The greatness of balanced exchange-traded funds is that they give you a professionally managed, fully diversified portfolio in a tidy package requiring zero maintenance.
But what happens when the investing outlook is ruled by a pandemic without precedent in the modern era? Can we rely on the tried-and-true, even in highly uncertain times such as these?
A recent query from a reader highlights the tension between what worked in the past for investors and what might work as we fight through the pandemic and its aftermath. “I have been reading that bonds are not offering very good returns right now,” this reader said. “I am wondering if a person should avoid investing in balanced ETFs such as VBAL?”
VBAL is the Vanguard Balanced ETF Portfolio, which holds 60-per-cent stocks and 40-per-cent bonds. For decades, this portfolio mix has been a trusty default that offers a lot of stock-market upside with substantial protection in down markets via bonds.
The outlook for bonds is negative because interest rates are low and probably close to their bottom in the current down cycle for the economy. If rates edge back up even a modest amount, bond prices will decline. For this reason, some market strategists have talked about changes to the 60-40 mix.
For example, you could switch to a 70-30 mix of stocks and bonds. Or you could make the kind of adjustments to 60-40 that Kurt Reiman, chief investment strategist for BlackRock Canada, discussed in a Q&A we did back in July. He said the 60-40 mix still makes sense, but he suggested emphasizing corporate bonds over government bonds and adding both long-term bonds and high-yield bonds.
Balanced ETFs don’t tend to get that elaborate, though. VBAL’s bond exposure is mainly to a broad-based Vanguard bond ETF with most of its assets in Canadian federal and provincial bonds. You could use VBAL or similar as a portfolio foundation and add other ETFs to bulk up your corporate, high-yield or long-term bond exposure, but that’s a detour from the simple, turnkey approach that have made balanced ETFs so popular.
If the 70-30 stock bond mix resonates with you, check out the Horizons Balanced TRI ETF Portfolio (HBAL). It’s not a traditional balanced ETF in that it doesn’t pay dividends or bond interest and instead produces total returns based on share-price changes plus interest or dividend income. I did a quick check of three other major ETF companies' asset-allocation ETFs and none offered a 70-30 option. There were 60-40 funds, labelled as a balanced option, and 80-20 growth funds. Skip the 80-20 mix unless you are comfortable with most of your portfolio being subject to the kind of stock-market plunge we saw in March and will see again at some point, whenever.
This brings us back to the 60-40 balanced ETF. Ask yourself this if you hold one now or are thinking of buying: Could I do a better job by managing individual ETFs myself? If not, then a 60-40 balanced ETF still makes sense.
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