Yes that is an ironic headline. While many of the asset allocation or one ticket ETFs are quite similar, Horizons asset allocation ETFs stand out. For starters as you may know, the ETFs used within these portfolios are held within a corporate structure that do not pay out taxable distributions. They primarily use swap-based ETFs to create the portfolios. That will enable greater tax efficiency with respect to withholding taxes on foreign dividends.
With the shackles of unwanted tax hits removed Horizons TRI (Total Return Investments) one ticket ETFs can create the most efficient mix of Canadian, US and International equities and bonds. They do not have to worry about how an over weighting to US equities might create those tax inefficiencies.
I had the pleasure of chatting with Mark Noble, the Executive Vice President, ETF strategies for Horizons. The general topic was building the Balanced Portfolio for the times. Will the traditional Balanced Portfolio be able to cut it moving forward? Certainly the classic 60/40 portfolio model is built upon studies from decades past. We’ll get to that later in this post.
I had also looked at the subject and offered the New Balanced Portfolio. Not surprisingly, you’ll find mention of Horizons asset allocation ETFs in that post.
The 70/30 is the new 60/40.
It might all start with the stock to bond ratio. With bond yields so low, their contribution is likely to be much less compared to the last few decades. Good bonds might be there as risk managers but their total contribution is likely to be quite muted. How low can yields go? The question might end up being ‘how negative’ can rates go? While lower rates might deliver some higher prices, the bonds would then paint themselves into a corner with no yield to offer. It’s a Catch-22.
We might need a greater allocation to growth – more stocks.
Horizons Balanced Portfolio is 70% stocks and 30% bonds. Here’s the make up of that portfolio – ticker HBAL.
On September 10, 2020 the breakdown (rounded figures) …
- 40.8% US stocks
- 19.6% International stocks
- 10.0% Canadian stocks
- 19.7% Canadian bonds
- 9.7% US bonds (treasuries)
The target stock to bond ratio for the Balanced Portfolio (HBAL) is 70/30.
Mark had explained how the largely embraced 60/40 model is built on studies and data from the 70’s and 80’s. The portfolio design was based on looking at the long term Sharpe ratio (risk/return profile) of owning equities from many decades past.
Over the last 20 years the optimal risk return mix has moved closer to 70% stocks and 30% bonds. HBAL offers a 70/30 allocation vs. Vanguard’s VBAL of 60/40. It results in a better return trajectory. And once again, those lower yielding bonds add another reason to slightly stretch the stock allocation if we want or need to eke out some greater gains. Keep in mind that you will be taking on some greater equity risk.
I have long been a proponent of the Balanced Growth Portfolio model. I describe that as the sweet spot, delivering ‘optimal’ risk adjusted returns.
Here’s some select returns for various one ticket portfolios. Returns are to the end of August. While it’s a short time horizon for evaluation, is shows the Horizons approach has paid off. In the brief history Horizons one ticket options have delivered the greater returns compared to peers.
We will find the same outperformance for the Horizons model if we back test the portfolio design to the inception of the Vanguard, BMO and iShares one ticket offerings.
For additional info on the competing offerings, here are my reviews of the …
Bonds that punch above their weight.
And while certainly it’s not usually ‘fair’ to compare a 70% stock portfolio to a 60% stock portfolio, the Horizons offerings employ some better risk managers. They go by the name of US Treasuries. Those bonds punch above their weight when it comes to managing those unruly stocks. Using those ‘super bonds’ will bring the volatility level of a 70% stock portfolio closer to that of a classic 60% stock portfolio.
Here’s US long term treasuries (TLT) in blue vs iShares Canadian Universe bond fund in red, for a one year period ending July 31. We see the much greater torque of the US treasuries during February and March when we had the violent stock market correction.
In fact, when I add 10% US Treasuries to a typical 70/30 portfolio, I see slightly LESS draw down compared to the 60/40 model from 2018. That is to say the portfolio carried more stocks for growth potential, and it dropped less in corrections. Those treasuries did some heavy lifting.
