A basic rule of investing has been upended in 2022: Portfolios are suffering because bonds are performing as badly or worse than stocks.
You’ll find many examples of this investing anomaly in the sixth and final installment of the 2022 Globe and Mail ETF Buyer’s Guide, which covers asset allocation ETFs. Think of these exchange-traded funds as an instant portfolio of Canadian, U.S. and international stocks, plus bonds designed for a particular investing need.
Asset allocation ETFs are broadly available in conservative, balanced, growth and all-equity versions, the key difference being the percentage of the portfolio held in bonds. Bonds are considered a portfolio stabilizer when stocks plunge – the more cautious you are as an investor, the more bonds you want.
But with interest rates on the rise this year, bond prices have fallen dramatically while Canadian stocks in particular have held their ground. The net result is that asset allocation ETFs for more cautious investors fell more in the first quarter of 2022 than more aggressive funds.
Long term, stocks present a much bigger danger of scary declines than bonds. But in spring 2022, bond exposure is definitely a risk to watch out for. The ETF guide shows you the stocks/bonds mix for each fund, along with recent and longer-term results. There are also notes on how individual holdings influence returns. For example, how exactly do these funds get their bond exposure?
The ETFs presented here are “funds of funds,” which means they hold individual stock and bond ETFs from the same corporate family. Each fund has a guideline on how much of the portfolio to keep in each asset class, and how often to rebalance back to those levels. Funds were considered for this list if they had assets of $25-million or more and a track record of at least one year.
Conservative and all-equity asset allocation funds were excluded. Conservative funds typically have bond allocations – 60 per cent or more – that make little sense in today’s market. All-equity funds may seem ideal because they hold no bonds, but long-term investors in these should expect severe losses in the next stock market crash. Bonds, rancid as they are right now, will help when that happens.
Here’s a discussion of terms used in this edition of the ETF Buyer’s Guide:
Assets: Shown to give you a sense of how interested other investors are in a fund.
Management expense ratio: The MER is the main cost of owning an ETF on a continuing basis; published returns are shown on an after-fee basis. The MERs shown here include the cost of the underlying funds in a balanced ETF.
Trading expense ratio: The TER is the cost of trading commissions racked up by the managers of an ETF as they make adjustments to the portfolio of investments; add the TER to the MER for a full picture of a fund’s cost.
Stocks/bonds split: Shown as of the most recent portfolio update on ETF company websites. It’s normal for the actual split to drift a little bit from the targeted asset allocation – periodic rebalancing takes care of this.
Top three weightings: “Canadian broad bond” means a bond ETF that includes both government and corporate bonds; the “total stock market” exposure some ETFs have means large, medium and small companies; the S&P 500 and S&P/TSX Composite tend to hold larger stocks.
Returns: Total returns are shown – price changes plus dividends and bond interest.
Due to technical issues, 3-yr line charts for FBAL-NE and FGRO-NE couldn’t display within the entry for those two ETFs.
Notes: Market data as of April 26, 2022. Returns to March 31, 2022. *Bond weighting may include a small amount of cash.
Due to technical issues, 3-yr line charts for FBAL-NE and FGRO-NE couldn’t display within the entry for those two ETFs.
Source: Rob Carrick; ETF company websites; globeinvestor.com; TMX Money
Click here to download an Excel version of the guide.
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Rob Carrick