The continuing recognition of asset allocation ETFs is undoubtedly an excellent factor—perhaps even revolutionary. Canadians have enthusiastically embraced the one-ticket portfolios from Vanguard and iShares particularly—VGRO alone has $1.7 billion in property. (BMO’s smaller household of one-ETF portfolios can also be glorious.) By no means one to overlook leaping on a bandwagon, different fund suppliers have not too long ago launched their very own one-fund options, together with the TD One-Click on ETF Portfolios, which appeared final August.
https://www.youtube.com/watch?v=SAQknZmRqNg
TD has at all times had an uneasy relationship with indexing. On one hand, their glorious e-Sequence mutual funds now have a 20-year historical past, which is an eternity for an index fund in Canada. They continue to be the most affordable index mutual funds accessible to DIY traders, which is why they’re nonetheless a part of my mannequin portfolios. However TD appears to take care of these funds solely reluctantly. They’re by no means marketed, and till 2019 they have been accessible solely to TD shoppers—and even then, you usually needed to bounce by way of flaming hoops to buy them.
It will have been simple for TD to mix the core e-Sequence funds right into a low-cost balanced portfolio lengthy earlier than asset allocation ETFs arrived on the scene. However they by no means did. They got here shut in 2017, launching a household of 5 Managed ETF Portfolios together with, for instance, the TD Managed Balanced Development ETF Portfolio. Regardless of the complicated title, these have been really mutual funds, not ETFs, however they used TD’s index ETFs as their underlying holdings. The press launch known as them “a brand new suite of all-in-one index options,” which sounded promising.
Sadly, as I identified on the time, they aren’t low cost, with MERs of about 0.78%. Worse, the prospectus gave the managers leeway to change the asset allocation “relying on the outlook for the markets.” It turned out to be even worse: in 2020, the Managed ETF funds dropped all pretense of being index options and added a big dollop of actively managed ETFs to the combination.
I point out all of this to offer some context for a dialogue of TD’s new trio of One-Click on ETF Portfolios. Like different asset allocation ETFs, they provide traders a possibility to construct a globally diversified portfolio at low value (the administration price is 0.25%) with a single product. However an in depth look reveals they’re way more lively than their counterparts from Vanguard, iShares and BMO.
The constructing blocks
At first look, the One-Click on ETF Portfolios are much like different asset allocation ETFs by way of construction and general asset combine. They embody a number of underlying ETFs overlaying Canadian, US and worldwide shares, although one notable distinction is that the TD portfolios embody no rising markets. There’s additionally a mixture of Canadian and US bonds.
The principle constructing blocks are the identical 4 ETFs that make up the underlying holdings within the e-Sequence funds:
To date, so good. However keep in mind after we stated TD has by no means absolutely embraced indexing? Effectively, not like the Vanguard, iShares and BMO asset allocation ETFs, the One-Click on Portfolios embody extra than simply conventional index funds. Much more, really. Whereas the advertising materials claims that about 75% of the portfolios are constructed from “low value, broad market index ETFs,” we take problem with that.
One of many largest holdings on the fairness facet is the TD World Expertise Leaders index ETF (TEC), which technically tracks an index, but it surely’s definitely not a broad-market ETF: it’s a concentrated wager on the worldwide expertise sector, with massive holdings in Apple, Microsoft, Amazon, Fb, Tesla and Alphabet.
You additionally get a serving to of the TD Q World Multifactor ETF (TQGM), which “makes use of a quantitative multi-variate inventory choice technique mixed with an optimized portfolio building course of,” no matter which means.
And there’s extra: the TD Q World Dividend ETF (TQGD), the TD Q U.S. Small-Mid-Cap Fairness ETF (TDQSM) and the TD Q Canadian Low Volatility ETF (TCLV). I haven’t seen this many Q’s since Peter Griffin was on Wheel of Fortune.
On the fastened earnings facet, a number of the bond publicity comes from index funds, however right here once more the portfolios are far more lively than conventional asset allocation ETFs. There are as much as 5 actively managed bond ETFs within the combine, together with three that maintain high-yield bonds, which carry way more threat than the investment-grade bonds you’ll discover within the Vanguard, iShares and BMO funds.
And to high all of it off, there are US bonds with no foreign money hedging, which suggests you’ll be uncovered to the trade price between the US and Canadian {dollars}. Keep in mind, bonds are supposed to scale back the volatility in your portfolio, however including unhedged overseas bonds is extra prone to enhance it.
