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Asset allocation ETFs are the unsung heroes of Canada’s ETF world. They represent one of the fastest-growing categories of ETFs and have not experienced a monthly outflow of assets since the first was launched in 2018.

But let’s face it: they’re boring.

“They’re not flashy and are never going to have headline-grabbing short-term performance,” Steven Leong, vice-president and head of iShares Product with BlackRock Asset Management Canada Ltd., said of asset allocation ETFs.

In fact, these ETFs never seek to hit home runs. “They do not strive to generate alpha, so they do not hold any tactical positions,” Leong said. “They simply seek to deliver high batting averages through consistent performance” — which is exactly what long-term investors seek. In fact, he added, they are “an efficient way of harnessing market returns in a low-cost and convenient way.”

Mark Raes, head of product with BMO Global Asset Management Canada, said that asset allocation ETFs “fly a little bit under the radar because they represent the stable, strategic core of a portfolio, whereas the headlines tend to go to the exciting new exposure or more volatile asset classes.” (Read this story.)

Raes added, “The primary benefit of asset allocation ETFs is that they are all-in-one solutions. They can represent an entire portfolio or represent the core to be surrounded by other ETFs, funds or direct securities.”

Asset allocation ETFs, also known as balanced ETFs, provide broad market exposure so that investors are diversified across not only stocks and bonds, but also geography and market capitalization, according to Raes.

Tim Huver, head of intermediary sales at Vanguard Investment Canada Inc. in Toronto, described asset allocation ETFs as “outwardly simple, but inwardly sophisticated” products that allow investors to use a single security to invest in “an asset allocation that’s aligned with their investment objectives and risk tolerance.”

The category’s popularity is borne out in its rapid growth since the first asset allocation suite of ETFs was launched in Canada by Vanguard in 2018. Since then, the category has accumulated more than $13.4 billion in assets under management (AUM) as of Aug. 31, 2021, according to National Bank Financial.

In fact, the category experienced its largest net inflow during the first eight months of 2021: $4.1 billion, compared with $2.6 billion for the entire previous year.

Vanguard is the largest player in the Canadian market, with $7.5 billion in AUM as of Aug. 31, followed by RBC iShares ($4.3 billion) and BMO ($715 million). Other companies with sizable AUM in this category include Purpose Investments Inc. ($360 million) and Horizons ETFs Management (Canada) Inc. ($280 million).

Although ETF AUM in general was growing rapidly when Vanguard launched its suite in 2018, “we saw a gap for broadly diversified, low-cost, single-solution, balanced portfolios,” Huver said. “A large contingent of investors were looking to set their asset mix and forget it.”

Asset allocation ETFs offer a broad range of asset mixes that are suitable across a full spectrum of investor risk profiles. For example, combinations include 80% equities/20% fixed income for aggressive investors; 60%/40% or 40%/60% for moderately aggressive investors; and 20%/80% for conservative investors.

Vanguard offers five balanced ETFs (see table) and its Retirement Income ETF Portfolio, which is aimed at generating a consistent monthly income stream of 4%. “We will underweight or overweight certain segments of the market using passive ETFs to achieve the income stream, which is achieved through dividend and interest income and capital appreciation based on historical returns,” Huver said.

iShares offers two suites of asset allocation ETFs — a core suite of four balanced ETFs and a suite comprising four sustainable ETFs. “The [environmental, social and governance] strategies focus on companies that have average or better than average sustainability risks,” Leong said.

Both iShares and Vanguard also offer asset allocation portfolios comprising 100% equities that are diversified across Canadian, U.S., developed countries outside North America and emerging markets. BMO offers a suite of four balanced ETF portfolios.

These types of ETFs are essentially ETFs-of-ETFs. Each is constructed using seven to nine ETFs offered by the sponsoring company.

While clients may be able to create their own balanced portfolios using individual ETFs, the key difference with asset allocation ETFs is their rebalancing feature.

“It is very difficult for investors to construct and rebalance their portfolios on their own,” Huver said.

“Automatic rebalancing within the ETF saves an investor time, effort and cost in reviewing and repositioning their portfolio,” Raes said.

Both Vanguard and iShares rebalance portfolios when they deviate from set asset-mix thresholds. BMO rebalances its portfolios quarterly.

Leong said BlackRock reviews its portfolios’ target weights annually. The review is not based on the direction of markets, but rather an effort to control risk and effectively meet portfolio goals, he said.

Prior to the launch of asset allocation ETFs, balanced mutual funds were typically considered the “single-ticket solution” for investors. While balanced mutual funds remain popular choices among investors, asset allocation ETFs are rapidly gaining ground.

Management expense ratios of asset allocation ETFs offered by Vanguard, iShares and BMO range between 20 and 25 basis points — considerably lower than the median asset-weighted MER for balanced mutual funds in Canada, which was 1.9% as of June 30, 2021, according to data provided by Morningstar Inc.

“Balanced ETFs tend to be strategically weighted, with ETFs as the underlying building blocks,” Raes said. “Balanced mutual funds are built around active investing, both from an allocation perspective between equities and bonds, but also by their underlying investments, which are either funds or direct holdings that look to generate active returns. Mutual funds look to beat the market, while ETFs look to capture market returns.”

The key differentiating factors between balanced mutual funds and ETFs, according to Huver, are diversification, cost and transparency.

“While asset allocation ETFs have been brought to market primarily with DIY investors in mind,” Raes said, “they are also gaining interest from advisors as smaller-client solutions, as core portfolio holdings and for global diversification. We see advisors using balanced ETFs for emerging clients or next-generation clients, but there is another advisor audience: those who are large users of ETFs, who can use these ETFs in a core and satellite framework [by] using balanced ETFs as a disciplined core and augmenting the exposure with other ETFs or investments through which [the advisors] want to make a more concentrated investment.”

Leong said asset allocation ETFs are a “natural fit for fee-based advisors.”

“We are at the early stage of the adoption of asset allocation ETFs,” Raes said. “With their benefits of diversification and rebalancing, and as easy-to-use, all-in-one solutions, we expect they will become mainstays for Canadian investors.”

Prominent asset allocation ETFs in Canada

Manufacturer ETF Ticker MER
BMO Conservative ETF ZCON 0.20%
Balanced ETF ZBAL 0.20%
Growth ETF ZGRO 0.20%
Balanced ESG ETF ZESG 0.20%
RBC iShares Core Income Balanced ETF XINC 0.20%
Core Conservative Balanced ETF Portfolio XCNS 0.20%
Core Balanced ETF Portfolio XBAL 0.20%
Core Growth ETF Portfolio XGRO 0.20%
ESG Conservative Balanced ETF Portfolio GCNS 0.24%
ESG Balanced ETF Portfolio GBAL 0.24%
ESG Growth ETF Portfolio GGRO 0.24%
ESG Equity ETF Portfolio GEQT 0.24%
Vanguard Conservative Income ETF Portfolio VCIP 0.24%
Conservative ETF Portfolio VCNS 0.24%
Balanced ETF Portfolio VBAL 0.24%
Growth ETF Portfolio VGRO 0.24%
Retirement Income ETF Portfolio VRIF 0.32%