Comparison of Canadian All-In-One Asset Allocation ETFs

The all-in-one or asset allocation ETFs are a simple and effective way to DIY invest. I am not a certified investment advisor and cannot make specific recommendations for you. However, I will present information that you may find helpful in deciding or seeking out more information first. If you have decided that you want to invest using one of these funds, there are two main steps.

First, figure out the asset allocation that you are looking for to balance risk and return for your risk tolerance. Each company that makes these ETFs has a flavor to match that. The next step is to pick which of the ETF families to use. This post will compare the big three: Vanguard, Blackrock iShares, and BMO. Plus, the Horizon offering which is a bit unique. The pros/cons of mixing and matching ETFs from different companies will also be touched upon. In the end, the differences are minor. Just picking something that matches your risk tolerance and getting invested is what matters.

This post also has embedded fee & tax drag calculators for the different ETFs in a TFSA, RRSP, personal taxable account, and corporate account that you can use with your own income numbers to compare. These are how I made the charts for the video where I compare the Canadian asset allocation ETFs.

In The Wrong Spot?

The Big Four All-In-One ETF Providers

The main concern with picking an ETF provider is if they are a small player and at high risk of shutting down. That doesn’t mean that you lose your money. An ETF holds underlying assets that have value. However, it could mean that the ETF is liquidated, you get your money, but also have an impending tax bill if you realized gains. The good news is that the big providers are huge and unlikely to go anywhere.

Another way an ETF could be liquidated is if it closes. ETFs close all the time. However, the reason that they close is usually due to lack of interest or high costs. That risk is highest with a niche ETF that focuses on a small segment of the market. Fortunately, the asset allocation ETFs are very popular and cover large liquid markets that are easily traded.

How I interpret the above table comparing providers.

Blackrock and Vanguard are both behemoths. Neither they, nor their ETFs, are likely to close. They also have a huge daily price-volume. So, buying or selling large sums is unlikely to influence the price or lose much to the market makers that grease the wheels when you buy/sell.

BMO is a major bank and the largest Canadian-owned ETF provider. Their all-in-one ETF offerings are newer and therefore smaller at the moment. They are committed to asset allocation ETFs and the underlying ETFs used are large and liquid.

Horizon is also a major Canadian ETF provider, and niche ETFs is the focus of their business. So, these ETFs are likely to remain important to them. The size and volume of these ETFs is pretty good, given that they are niche. However, they are nowhere near the behemoths.

The BMO and Horizon ETFs have small dollar-volumes traded each day. Buying/selling hundreds of thousands of dollars of a low-volume stock all at once could result in some inefficiencies. However, these ETFs are different from stocks. There are actually three layers of liquidity that operate in the background. Volume is actually not well-tracked (since they trade on multiple exchanges) and doesn’t reflect their liquidity. The underlying holdings are extremely liquid – what matters.

Matching Your Target Asset Allocation

Each of the providers has their offerings to emulate commonly used stock:bond target asset allocations. As mentioned elsewhere, choosing an asset allocation is a best guess rather than a precise science. However, if you want to pick something in between, you can blend two options. This is summarized in the table below.

Differences in Equity Exposure Under the Hood

Each of the companies have some slight variations with the way that they sub-divide their stock exposure around the world. There are also some differences in the structure of some of the underlying ETFs. I honestly think that for the most part, it is hair-splitting. Further, no one can predict which little nuance here and there will be better or worse in the future. Stocks around the world are very strongly correlated. So, any performance differences are likely to be miniscule. The one exception is the Horizon ETF family which have a very different corporate class structure.

Bottom Line: Don’t get hung up on minute differences. I think that it doesn’t matter much. Except, for the Horizon option. I am providing the information below and some commentary for you to decide for yourself if it matters to you.

best all in one etf canada

How I interpret the above table comparing providers.

Why are they all overweight in Canadian equity?

Canada is about 3% of the global market. However, Canadian investors generally overweight Canada. That has the advantage of tax-efficient eligible dividends. Canada and global markets are also closely linked, but the correlation is not perfect and rebalancing two assets with similar risk/expected returns, but imperfect correlation can be helpful to smooth volatility without reducing return. No one knows the perfect Canadian overweighting, but 20-30% is a reasonable guess. So, I don’t see significant difference between the three conventional ETFs in this regard. The Horizon ETF is on the low end.

What are the main differences between the Blackrock iShares, BMO, and Vanguard allocations?

Blackrock is slightly more spread out around the developed world with a bit lower emerging markets exposure. The BMO version has a bit more emerging markets at the expense of Canadian exposure. The Vanguard version has a bit more Canadian exposure at the expense of US. Does any of that matter? Probably not much and no one can predict which minor variation will perform better.

Nuances of the Horizon Special Brew.

