VGRO is Vanguard's most popular one-fund ETF with $3B of assets under management (AUM). VGRO is their “Growth ETF Portfolio''. With a blend of 80% equity and 20% bonds, it offers long-term portfolio growth with medium risk level.
In this article, we’ll review VGRO and discuss its pros and cons.
What are one-fund ETFs?
Also called self-rebalancing or asset allocation ETFs, one-fund ETFs are comprehensive portfolios that are rebalanced automatically to maintain their allocation and risk/return goals. They come in various blends of allocations, ranging from long-term options with 100% equity to conservative portfolios of mostly bonds.
What is VGRO?
VGRO is Vanguard’s Growth ETF Portfolio. It consists of 80% equities and 20% bonds. In practice, VGRO is a portfolio ETF comprised of Vanguard ETFs with the following allocation:
As of December 31, 2020
|VUN||Vanguard US Total Market Index ETF||33.20%|
|VCN||Vanguard FTSE Canada All Cap Index ETF||23.80%|
|VIU||Vanguard FTSE Developed All Cap ex North America Index ETF||17.00%|
|VAB||Vanguard Canadian Aggregate Bond Index ETF||11.70%|
|VEE||Vanguard FTSE Emerging Markets All Cap Index ETF||6.40%|
|VBG||Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged||4.50%|
|VCB||Vanguard US Aggregate Bond Index ETF CAD-hedged||3.40%|
As suggested in the name of its underlying funds, VGRO is geographically diverse with its top 95% of net assets with the following allocation:
VGRO Geographical Allocation
As of December 31, 2020
VGRO is also diversified in terms of industry weighting.
VGRO Industry Allocation
As of December 31, 2020
VGRO is relatively new since it started in January 2018. It showed a return of of 17.66% in 2019 and 10.89% in 2020 and an average annual return of 8.44% since inception.
VGRO's distribution yield is currently 1.74%. Since VGRO is a mix of stocks and bonds, this includes both stock dividends and bond interest payments.
VGRO's Management Expense Ratio (MER) is 0.24%.
The main benefit of VGRO, as other one-fund ETFs, is simplicity. There’s no need to rebalance your portfolio. Each unit is balanced, so your portfolio is too.
VGRO, as other one-fund ETFs, has the benefit of being well diversified. In general, a broad global exposure to the markets limits investment risks. VGRO is also relatively low cost compared to similar investment vehicles like mutual funds and robo-advisors.
So, why isn’t everyone already invested in VGRO and other one-fund ETFs? Well, as easy as it sounds to just invest using VGRO, there is a case to be made that it is actually better to hold the underlying ETFs of the fund. Here’s why:
1. It’s much cheaper
As mentioned earlier, VGRO has a MER of 0.25%. Here’s the breakdown of your MER if you were to hold the same allocation of ETFs as VGRO individually:
As of December 31, 2020
|VUN||Vanguard US Total Market Index ETF||33.20%||0.16%|
|VCN||Vanguard FTSE Canada All Cap Index ETF||23.80%||0.06%|
|VIU||Vanguard FTSE Developed All Cap ex North America Index ETF||17.00%||0.22%|
|VAB||Vanguard Canadian Aggregate Bond Index ETF||11.70%||0.09%|
|VEE||Vanguard FTSE Emerging Markets All Cap Index ETF||6.40%||0.24%|
|VBG||Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged||4.50%||0.38%|
|VCB||Vanguard US Aggregate Bond Index ETF CAD-hedged||3.40%||0.26%|
The difference between a 0.16% and a 0.24% MER may not seem like much. On a $100,000 portfolio it already represents a $80 difference per year. You have to think of it as a percentage of your growing portfolio. It can add up to quite a bit, especially knowing that it’s money you also won’t be able to reinvest into your portfolio, losing on the compounding interest year after year.
2. Rebalancing is not that hard
Rebalancing can be a hassle but it doesn’t have to be. With Passiv, you don’t need to use complicated spreadsheets to keep your portfolio balanced and spend time placing trades at your brokerage.
It’s easy to set your target portfolio and Passiv will recommend the trades needed to rebalance your portfolio. After review, you can place these trades directly into your brokerage account at the click of a button.
3. One-fund ETFs don’t offer any room for customization
While it’s great that you don’t have to think too much about your asset allocation with one-fund ETFs (other than picking your split between stock and bonds), there is also no opportunity for tweaking.
For example, while VGRO is diversified geographically, it is heavily biased towards Canada. Canada represents almost 30% of the fund while Canada represents only about 4% of global GDP. A lot of Canadians are fine with this bias for various reasons (stable market, knowledge of market, good historical returns, limits currency risk, tax advantages), but not everyone is. If you wanted to reduce the allocation of Canadian securities (VCN and VAB), that would be impossible while investing in VGRO.
If you held each ETF separately, you could easily tweak the allocation to reflect your financial philosophy. As a bonus, you would be able to also optimize your weighted average MER.
4. One-fund ETFs are not the most tax-efficient option
While VGRO is a Canadian traded asset, it holds foreign funds as underlying assets. These foreign funds are charged withholding taxes on dividends when held outside of a RRSP, which are passed on to the investor (you), in the form of a reduced return. If you have a small portfolio, you can just hold VGRO in your RRSP or decide that the reduced return doesn't impact your small portfolio much.
When your portfolio gets larger, it may become more efficient to hold each underlying asset in the account that makes your portfolio the most tax-efficient. For example, you can decide to hold foreign holdings in your RRSP and domestic holdings in your TFSA, RESP, or margin accounts (assuming that you maxed out your contribution room).
With Passiv's asset class prioritization feature, you can choose in which account your assets are traded, so you can build and keep balanced your own tax-efficient ETF.
5. Changing your allocation is much more difficult and/or costly with one-fund ETFs.
Have you noticed that one-fund ETFs are associated with an investment time horizon? In general, the closer you get to the end of your investment life, the less stocks you hold as they are more volatile than bonds.
How would you go about changing your portfolio allocation invested 100% in VGRO to a portfolio of 100% of its more conservative counterpart VBAL?
Well, you would either:
- Sell all your VGRO and use the cash to buy VBAL instead. That would cost you a lot in fees and capital gain taxes to do this regularly throughout your investment life.
- Calculate how much of an even more conservative one-fund ETF (like VCIP) to buy in order to get to an allocation similar to VBAL with both VGRO and VCIP. That sounds like even more work than rebalancing, doesn’t it?
All of Vanguard’s one-fund ETFS hold the same securities with different allocations. If you hold each ETF separately in your portfolio, it is much easier to tweak the allocation over time to adjust your portfolio’s risk tolerance. This is especially true if you use Passiv, as it lets you adjust your target allocation in a few simple steps.
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VGRO is a good starting point for beginner investors. It’s a simple, well-diversified, relatively low cost option. However, if you want more control over your investments, fees, or are looking for a portfolio that can grow with you over your lifetime, it is a good idea to consider holding VGRO’s underlying ETFs instead.