Asset Allocation ETF portfolios: a beacon of calm

15 May 2020 | Investing


Commentary by Tiffany Ng, CFA, CPA, CMA, MFin, Investment Product Manager, Vanguard Investments Canada

The markets have been on a rollercoaster ride these past few weeks – in a short period of time, we saw a significant market downturn followed by a quick reversal. Understandably, there is considerable uncertainty around market conditions and when our daily lives will return to normal. Despite this, investors can rest well knowing that their money is invested in Vanguard’s Asset Allocation ETF portfolios – they are well-diversified, rebalanced regularly, and stayed the course during stressed market conditions.

Through the most recent bout of market volatility, the ETF portfolios have been stress-tested and remain in line with investors’ long-term goals. These ETF portfolios are one-ticket solutions that simplify investment management and mitigate risk through asset allocation. Each ETF portfolio provides broad global diversification using a blend of several core Vanguard ETFs.

Diversification helps mitigate market volatility

It is especially important to maintain a well-diversified, global portfolio during periods of heightened volatility. Throughout the downturn, equity markets saw the steepest declines while fixed income served as a ballast for the portfolio. When considering performance over longer time periods, equities have significantly outperformed fixed income.

In the current environment, there has been growing interest in obtaining niche exposures in narrow sectors, such as gold or individual companies. At Vanguard, we take a different route of breadth. The Asset Allocation ETF portfolios are all-cap, globally diversified, and have exposure to over 90% of the investment universe or over 25,000 individual equity and fixed income securities. This includes investment opportunities in a more balanced way – for example, gold miners already make up over 10% of Canadian equities – and means you have all the exposures you need, in an all-in-one solution.

Portfolio performance is aligned to the risk profile of the portfolios. On the downside, the All Equity Portfolio (VEQT – 100% Equity) experienced the greatest downside while the Conservative Income Portfolio (VCIP - 20% Equity/80% Fixed Income) held up the best. When the markets rebounded, the ranking reversed as equity performance led. This is exactly what we expect from our Asset Allocation ETF portfolios – each part of the portfolio has a different role to play.

Rebalance regularly to maintain the desired risk profile

As volatility picks up, portfolio exposures start to drift away from the target allocations and portfolios may become more risky. The Asset Allocation portfolios maintain the appropriate allocations despite changing market conditions; the portfolios are rebalanced regularly to maintain the appropriate exposure across sub-asset classes and risk levels. Our global team of dedicated portfolio managers manage over $1tn (yes, trillion!) in asset allocation products this way every day, meaning they were able to navigate this recent period with relative ease – stepping in more frequently to rebalance our Canadian Asset Allocation ETF portfolios.

Trading well under stress

Many investments, primarily in the bond market, became hard to buy or sell in the most volatile days as the underlying liquidity of certain types of individual bonds diminished. Despite this, ETFs continued to trade, providing liquidity for investors looking to buy or sell. The Asset Allocation ETF portfolios held up particularly well under these conditions and the spread between the net asset value and market price of the portfolios remained tight throughout the period of market volatility.

Stay invested for the long term

It is important to maintain discipline and stay focused on the long-term. Investors need to fight the temptation to adjust and trade when markets are most volatile. It is challenging to time markets during stable market environments and even moreso during stressed market environments; missing even one of the best performing days in the market may have detrimental impacts to your portfolio. Our Asset Allocation portfolios are well-diversified, rebalanced regularly, and designed to be resilient in all market conditions.

Important information

The views expressed in this material are based on the author's assessment as of the first publication date (May 15, 2020), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The author may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise. Any "forward-looking" information contained in this material should be construed as general investment or market information and no representation is being made that any investor will, or is likely to achieve, returns similar to those mentioned in this material or anticipated in this material.

While this information has been compiled from sources believed to be reliable, Vanguard Investments Canada Inc. does not guarantee the accuracy, completeness, timeliness or reliability of this information or any results from its use.

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Please consult your financial and/or tax advisor for financial and/or tax information applicable to your specific situation. Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice. In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.