What makes asset allocation ETFs the ideal choice for long-term investors is the built-in diversification.
For this reason, it’s sad to report that the favourite exchange-traded funds in the asset allocation category are all-stock portfolios. This surprising trend was pointed out in a recent note from Craig Basinger, chief market strategist at Purpose Investments.
”The flows into all-equity one-ticket solutions have ballooned higher over the past few years while the appetite for more ‘balanced’ solutions, even the ‘growth’ tilted portfolios, has lagged,” he wrote. “All-equity flows have generally been tracking double the others.”
All-equity funds in the asset allocation category do offer diversification. But it’s focused on dividing money between Canadian, U.S. and international stock markets, without exposure to bonds. Mr. Basinger links the popularity of all-equity asset allocation funds to a 22-per-cent annualized global stock market return since the start of 2023.
Stocks have delivered, and so have all-equity asset allocation ETFs. For example, the iShares Core Equity ETF Portfolio (XEQT-T) made 31.9 per cent on a total return basis for the 12 months to Oct. 31, the iShares Core Growth ETF Portfolio (XGRO-T) made 27.6 per cent and the iShares Core Balanced ETF Portfolio (XBAL-T) made 23.2 per cent. Here’s how the popularity of these three ETFs compares: XEQT has assets of $5.4-billion, XGRO has $2.8-billion and XBAL has $1.7-billion.
Investors are obviously working on the idea that more stocks equals better performance. Bonds actually did pretty well in the past 12 months, but stocks were far better.
The popularity of all-equity ETFs suggests investors see the hot stock trend continuing. But Mr. Basinger noted that the stock markets have lately moved into a particularly speculative phase, which suggests heightened risk for all-equity investors. Bonds offset that risk, even if the outlook for fixed income isn’t stellar right now.
Concerns about inflation rebounding in the United States under incoming president Donald Trump have recently damped bond market performance in both the United States and Canada. In October alone, the benchmark FTSE Canada Universe Bond Index lost 1 per cent.
Still, there’s more risk in stocks than bonds right now. If stocks tank, bonds should add some buoyancy. For investors using asset allocation ETFs, this means that growth or balanced funds should outperform all-equity funds handily.