A NEW
way to Invest
I started TheAnswerIs.ca to give young people the basic knowledge, and more importantly, the confidence to invest for themselves.
Historically, I have avoided investing in "flavour of the month" ETFs and stocks. I have found that by focusing on dividend paying ETFs and stocks, that have been around for at least 5 years, I have managed to avoid some real investing blowouts like the Tech crash of 2000, cannabis stocks in 2018/19, and a few other market explosions.
In October 2016, when the TheAnswerIs.ca was launched, the easiest way to create a diversified portfolio, (economic sector and geography), was to use six separate ETFs. Now there is even an easier way to invest by purchasing only one-single ETF. The newly launched “Asset Allocation ETFs” are basically a one-stop shop for a fully diversified portfolio and are an effective strategy for the most passive of passive investors. As a one-ETF portfolio, they are powerfully simplistic. Each of these new all-equity ETFs own shares in over 8,000 companies, and as a result, are very well diversified, (by economic sector and geography).
I will contrast the two largest and lowest cost Asset Allocation ETFs in the market; Vanguard (VEQT) and iShares (XEQT), and also compare them to TheAnswerIs.ca Model Portfolio (TMP). There are a few other asset allocation ETFs in the market, but these two will likely remain among the largest and the lowest cost.
Canada represents a small part of the global investment marketplace, and the Canadian stock market (TSX), is concentrated in the economic sectors of finance, energy and materials. A long-term investment portfolio needs a much broader economic sector diversification than the TSX can offer, and so a Canadian investor must hold foreign investments to achieve broader geographic and economic sector diversification. A table summarizing the differences in economic sector weightings of VEQT and XEQT, as well as TMP, appears as follows:
| Economic Sector Diversification | Vanguard VEQT | iShares XEQT | TheAnswerIs.ca Model Portfolio TMP |
|---|---|---|---|
| Technology | 18.5% | 17.4% | 12.8% |
| Financials | 18.5% | 18.4% | 18.6% |
| Consumer Discretionary | 13.2% | 10.2% | 7.8% |
| Industrials | 12.4% | 11.4% | 9.6% |
| Health Care | 9.0% | 10.0% | 6.0% |
| Basic Materials | 6.6% | 6.2% | 7.0% |
| Energy | 6.0% | 5.1% | 6.0% |
| Consumer Staples | 5.0% | 6.4% | 5.2% |
| Utilities | 3.9% | 3.2% | 10.7% |
| Telecommunications | 3.8% | 8.2% | 6.1% |
| Real Estate | 3.1% | 3.5% | 10.2% |
| Other | 0.0% | 0.0% | 0.0% |
| Total | 100.0% | 100.0% | 100.0% |
A few comments about the economic sector diversification:
In 2016, TMP relied on six separate ETFs to achieve a much broader economic sector diversification than the Canadian market TSX ETF could offer in isolation.
Since inception in October 2016, the TMP has outperformed the TSX ETF, with lower volatility, and a higher dividend yield.
The biggest difference between VEQT and XEQT, compared to TMP is that the later has a much higher allocation to real estate and utilities, and as a result, slightly smaller allocations to most other sectors.
For an all-equity portfolio, the TMP was designed to have slightly lower volatility and higher dividend income than the TSX ETF in isolation. Importantly, real estate and utility ETFs pay their dividends monthly, so a young investor sees money flowing into their account every month. This consistent income helps young investors stay patient during down markets, as the investor is being "paid to wait" for the eventual stock market recovery.
Geographical Diversification
A table summarizing geographic diversification of VEQT and XEQT, as well as TMP, appears as follows:
| Geographical Diversification | Vanguard VEQT | iShares XEQT | TheAnswerIs.ca Model Portfolio TMP |
|---|---|---|---|
| USA | 41.0% | 47.6% | 21.0% |
| Canada | 29.8% | 23.5% | 49.1% |
| Developed Markets ex NA | 20.9% | 23.2% | 19.8% |
| Emerging Markets | 8.3% | 5.3% | 10.0% |
| Cash | 0.0% | 0.4% | 0.0% |
| Total | 100.0% | 100.0% | 100.0% |
Both VEQT and XEQT have similar geographic diversification.
The TMP has a higher weighting to Canada, due largely to the 10% and 11% weightings given to Canadian listed real estate and utilities. As mentioned previously, these two sectors were purposely overweighted in order to dampen volatility, and materially increase the monthly income of the portfolio.
