Welcome to a weekly series where I break down and compare some of the most popular exchange-traded funds (ETFs) available to Canadian investors!
Canadian investors favouring the most hands-off, passive approach to investing can eschew a hand-picked portfolio of stocks and bonds for an all-in-one asset allocation ETF. Both Vanguard and BlackRock provide a set of tickers for these kinds of ETFs.
Today, we’ll be looking at the 60/40 stocks/bonds version, also known as the “balanced” ETF portfolio, suitable for investors with a lower risk tolerance. Up for consideration are Vanguard Balanced ETF Portfolio (TSX:VBAL) and iShares Core Balanced ETF Portfolio (TSX:XBAL).
VBAL vs XBAL: fees
The fee charged by an ETF is expressed as the management expense ratio (MER). This is the percentage that is deducted from the ETF’s net asset value (NAV) over time, calculated on an annual basis. For example, an MER of 0.50% means that for every $10,000 invested, the ETF charges a fee of $50 annually.
VBAL has an MER of 0.24%, compared to XBAL’s fee of 0.20%. The difference is minuscule (a difference of $4 on a $10,000 portfolio), but if we had to pick a winner, it would be XBAL.
VBAL vs XBAL: size
The size of an ETF is very important. Funds with small assets under management (AUM) may have poor liquidity, low trading volume, high bid-ask spreads, and more risk of being delisted due to lack of interest.
VBAL currently has AUM of $2.24 billion, whereas XBAL has AUM of $927 million. Although both are sufficient for a buy-and-hold investor, VBAL is clearly the more popular one.
VBAL vs XBAL: holdings
Both ETFs here are considered “funds of funds,” in that their underlying holdings are not stocks, but rather other ETFs. This makes sense in that XBAL and VBAL are intended to be all-in-one portfolios.
XBAL chooses to allocate approximately 27% to the U.S. stock market, 15% to the Canadian stock market, 15% to the developed international stock market, 3% to the emerging international stock market, 30% to the Canadian bond market, and 10% to the U.S. bond market.
VBAL chooses to allocate approximately 26% to U.S. stocks, 18% to Canadian stocks, 11% to developed international stocks, 5% to emerging international stocks, 24% to Canadian bonds, 7% to U.S. bonds market, and 9% to the global ex-U.S. bond market.
VBAL vs XBAL: historical performance
Both funds are quite new, so their performance history is rather limited. Nonetheless, a backtest is useful for assessing their tracking error and relative performance.
A cautionary statement before we dive in: past performance is no guarantee of future results, which can and will vary. The portfolio returns presented below are hypothetical and backtested. The returns do not reflect trading costs, transaction fees, or taxes, which can cause drag.
Here are the trailing returns from 2019 to present:
Here are the annual returns from 2019 to present:
Both ETFs have very similar performance. XBAL had slightly higher returns and volatility due to its higher concentration of U.S. stocks. Over the long run, I expect them to perform virtually identical.
The Foolish takeaway
If I had to choose one ETF to buy and hold, it would be XBAL. Despite the lower AUM, the 0.04% difference in MER could make a big difference over long periods of time with a large portfolio. Both funds have roughly the same holdings with good diversification. Still, if you’re partial to Vanguard, VBAL is a fantastic choice as well.