Let me be clear—I don’t think the Vanguard Growth Portfolio (TSX:VGRO) is a bad ETF. For the vast majority of self-directed investors, it’s a big step up from the pricey mutual funds that the “financial advisors” at big bank branches love to shill.
That being said, VGRO isn’t perfect. Personally, it has a few drawbacks that prevent me from ever allocating to it. I’ll probably get hunted down by the cult over this, but you know what? Investing isn’t a team sport, and criticism keeps asset managers competitive.
The Canadian Home Country Bias is Too Heavy
VGRO allocates to US, developed, and emerging markets according to market cap weight, and I’m fine with that. It’s passive investing at its finest.
What I’m not okay with is the 30% allocation to Canadian equities, which is about 10 times their actual market cap weight. Ironically, this is one hell of an active management decision.
Vanguard says this heavy tilt towards Canadian stocks promotes tax efficiency, reduces historical volatility, and lowers currency risk.
When it comes to tax efficiency, who cares? The vast majority of Canadians buying VGRO aren’t wealthy enough to be using a non-registered account. They’re buying it in a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP), where tax efficiency doesn’t matter.
The idea of reducing historical volatility is also questionable. I could backtest and curve-fit data to justify any allocation. Just because a Canadian allocation was less volatile in the past doesn’t mean it will be in the future. It’s a classic case of driving with your eyes glued to the rearview mirror.
As for currency risk, if that’s really a concern, then why aren’t the non-Canadian equity ETFs in VGRO—U.S., international developed, and emerging markets—currency hedged? Wouldn’t that do more to reduce currency risk than overweighting Canada by 10 times?
Most Canadians already have a ton of exposure to Canadian assets—through their job, properties, and the economy they live in. The question is, do you really want to tie yourself to Canada financially even more than necessary?
The Use of Global Bonds is Unnecessary
The Canadian Couch Potato model portfolio keeps things simple by using an aggregate bond ETF like the BMO Aggregate Bond Index ETF (ZAG) for low-cost exposure to Canadian federal, provincial, mortgage, and investment-grade corporate bonds. I’m fine with this approach—it’s cheap and diversified.
What I’m less fine with is VGRO’s decision to allocate its 20% bond component across U.S. aggregate bonds and global ex-U.S. aggregate bonds.
My main issue is cost. Both of the underlying ETFs that VGRO uses for this allocation are relatively expensive. You also lose some of the distributions to foreign withholding tax, which eats into your returns. On top of that, both funds are currency hedged, adding an additional drag to performance.
In my opinion, this approach entirely negates the benefits of global fixed-income diversification. If you can’t do it cheaply, don’t try it at all.
The Management Expense Ratio (MER) is Uncompetitive
Finally, and somewhat ironically, despite Vanguard being billed as a low-cost provider, VGRO is actually more expensive than some of its asset allocation ETF competitors.
Don’t get me wrong—at a 0.24% MER, VGRO is still much cheaper than the vast majority of mutual funds in Canada, but it falls short when compared to other ETFs.
For example, the iShares Core Growth ETF (XGRO) offers the same 80/20 allocation as VGRO but with a 0.20% MER. Even cheaper is the TD Growth ETF Portfolio (TGRO), which offers a 90/10 allocation at just 0.17%.
VGRO might have that name-brand recognition, but Vanguard has been cruising on its laurels for too long. It’s time for a fee reduction.
How I Would Improve VGRO
This might sound a bit like backseat portfolio managing, but I have three simple suggestions for Vanguard to make VGRO great again:
- Reduce the MER to 0.20% to at least be congruent with XGRO. There’s no reason a low-cost leader like Vanguard should lag behind its competitors on fees.
- Reduce the Canadian equity allocation to 20-25%. This would strike a better balance between home-country bias and global diversification, avoiding the current 10x overweight to Canadian stocks.
- Drop the global bond component entirely. The extra cost, foreign withholding taxes, and currency hedging drag cancel out any benefits of global fixed-income diversification. Stick with low-cost Canadian bonds.
Your mileage may vary, but these are my personal opinions and the three reasons why VGRO will never find a spot in my portfolio.