Those Canadian investors who are fortunate enough to have a solid inflation-indexed defined benefit (DB) pension could be more aggressive in choosing their asset allocation ETF. And, those without a true DB pension might be more conservative. I’d consider moving up or down in 20% increments, roughly speaking. For example, someone with a DB plan could choose VBAL; those without one, VCNS. However, Felix notes, this depends more on the amount of the pension relative to expenses than on a binary pension-versus-no-pension scenario. These ETFs are available to buy in Canadian dollars and are listed on the TSX. They offer broad global exposure as well as Canadian, all with regular rebalancing. Easy peasy.
Tactical overlays for inflation, low volatility and themes
In practice, most Canadian investors (whether retired or not) may want to do a bit more tinkering with their mix than this. For one, the asset allocation ETFs tend to have minimal exposure to alternative asset classes outside the realm of stocks and bonds. They will own gold stocks and some real estate stocks or real estate investment trusts (REITs), but they have little or no pure exposure to precious metals bullion, commodities or, indeed, cryptocurrencies. (But, maybe for that last asset, that’s a good thing.)
MoneySense’s ETF panellists Yves Rebetez, CFA, partner at Credo Consulting, and Mark Seed, of the My Own Advisor website, aren’t convinced that anyone can rely 100% on asset allocation ETFs. Given volatile markets and unpredictable levels of interest rates and inflation, it can be very risky to go all-in on this type of ETF. That goes double for retirees, when inflation can wreak havoc with long-term nest eggs.
The first half of 2023 didn’t unfold as anticipated, starting with a pivot sooner or later from the U.S. Federal Reserve, with a recovery spurred further by the excitement over ChatGPT, AI and “Nasdaq animal spirits,” Rebetez tells me on a Zoom call. He finds asset allocation ETFs to be “OK, as long as bonds behave.” Bonds, of course, benefited from the long-time bond bubble in the first few years of asset allocation ETFs. That bubble nastily burst in 2022 on both the stock and fixed-income sides, hurt by the successive rises in interest rates. He doesn’t feel we are out of that yet. “Give the bond market more time to digest,” he says, adding that yield curves are still not behaving.
Felix says the fixed-income market looks far more positive in 2023: “Bonds have been declared a dead asset many times in the last decade, and [they] took a beating in 2021 and 2022. This was counterintuitively good news for long-term investors as the now-higher yields far outweigh the capital losses incurred in 2021 and 2022.”
Some MoneySense ETF panellists see a case for adding tactical layers to an asset allocation ETF.
For example, you might use the 40/60 VCNS instead of 60/40 VBAL for 80% of your investments, reserving the other 20% for more tactical mostly specialized equity ETFs. You’d aim for a net 50/50 asset mix after blending the asset allocation ETF and these tactical ETFs, assuming the tactical picks are pure equity plays.
Apart from layering on 10% or 20% of inflation hedges, like gold, commodities or REITs, some of the panellists recommend reducing volatility through “low-vol” equity ETFs, like ZLU (BMO’s low-volatility U.S. equity ETF). By using the more conservative 60% fixed income asset allocation ETFs, that could allow some folding in of equity ETFs that are more defensive in nature.