Corporate Class Structure & Some Synthetic ETFs

The Horizon ETF has some big differences from the other convention ETFs. The underlying funds are corporate class. That means they are organized together as a company and expenses in one fund can be used to offset income in another. The index-tracking Horizon funds plus their more expensive trader-oriented funds are bundled. The net effect (if managed well) is that the index funds should accrue capital gains rather than pay out dividends/interest. That means tax deferral (until you sell) and tax reduction because capital gains are taxed at half the usual rate.

Some of the underlying funds also use a complex swap structure. That is a synthetic ETF using contracts with major banks rather than holding the stocks directly. It is actually a common practice elsewhere in the world because it is efficient and effective. However, in Canada it was a target for legislative attack because they were also re-characterizing income. The subsequent change to corporate class is a more conventional approach to managing income and has hopefully put that to rest. However, governments can do just about anything.

Tax advantages of the Horizon ETFs

The Horizon product could be a major advantage if you have a high tax bracket personal account or corporate account. It is not a slam dunk because the foreign market ETFs have a slightly higher fee. It is a balance between fee cost and tax savings. You can look in the fee/tax drag section of this page to see the difference. Further, if the management team is not able to offset all of the income, then there would need to be an eligible dividend paid out. Still better than a foreign dividend or interest.

Eligible dividends may be good in a corporation. If a private corporation has to pay its owners dividends to live off of, then eligible dividends are more efficient than ineligible ones. It is complex, but that could mean about a 0.07%/yr tax savings favoring convention Canadian exposure, if ideal. However, when you consider the increased tax drag of the international investments, then the corporate class bundle comes out ahead. Further, if the corporation owners do not need to draw dividends from their company to fund their lifestyle, then the corporate class with capital gains are much more tax efficient.

The Horizon Bundles have slight large cap & growth tilts.

Instead of tracking the whole market, Horizon got creative with their asset allocation. In summary, they have more large cap exposure and growth exposure. They are missing small stocks. While those make up <5% of most markets, small size and value pricing are factors associated with increased risk and expected return over very long time periods (think decades).

I analyzed the Horizon mix using comparable index funds and If you assume a ~2%/yr value premium & ~2%/yr premium for small cap size, there is a potential decreased expected return of ~0.15%/yr. Those factor premiums are more likely ~1%/yr given that they are now broadly known and dependent upon how you slice the data. So, that would translate into a 0.08%/yr decreased expected return. Growth has outperformed over the past decade and simply looking at historical returns would actually show an increased return for the growthy Horizon mix. However, no one knows how they will perform moving forward and factors out or underperform for long periods (like a decade). Overall, I would say that it is theoretically interesting, but small and unpredictable.

Differences in Bond Exposure Under the Hood [Yawn]

Again, this is likely hair-splitting. Any potential impact of differences is likely to be small and unpredictable. However, below is a table comparing how the different fund families get their bond exposure. Again, the one outlier is Horizon which uses a corporate class bond fund. I discussed how that works above. In short, there are management risks and legislative risks, but a potential big tax advantage for highly taxed accounts.

How I interpret the above table comparing providers.

Blackrock has mostly Canadian bonds with slight short-term corporate tilt. BMO has mostly Canadian bonds that is government dominated and some US corporate exposure. Vanguard has 60% Canadian and then a broad global exposure. Horizon is 2/3 Canadian and 1/3 Unhedged US Treasuries. I am skeptical that the small differences translate into any meaning or predictable performance differences. However, I will provide some theoretical commentary.

How effectively should the different bonds smooth volatility?

The role of bonds in a portfolio is to stabilize and lower volatility. Government bonds tend to work better for that, but some people like that corporate bonds pay slightly more income. The issue with corporate bonds is that they are more correlated to the stock market and less of a volatility dampener.

With the exception of Horizon’s US Treasury holding, the other foreign bonds are CAD-hedged. That helps to dampen volatility.

The Vanguard version is the only one with Non-North American bonds. That is more diverse. However, I am not sure how much of a different that makes with bonds since they have low volatility to begin with and are still correlated globally with each other.

Comparing Fee & Tax Drag

If we assume that the slight differences in asset hair-splitting don’t make a meaningful predictable difference, then perhaps fees and taxes will. They are at least pretty predictable! If an ETF tracks an index, the annual growth in your portfolio would be expected to trail it by the annual fee & tax drag. For example, if the market returns 7%/yr and you have 0.2% fees and 0.8%/yr in taxes, then your portfolio would grow by 6%/yr.

I will compare the different ETFs in different account types. For the taxable accounts, you can adjust your income information to get a personalized tax drag comparison. Tax calculations start with the gross yield of a holding. That is the income paid divided by the price. Because price is very volatile, yields can fluctuate significantly. So, I used the average yield over the preceding 8 to11-year period for the fund or its index, depending on data availability.

