Aug 09, 2024

Breaking News, Familiar Ground: iShares Asset Allocation ETFs

“When a thing has been said and said well, have no scruple. Take it and copy it.”

Anatole France

If there’s an overnight success story to be savored from 2018, it would be Vanguard’s Asset Allocation ETFs. Since their launch earlier this year, their combined assets under management have already exceeded $800 million. What’s not to like about gaining access to a low-cost, self-rebalancing globally diversified portfolio with the click of a mouse?

So, no huge surprise: BlackRock Canada has noticed its rival’s success. Perhaps inspired by Anatole France’s words of wisdom, they’ve just launched a pair of matching iShares Asset Allocation ETFs of their own, with ticker symbols that are suspiciously similar to Vanguard’s.

What’s in a Name?

BlackRock is not new to the “fund-of-funds” game. They already had two balanced ETFs in their product lineup. But unlike Vanguard, they hadn’t generated much investor interest. After more than a decade, their two balanced ETFs had less than $150 million under management.

So – Abracadabra! – the old becomes new again. Instead of launching more ETFs, BlackRock took a slightly different approach: They simply changed the fund names, ticker symbols, management fees and investment objectives of their two existing balanced ETFs.

Old Name and Ticker New Name and Ticker
iShares Balanced Income CorePortfolio™ Index ETF (CBD) iShares Core Balanced ETF Portfolio (XBAL)
iShares Balanced Growth CorePortfolio™ Index ETF (CBN) iShares Core Growth ETF Portfolio (XGRO)

BlackRock’s new tickers come as no surprise; their XBAL and XGRO will be in direct competition with Vanguard’s VBAL and VGRO (Note: The ticker for each iShares Fund is expected to change on or about December 18, 2018). The MER for each Vanguard fund is 0.25%; the projected MER for each iShares ETF is around 0.21%.

Asset Allocations and Underlying Funds

XBAL’s long-term strategic asset allocation will be approximately 40% fixed income and 60% equities. XGRO’s strategic asset mix will be more aggressive, with 20% fixed income and 80% equities.

The chart below includes the target weight for each asset class within the fixed income and equity allocations. I’ve also included the underlying ETFs that XBAL and XGRO will initially hold to gain exposure to each asset class.

Underlying ETF Asset Class iShares Core Balanced ETF Portfolio (XBAL) iShares Core Growth ETF Portfolio (XGRO)
iShares Core Canadian Short Term Corporate + Maple Bond Index ETF (XSH) Canadian Short Term Corporate Bonds 6% 3%
iShares Core Canadian Universe Bond Index ETF (XBB) Canadian Bonds 26% 13%
iShares U.S. Treasury Bond ETF (GOVT) U.S. Government Bonds 4% 2%
iShares Broad USD Investment Grade Corporate Bond ETF (USIG) U.S. Corporate Bonds 4% 2%
iShares Core S&P/TSX Capped Composite Index ETF (XIC) Canadian Stocks 15% 20%
iShares Core S&P Total U.S. Stock Market ETF (ITOT) U.S. Stocks 27% 36%
iShares Core MSCI EAFE IMI Index ETF (XEF) Developed Markets Stocks (ex North America) 15% 20%
iShares Core MSCI Emerging Markets ETF (IEMG) Emerging Markets Stocks 3% 4%
Total 100% 100%

Investment Strategy

Following are some additional “under the hood” comparisons between our two contenders:

  • Canadian/foreign equity split: XBAL and XGRO each split their equity allocation 25/75 between Canadian and foreign stocks. VBAL and VGRO have a 30/70 domestic/foreign stock split.
  • Overweight US tilt: XBAL and XGRO underweight Canadian stocks by 3% and 4% respectively, relative to VBAL and VGRO. These “extra” assets are then fully allocated to US stocks, instead of being used to top-up US, international and emerging market equities alike. Vanguard allocates its VBAL and VGRO foreign equity allocations according to its current market capitalization; this makes Vanguard’s foreign equity weighting methodology arguably more “passive” than BlackRock’s.
  • Underweight emerging markets: Relative to VBAL and VGRO, BlackRock also underweights emerging markets in XBAL and XGRO. The underweight is even more significant than what appears in the chart below, because Korean stocks are allocated to developed markets in VBAL and VGRO, whereas the same stocks are allocated to emerging markets in XBAL and XGRO.
  • Fixed income allocations: Vanguard targets 60% domestic and 40% foreign bonds, while BlackRock targets 80% domestic and 20% foreign bonds. XBAL and XGRO do not currently have an allocation to non-US foreign bonds, whereas Vanguard does. Over time, I would not expect these differences in fixed income strategy to have a material impact on fund performance.
Asset Class XBAL VBAL XGRO VGRO
Canadian Bonds 32% 23.5% 16% 11.7%
U.S. Bonds 8% 7.3% 4% 3.7%
Global Bonds (ex US) 9.2% 4.6%
Canadian Stocks 15% 18.0% 20% 24.0%
U.S. Stocks 27% 23.7% 36% 31.7%
Developed Markets Stocks (ex North America) 15% 14.2% 20% 18.9%
Emerging Markets Stocks 3% 4.1% 4% 5.5%
Total 100% 100% 100% 100%

Rebalancing Strategy

BlackRock plans to occasionally rebalance its portfolios (at their discretion). They do not expect to allow any asset class to deviate by more or less than 10% of its target weight.

For example, XBAL has a Canadian equities target weight of 15%, invested in the iShares Core S&P/TSX Capped Composite Index ETF (XIC). If XIC were to become more than 16.5% of the portfolio [15% + (15%/10)], BlackRock would likely sell a portion to bring the asset class back in line with its target.

Likewise, if XIC were to become less than 13.5% of the portfolio [15% – (15%/10)], BlackRock would likely sell a portion of any overweight ETFs, and use the proceeds to buy more shares of XIC.

Vanguard also plans to rebalance their portfolios from time to time (at their discretion).

Currency-Hedging Strategy

BlackRock will not employ a currency-hedging strategy for the foreign equity portion of both ETFs. This means that Canadian investors will want foreign currencies like the US dollar, British pound and Japanese yen to appreciate relative to the Canadian dollar.

BlackRock will implement a currency-hedging strategy for its non-Canadian fixed income allocations. As the ETFs both hold the iShares U.S. Treasury Bond ETF (GOVT) and the iShares Broad USD Investment Grade Corporate Bond ETF (USIG), XBAL and XGRO will have to directly enter into currency forward contracts to offset the US dollar exposure of these funds.

Vanguard has a similar currency-hedging strategy in their asset allocation ETFs.

So, Vanguard or iShares? You Decide … We’ll Provide the Models

Time will tell which firm’s solutions will reign supreme … or whether there’s room for both in this big, wide world of opportunities. As single-ETF solutions continue to gain traction among DIY investors, I’ve decided to include both Vanguard and iShares Asset Allocation ETFs as additional model portfolios on my blog. I’ll also continue to update our 3-ETF and 5-ETF model portfolios. As with the current model portfolios, I’ve back-tested each of the funds’ performances using appropriate index returns minus fees. Going forward, I’ll update the data with actual fund performance as it is available.

Where does that leave us? If you ask me, it’s good to have a few good choices. Healthy competition helps keep costs under control. That’s good for you too, no matter which model you may choose.

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