Unit Price Performance
Vanguard’s VEQT was the first Asset Allocation ETF launched in January 2019, and iShares XEQT quickly followed in August 2019. TheAnswerIs.ca Model Portfolio (TMP) was launched in October 2016.
Each ETF portfolio will react differently to changing economic and interest rate environments, meaning unit price comparisons for such a short time frame, (only available since August 2019 when all three portfolios existed simultaneously), can be misleading. It is more typical to make unit price comparisons over a three-, five- and ten-year periods.
Nonetheless, between August 2019 to March 2021, both VEQT and XEQT posted unit price returns that were on average 24% higher than weighted average return of the six ETFs in the TMP. However, in the most recent stock market recovery period since March 23rd 2020, (marked the bottom the Covid pandemic stock market crash), the TMP has posted unit price returns that are on average 10% higher than both VEQT and XEQT.
A better analysis of relative unit price performance of VEQT, XEQT and TMP will develop over the next few years, as each portfolio has a chance to perform in differing market conditions.
All comparative ETF performance is measured after the Management Expense Ratio (MER), and for disclosure purposes, the MER for each ETF portfolio is summarized as follows:
VEQT - 0.24%
XEQT - 0.20%
TMP - 0.20% (weighted average MER of 6 ETFS in TMP)
Please note the above MERs are all about TEN times cheaper than the Series "A" Mutual Funds of most banks, life insurance companies and mutual fund companies.
Income Performance
Unit price performance is only part of the comparison process. Another important characteristic is the income performance that each ETF portfolio generates. VEQT has a dividend yield of 1.43%, XEQT is 1.63% and TMP is higher at 2.41%. The TMP portfolio has a much higher dividend yield due to its higher proportion of Real Estate and Utilities, compared to both VEQT and XEQT.
These dividend yields look small, but can make a significant difference if an investor plans to eventually live off the income from their portfolio without consuming the original capital.
For example, if an investor eventually builds up a $1M portfolio by retirement, the annual dividend income from each portfolio (remember if an investor has no other sources of income, they can earn $50,000 of dividend income per year tax free outside an RRSP or TFSA – TheAnswerIs here: Earn $50,000 TAX FREE ), would be as follows:
VEQT - $14,300
XEQT - $16,300 (14% more than VEQT)
TMP - $24,100 (68% more than VEQT)
Expressed differently, if an investor wanted $24,100 of annual dividend income from their investment portfolio to support their lifestyle, without dipping into and spending their original capital, then an investor would need to have an investment portfolio size as follows:
TMP - $1,000,000
XEQT - $1,478,527 (need to save 47% more than TMP)
VEQT - $1,685,315 (need to save 68% more than TMP)
The dividend yield has a profound impact on how much an investor needs to save in order to fund a comfortable lifestyle.
Summary
Both XEQT and VEQT make excellent one-stop choices for investing long-term. They are both powerfully simplistic and appear to be an interesting alternative to the six ETF TMP. The attractiveness of VEQT and XEQT ETFs are:
A single ETF purchase
Instant global diversification
Instant economic sector diversification
Automatic rebalancing so that one geographic area or economic sector does not become too overweighted or under weighted
Extremely low costs compared to Series "A" mutual funds
| Asset Mix | Vanguard | iShares |
|---|---|---|
| 100% Equity | VEQT | XEQT |
| 80% equity / 20% Fixed Income | VGRO | XGRO |
| 60% equity / 40% Fixed Income | VBAL | XBAL |
| 40% equity / 60% Fixed Income | VCNS | XCNS |
| 20% equity / 80% Fixed Income | VCIP | XINC |
One final note, both Vanguard and iShares make it extraordinarily easy to introduce fixed income (bonds) to suit one’s current risk tolerance, or to simply reduce volatility of a portfolio as one approaches retirement, by switching to a different ETF within their respective “Asset Allocation ETF” families:
TheAnswerIs.ca Model Portfolio (TMP) is still an interesting portfolio for consideration, given its much higher income and resultant savings requirement for a given level of income required. Critically, the Total Return (i.e., unit price performance and dividend yields) of XEQT, VEQT and TMP need to be analyzed over a longer investment horizon of 3, 5 and 10 years to draw firm conclusions. Having said that, I just thought it was important to bring these two new innovative ETF portfolio alternatives to your attention for consideration.
Invest long-term and prosper.