around the world, which is about as diversified as one can get without being a pension fund.
Ironically, Bernie, building a portfolio from the three ETFs you mention would actually be far less diversified than using VCNS. It would include only large-cap Canadian and U.S. stocks, with no international exposure at all. And it would include only short-term Canadian corporate bonds, whereas VCNS includes bonds of all maturities, both government and corporate, from all developed countries.
Using a single balanced ETF for your RRIF also makes managing your investments a breeze. You never have to rebalance, because that’s done for you. All you need to do is make sure you occasionally sell enough shares to free up the cash for your required withdrawals.
That said, there are some good reasons for using individual ETFs rather than a balanced fund. For one, you would have more flexibility in setting your asset allocation. VCNS holds 60% bonds, and the other Vanguard asset allocation ETFs hold 20% and 40%. If you want your asset allocation to be, say, 50% bonds and 50% stocks, there isn’t that option.
If you’re an experienced DIY investor, you can also use individual ETFs to build a more tax-efficient portfolio across multiple accounts. For example, you might want to favour equities in your TFSA and bonds in your RRSP, which you can’t do if you use only one balanced fund.
But for most investors who want a broadly diversified, easy-to-manage portfolio at extremely low cost, it’s hard to beat the Vanguard asset allocation ETFs. Embrace the simplicity.
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