Are ETFs a good investment for an all-weather portfolio?

It’s true short-term bank savings accounts and guaranteed investment certificates (GICs) seem relatively safe from both stock meltdowns and precipitous rises in interest rates, but now there’s the added scourge of rising inflation. Even if you can earn 2% annually on a GIC, if inflation is running at 4%, you’re actually losing 2% a year. 

Are ETFs a good investment for an all-weather portfolio? 

It’s tempting to throw your hands up and retreat to those much-praised asset allocation exchange traded funds (ETFs). You can use these types of investments to simulate the classic pension mix of 60% stocks to 40% bonds through Vanguard Canada’s VBAL or similar ETFs from rivals, including iShares’ XBAL and BMO’s ZBAL. These vendors also offer alternative asset mixes catering to more aggressive and more conservative investors. 

A nice feature of asset allocation ETFs is automatic rebalancing. If stocks go too high, they will at some point plough back some of the gains into the bond allocation, which indeed may be cheaper as rates rise. Conversely, if stocks plummet and the bonds rise in value, the asset allocation ETFs will snap up more stocks at cheaper prices. 

Is the traditional 60/40 portfolio really well balanced?

These are all good reasons to make such funds the core of your portfolio. But are asset allocation ETFs suitable for any economic scenario? Any of the above fund products will own thousands of stocks and bonds from around the world, so they are certainly geographically diversified. However, from an asset class perspective, the focus on stocks and bonds means the ETFs are lacking many other possibly non-correlated asset classes, including commodities, gold and precious metals, real estate, cryptocurrencies and inflation-linked bonds, to name the major ones.

In his book, Balanced Asset Allocation, Alex Shahidi says you may think “your portfolio is well balanced, but it is not.” The conventional 60/40 stock/bond portfolio “is not only imbalanced, but it is exceedingly out of balance.” The problem is the conventional balanced portfolio is 99% correlated to the stock market, Shahidi argues.

At least one financial advisor consulted for this article agrees. 

“What was once the staple of retirees, the 60/40 portfolio is no longer viable,” says Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “Bonds were the safe harbour of retired investors, providing income through interest payments and an offset to the volatility of stocks. In 2022, we are in a much different world than we were when I started in this industry over 20 years ago. Bonds now face two major risks: Interest rate and inflation.”

What’s needed, writes Shahidi, is a “new lens” to assess an asset class as “not as something that offers returns, but as something that offers different exposures to various economic climates.” In short: A broadly diversified all-weather portfolio with multiple uncorrelated (or only partly correlated) asset classes, which will work in inflation, deflation, rising growth (stock bull markets) or falling growth (stock bear markets).


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