The Balanced Portfolio one ticket comparison. 1-year returns.
- Horizons Balanced 15.58%
- BMO Balanced 9.07%
- iShares Balanced 8.81%
- Vanguard Balanced 8.25%
We can see that there is quite the dispersion between the performance of the funds. US stocks have soared well above Canadian and International Stocks. All of the asset allocation fund providers have different levels of US exposure. The one ticket options will each use a different mix of bonds as well.
Nasdaq 100 – that’s the ticket.
Horizons employs the Nasdaq 100 index as that US stock (tech and other) growth kicker. That index was discussed in my recent post do you have enough tech in your portfolio? While the S&P 500 has largely been driven by tech in recent months and years, the NAS 100 has great tech and bio tech and healthcare exposure. The index has outperformed the S&P 500 by a considerable degree.
Over the last year the Nasdaq 100 has delivered a 40% return compared to the near 12% for the S&P 500. The returns are in US dollars.
Removing that Canadian home bias.
Canada is just 3% of the global economy and global stock market value. And yet we Canucks hold an average of 60% allocation to Canadian stocks. Yes I’ll raise my hand, I am guilty of a Canadian home bias.
Again the Canadian stock component is 10% in HBAL. As a comparison point, Vanguard’s VBAL has Canadian equity at 18.4% of the total portfolio as of July 31. iShares XBAL has the Canadian stock weighting near 15%.
Mark had also offered that there was no need to go heavy on developed markets. You’ll see that the Horizons portfolios are more over-weighted to US stocks. The US stock market has 57% exposure in the MSCI world index.
My add – the US multinationals that dominate the US stock indices will inherently provide a level of exposure to foreign developed markets.
Here’s the initial targets for regional stock exposure for the 3 portfolios – and for ETF rebalance targets.
HCON – HBAL – HGRO.
The cure for those portfolio tax issues.
These portfolios will show no withholding taxes on foreign dividends. Keep in mind that the US holdings of HXQ and HULC ETFs do hold stocks. But because the Horizons one ticket ETFs are held in the corporate class structure, that income can be offset by expenses within the corporation.
That allows the investors to remove the home bias without worry. The dividends and bond income from the actual assets of the indices that are tracked are turned into value (price increases). For example, if a company pays a 4% annual dividend in Europe, that 4% is turned into value via price increases. It’s the same story for bond income.
As you may know when you hold US assets in a Canadian fund you will normally lose out due to the withholding taxes on the US dividends. Uncle Sam will keep a slice. Foreign (non US dividends) are not recoverable at all for Canadian investors.
With the Horizons one ticket offerings you receive the full benefit of the stock and bond payments for all Canadian, US and International assets.
Here’s a great post on withholding taxes on ETFs from Justin Bender.
And keep in mind that foreign income is then taxed at your marginal rate. That is the greatest potential tax loss within the one ticket universe. The Horizons portfolios will grow tax free in any account type from RRSP, to RRIF to TFSA and taxable. You will only pay capital gains when you eventually sell units in taxable accounts.
Beware the IRS – the US taxman.
No income would be registered with the IRS in the US. Considerable US income can cause estate issues as the significant US investment exposure can be recognized as US assets. The same goes for holding extensive assets in US listed stocks or funds at any time. That can get the attention of the IRS. If you’re going to build a sizable six figure portfolio, it’s a good idea to hold Canadian listed funds. Of course, check in with a tax professional.
With the Horizons asset allocation ETFs you would only receive a tax slip when you sell units. Quite simply they are just easier to manage when it’s time to do those taxes. You’ll simply keep track of your average cost base to calculate your capital gains.
And while I have offered that tax issues should not drive the portfolio bus, investors can benefit from besting any tax issues. And the Horizons one ticket portfolios show that the benefit can then move into the all important asset allocation and choice of assets.
Thanks for reading. We’ll see you in the comment section.
Got one ticket? What are your thoughts on Horizons asset allocation ETFs?
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