For the Horizon funds, I used a mix that made them have a comparable asset allocation to the conventional all-in-one ETFs. That is to make a fairer comparison as the Horizon 70:30 mix was in between the others, and allocation impacts tax drag.

Fee & Tax Drag in a TFSA

The main drag on growth in a TFSA are the fees of the funds and foreign withholding taxes (FWT). A TFSA is not recognized by some countries, making the FWT on foreign dividends is non-recoverable. Calculation of FWT is complex, but I applied the methodology of this paper to the asset allocation ETFs. It is mind-bending. So, don’t fret about it. I just want to be transparent.

Fee & Tax Drag in an RRSP

Like a TFSA, the drags on growth in an RRSP are the fees and FWT. An RRSP is FWT exempt when the foreign stocks are held directly and can have a punitive layer of FWT when held indirectly. I accounted for those fund structure differences in the comparison below.

Fee & Tax Drag in a Personal Taxable Account

The main drag on growth in a personal taxable account are the persona income taxes. The fees are usually small in comparison. Most FWT is recoverable. However, there are a few cases where one layer may not be, depending on fund structure. I accounted for those fund structure differences in the comparison below. You can adjust your income to see what the comparable tax drag is for your situation.

Fee & Tax Drag in a Corporate Account

Tax drag on investment income is quite variable.

Canadian private companies can invest using a corporate account. How money is taxed as it flows through a corporation and how corporate investment income is taxed is complex. The tax drag on investment income in a corporate account is quite variable. Ideally, it can be quite tax efficient. However, there are ways that it can become very tax-inefficient compared to personal investing. There are two main ways that can happen.

Corporations become tax-inefficient is not paying out enough dividends.

To discourage corporations being used as massive tax-deferred passive-income pools, interest and dividends paid to a corporate account are subjected to a high upfront tax rate close to the top personal rate. Some, or all, of that tax is refundable when you pay dividends out of the corporation to owners (and they pay personal tax). That is called refundable dividend tax on hand (RDTOH). So, if your corporation is not paying out enough dividends to release the RDTOH, the investment income in the corporation has a high tax drag. If in a low personal tax bracket, it sometimes makes sense to pay extra dividends to release the RDTOH and then invest that extra money personally.

Corporations become tax-inefficient if too much active & passive income.

In 2018, another rule aimed to limit the utility of small corporations for investing was introduced. If you earn more than $50K in passive income, then the amount of active income (from operations) that is taxed at the lower small business deduction rate is reduced. That occurs at a rate of 5:1 so that all active income is taxed at the general corporate rate when there is $150K/yr of passive income. So, high levels of active and passive income is when this may kick in.

The difference between the small and general tax rates is ~15% and the 5:1 impact makes that a ~75% tax rate on the investment income in the $50-150K range. That can be attenuated if you are paying out a lot of dividends to meet personal cashflow needs (and paying personal tax), but it is still a ~38% tax rate on the investment income.

Asset Allocation ETF in a Corporation Comparison Calculator

Given the variable efficiency, I created the calculator below. It is pre-populated with numbers, but you can change the ones in the cream fields for your own situation. If there is a tax-inefficiency, a comment about it will appear. The fees, FWT, and Canadian taxes adjust accordingly. You can enter in the investment income already received if you are keeping those investments. You can enter how much you plan to invest to see how that impacts efficiency for new investments bought moving forward.

In Summary: Pick Something.

The most important thing is to build a portfolio with holdings that suit your risk tolerance. That can be efficiently and effectively done as a DIY investor using All-In-One Asset-Allocation ETFs. The differences between the Blackrock, BMO, and Vanguard asset allocation ETFs are miniscule whatever account you hold them in.

All things being equal, Blackrock’s XEQT, XGRO, and XBAL are on the list of commission-free ETFs at Qtrade.

The Horizon ETFs have a tax-efficiency advantage across account types. For the TFSA and RRSP, it is quite small and within the range of error, if the size and value premiums increase returns in the future. In a personal taxable account, the Horizon ETFs have a clear tax drag advantage at personal income levels over about $50K. That grows dramatically at higher incomes. In a corporate account, the Horizon ETFs have a clear tax drag advantage when the corporation is functioning efficiently. If the corporation becomes less efficient due to retained RDTOH or a bump over the active-passive income limits, then the Horizon tax advantage is huge. Despite these tax advantages, one would need to be comfortable with the unique structure and nuances of the Horizon products to consider using them.

I cannot and will not advise what is suitable for you. However, hopefully the information on this page has helped you to learn about some possible options to use. The differences are small. The most important thing is time in the market. So, pick something and get invested.