As you’d count on, TD is advertising these actively managed parts as an enchancment on conventional indexing: “What makes the TD One-Click on ETF Portfolios distinctive is the allocation to roughly 25% Lively & Quant ETFs. Usually, all-in-one ETFs have 100% passive elements, which means with TD you get extra skilled administration.”
That is in keeping with what TD has finished with the Managed ETF portfolios mentioned earlier. It’s clear they’re making an attempt to distinguish their One-Click on ETF Portfolios from the competitors by transferring away from indexing and touting the ability of their portfolio managers.
A weight downside
Now that we’ve reviewed the underlying holdings of the One-Click on ETF Portfolios, let’s take into account how they’re assembled. Right here’s how the TD web site broke down every fund by asset class in late January:
| Asset class | TOCC | TOCM | TOCA |
|---|---|---|---|
| Canadian equities | 8% | 18% | 27.6% |
| US equities | 15.7% | 28.8% | 41.7% |
| Worldwide equities | 12.9% | 19.5% | 25.2% |
| Canadian bonds | 47.0% | 23.2% | 0% |
| International bonds | 13.7% | 8.6% | 4.4% |
| Different | 2.7% | 1.9% | 1.1% |
| 100% | 100% | 100% |
Supply: TD Asset Administration as of January 29, 2021
Just a few issues bounce out right here. The primary is the inconsistency among the many three funds. Within the Vanguard and iShares asset allocation ETFs, the relative weighting of Canadian and overseas equities are the identical throughout the entire household. For instance, in all 5 iShares funds, Canadian shares make up 25% of the fairness allocation, whereas US shares are allotted 45%, and worldwide and rising market shares get the opposite 30%.
In contrast, the relative proportions differ among the many three TD funds. Discover that TOCC has a lot much less in Canadian shares than worldwide shares (8% versus 12.9%), whereas TOCA as extra (27.6% Canadian equities and solely 25.2% worldwide). In TOCC and TOCM about three-quarters of the bonds are Canadian, whereas in TOCA none of them are.
It’s one factor to tout the ability of the fund managers, but it surely’s arduous to grasp why they’d apply their convictions in a different way. Why obese an asset class in a single fund and underweight it in one other? One would count on these portfolios to be the identical in all respects besides the general mixture of shares and bonds.
A shifting asset combine
We’re not finished but. The Vanguard, iShares and BMO asset allocation ETFs have particular long-term targets for shares and bonds and clear guidelines for a way usually they may rebalance again to these targets. Should you purchase VBAL, for instance, you may be assured the ETF will at all times keep very near its goal of 60% shares and 40% bonds.
Not so with the One-Click on ETF Portfolios. TD’s literature particularly says the asset weightings “could change because of market actions and portfolio supervisor discretion,” and that the fund “may additionally maintain a good portion of its property in cash-equivalent devices when the portfolio adviser believes it’s prudent to take action.”
You may already see these portfolios deviating from their targets. TOCM, which has the identical 60/40 benchmark allocation as VBAL, at the moment has lower than 32% in bonds. Equally, TOCC has a benchmark of 70% bonds, however its present allocation is simply over 60%. And TOCA, with a benchmark of 10% bonds, has solely half that a lot.
This technique (known as tactical asset allocation) is widespread in lively funds, but it surely has the same monitor file to different types of lively administration: it has intuitive attraction, works a number of the time, however often fails to ship higher risk-adjusted returns than a boring previous index portfolio that rebalances mechanically each time an asset class deviates by quite a lot of proportion factors.
The underside line
Let’s take a step again and keep in mind why the Vanguard, iShares and BMO asset allocation ETFs are such glorious merchandise. Sure, they’re effectively diversified, low cost and handy. However their different key profit is that they’re constructed totally from index funds.
The TD One-Click on ETF Portfolios, against this, make use of two layers of lively administration, with non-indexed holdings and tactical asset allocation. They could effectively ship outperformance over some intervals, and when you consider in a so-called core-and-satellite technique that mixes passive and lively parts, then these TD ETFs are a low-cost and effectively diversified solution to obtain that.
Nevertheless, when you’re in search of plain-vanilla index funds— that are all I’ve ever included in my mannequin portfolios—then the One-Click on ETF Portfolios from TD merely don’t match that description.
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