Half the greatness of asset allocation ETFs is that they’re a cheap, easily accessible and effective way to invest.
The other half is that these products are well-used. Over $25-billion has flowed into asset allocation funds since Vanguard popularized them six years ago. In a recent strategy note, the ETF team at TD Securities said the amount of money in these funds “consistently continues to grow like a weed each month.”
Asset allocation ETFs are a fund-of-fund product where an ETF company bundles six or so of its stock and bond funds into a single portfolio that offers periodic rebalancing and fees as cheap as 0.2 per cent in total. TD says there are now more than 50 of these funds in the Canadian market from a dozen providers.
The TD note offers some insights into how investors are using asset allocation ETFs. One encouraging trend is that in-flows of money have been steady, regardless of stock market conditions. This suggests investors are making choices they can stick with over the long term, which is a key to successful investing.
Two-thirds of the assets held in these products are in all-equity and growth funds, which typically have an 80-20 mix of stocks and bonds. Another 23 per cent is in balanced funds, which usually have a 60-40 mix. Conservative funds account for 5 per cent of assets and income-focused funds for 4 per cent. This rest is a mix of strategies.
All-equity and growth funds are more popular with DIY investors, while balanced funds are popular among advisers. TD notes that some funds have developed a following on social media platforms. “As an example, XEQT and VGRO both have numerous followers on Reddit, which may explain the sustained interest and flows into these ETFs,” the report says. XEQT is the iShares Core Equity ETF Portfolio, and VGRO is the Vanguard Growth ETF Portfolio.
BlackRock’s iShares brand introduced asset allocation ETFs back in 2007, but the category didn’t take off until Vanguard launched its version in January 2018. TD reports that Vanguard has a 52 per cent share of the asset allocation ETF market, iShares has 31 per cent, Fidelity has 8 per cent, BMO and Global X (formerly Horizons) have 3 per cent each and the rest is spread among a group of small players.
The popularity of all-equity funds speaks to the strong performance of the stock markets in recent months. The appeal of these products is that they offer exposure to Canadian, U.S. and international stocks in a single package.
The 100-per-cent focus on stocks means these funds will be hit hard in the next correction. Unless you consider yourself a trader, they’re best for people with at least five and preferably 10 years or more until they might need their money.
-- Rob Carrick, personal finance columnist
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The Rundown
Investing Club: Introducing the Readers’ Portfolio
The best stocks to ride out the coming year draw from several of the biggest technology companies, profit-gushing Canadian energy producers and a couple of beaten-up dividend powerhouses, according to the newly minted Readers’ Portfolio. The portfolio consists of the 10 most popular stock picks sent to us by savvy readers as part of the second annual Globe and Mail Investing Club. David Berman tells us more about it.
Watch these two indicators for clues on how to position your portfolio this year
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What’s up in the days ahead
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Compiled by Globe Investor Staff