The Vanguard Growth ETF Portfolio (TSX:VGRO) has quickly become a go-to choice for Canadian DIY investors looking for a comprehensive investment solution.
Since its inception in 2018, VGRO has successfully amassed approximately $4.6 billion in assets under management (AUM), testament to its popularity and the trust investors place in it.
With its expansive coverage offering global diversification across more than 13,000 global stocks and 17,000 global bonds, all for a modest 0.24% expense ratio, VGRO presents an attractive proposition for those seeking broad market exposure in a single ETF.
However, if you’re considering VGRO for a long-term investment, there are a couple of critical aspects you need to understand, especially if you’re a beginner.
Familiarizing yourself with these details can enhance your confidence in this ETF, empowering you to maintain your investment through both prosperous periods and challenging market conditions.
There’s 30% in Canadian stocks for a reason
Within VGRO’s diversified portfolio of seven underlying ETFs, there’s a deliberate allocation of about 23% towards Canadian stocks.
While this may appear disproportionately high considering Canada’s relatively small global market capitalization, Vanguard’s decision is strategic, aimed at offering investors several benefits tied to this home country bias.
Firstly, allocating a significant portion to Canadian stocks reduces currency risk for Canadian investors. By investing more heavily in the domestic market, you’re less exposed to the fluctuations in currency exchange rates that can affect the value of international investments when converted back to Canadian dollars.
Secondly, Canadian markets have historically shown lower volatility compared to some global markets. This characteristic can help stabilize your portfolio, providing more consistent performance over time by buffering against the sharp ups and downs seen in more volatile markets.
Lastly, the tax efficiency of investing in Canadian stocks is a notable advantage. Canadian investors benefit from the lack of withholding tax on dividends from Canadian companies, which isn’t the case with dividends from international stocks.
This makes your investment in VGRO more tax-efficient, optimizing your returns by minimizing the tax impact on your dividend income.
The bonds aren’t always safe, but that’s OK
Many investors view the 20% bond allocation within VGRO as the “safe” portion of the portfolio, but it’s important to understand that bonds aren’t always as secure as one might think.
While it’s true that this allocation has offered a cushion during periods of market downturns, such as the March 2020 COVID-19 crash, there have been instances when it hasn’t performed as expected.
A key reason for this is the average duration of the bonds within VGRO, which stands at 7.2 years. Duration is a measure of a bond’s sensitivity to interest rate changes.
Simply put, if interest rates rise by 1%, the value of VGRO’s bonds could be expected to decline by approximately 7.2%, all else being equal. This was observed in 2022 when both bond and stock markets experienced downturns due to rising rates.
However, the relationship with interest rates works both ways – if rates fall, bond values can increase. Therefore, seeing VGRO’s bonds decline in value shouldn’t necessarily be a cause for alarm. Historically, bonds have offered meaningful diversification benefits to a portfolio, helping to balance out volatility and risk over the long term.
It’s crucial for investors to keep this perspective in mind, especially during fluctuating market conditions, to maintain confidence in their diversified investment strategy with VGRO.
