Would you like to invest in the stock market, but don’t know where to start? Asset allocation ETFs are an excellent option for beginners and passive investors. But more experienced investors will also find something to their liking. These ETFs offer an all-in-one investment solution for diversifying and balancing your portfolio with ease. In this guide, we explain the different investment options, the benefits of asset allocation ETFs, online brokerage platforms, and more.

An Exchange Traded Fund (ETF) is a type of investment that combines several stocks and bonds into a single fund. This allows investors to purchase a share of the fund, rather than buying each share and bond individually.

ETFs are traded on stock markets like equities. This means you can buy and sell them using a brokerage platform such as Wealthsimple, Questrade (no trading fees for ETF purchases) or Qtrade Direct Investing.

Index ETFs track indices, such as the S&P 500 in the U.S. or the S&P/TSX 60 in Canada. With a single purchase, you can invest in a diversified basket of equities. For example, if you buy an ETF that tracks the S&P 500 index, you own a small portion of the 500 largest U.S. companies. Index ETFs give you access to overall market performance, without having to select individual stocks. Management fees are generally very low, as this is a passive portfolio.

Fixed-income ETFs invest in government or corporate bonds and provide you, the investor, with regular income. One advantage is the low volatility of bonds compared with equities. However, they can be sensitive to interest rate fluctuations.

Sector ETFs focus on specific business sectors such as technology, finance or healthcare. One advantage of these ETFs is their ability to target growth sectors. However, the level of risk in your portfolio increases, depending on the exposure and performance of the business sector. For example, a technology ETF invests in technology companies such as Microsoft, Apple and NVIDIA.

Thematic ETFs invest in specific themes such as renewable energies or artificial intelligence (AI). One advantage is the ability to take advantage of emerging trends. However, thematic ETFs are more volatile, as they depend on the success of a theme or trend (think of cannabis stocks during legalization in Canada). For example, an artificial intelligence ETF invests in companies focused on the development and use of AI, such as NVIDIA or Alphabet (Google).

Commodity ETFs invest in materials such as gold or oil. One advantage is that you can diversify your portfolio with “tangible” assets. However, their value can be influenced by external factors such as global supply and demand.

Which of the ETF categories presented so far should you choose? What should be the asset allocation in your portfolio? Asset allocation ETFs, also known as all-in-one ETFs, solve this problem. Asset allocation ETFs invest in a mix of stocks, bonds and cash, according to a predetermined level of risk. We cover this type of ETF in depth in the rest of this guide…

Asset allocation ETFs are made up of several ETFs. As such, they are designed to offer investors a diversified portfolio by purchasing a single fund.

Asset allocation ETFs generally include a mix of Canadian and international equities, Canadian bonds and cash, depending on the risk profile chosen.

They offer diversification between asset classes (equities, bonds, cash) as well as sector and geographic diversification. For example, a balanced ETF may hold stocks from different sectors (technology, finance, health care, commodities) and geographic regions (Canada, U.S., Europe, Asia).

Depending on the performance of the various asset classes, automatic rebalancing maintains the desired asset allocation targets. This approach ensures that the investment portfolio remains aligned with the predetermined profile, generally determined as follows: cautious, conservative, balanced, growth and aggressive.

The risk level of asset allocation ETFs depends on their asset allocation. More equity-oriented funds have a higher level of risk, while more bond-oriented funds have a lower risk.

Although these ETFs are fairly new to Canada (about 5 years old), their underlying ETFs generally have a long track record. Asset allocation ETFs invest in well-known stock market indices, such as the S&P 500 in the U.S., the S&P/TSX 60 in Canada and developed markets outside North America.

Asset allocation ETFs have very low management fees compared to mutual funds suggested by bank branches. For example, the management expense ratios (MERs) of the leading asset allocation ETFs featured in this guide range from 0.15% to 0.25%, compared with over 2.00% for the leading mutual funds.

To invest in an asset allocation ETF, you must first open an investment account on an online brokerage platform. Traditional financial institutions offer their customers a trading platform. However, there are also independent brokerage platforms that offer very attractive services. Then you can choose the type of investment account that best suits your needs and objectives: TFSA, FHSA, RRSP, etc. Finally, you can trade asset allocation ETFs. It’s a passive investment approach that’s very easy to implement.

The latter are directly attached to a financial institution. Of course, they are protected by the Canadian Investor Protection Fund (CIPF) and are members of the Investment Industry Regulatory Organization of Canada (IIROC). Their fees are generally higher than those of independent platforms, but some of them stand out for the absence of trading fees for equities and ETFs, notably : NBDB and Disnat.

They are not attached to a traditional financial institution. What’s more, most of them operate online, which reduces their costs and enables them to offer their customers many features free of charge. All these platforms are protected by the Canadian Investor Protection Fund (CIPF) and are members of the Investment Industry Regulatory Organization of Canada (IIROC). Independent brokerage platforms are distinguished by their costs. For example, some of them offer investment accounts with no administration or trading fees for stocks and ETFs. Wealthsimple Trade comes to mind.

The following table compares the main online brokerage platforms available in Canada:

To find out more about online brokerage platforms, consult our guide:

Now that you’ve opened your online brokerage account and selected your investment account (TFSA, FHSA, RRSP, etc.), you’re ready to choose an asset allocation ETF.

Among the various asset allocation ETFs, you need to choose one based on your investor profile: risk tolerance, investment horizon and financial objectives. But also according to your values. For example, some ETFs comply with ESG (environmental, social and governance) criteria.

Of course, more equity-oriented funds have higher growth potential. While they generally offer better long-term returns, they are also more volatile and riskier.

Here are Vanguard Canada’s asset allocation ETFs:

To learn more about Vanguard’s Asset Allocation ETFs, click here.

BlackRock Canada also offers a wide range of investment products, including passively managed asset allocation ETFs. Here are the iShares asset allocation ETFs. Note that some of these iShares ETFs meet ESG criteria.

To learn more about BlackRock Canada’s asset allocation ETFs (iShares funds), click here.

BMO is another provider of asset allocation ETFs in Canada. Here are the ETFs it offers, including an ESG ETF:

To learn more about BMO Asset Allocation ETFs, click here.

Global X (formerly Horizons ETFs) is also a provider of asset allocation ETFs in Canada. Here are the Global X ETFs:

To find out more about Global X Asset Allocation ETFs, click here.

The best asset allocation ETFs are those that match your investor profile. As mentioned earlier, ETFs with higher equity exposure have higher long-term growth potential. However, this growth potential comes with greater volatility and risk.

You should choose an asset allocation ETF based on your investor profile. If you choose an ETF on the basis of its potential return, you could find yourself in a situation where a falling stock market and (unrealized) investment losses prompt you to sell on the spur of the moment. Which could be a costly mistake…

Here are the best asset allocation ETFs for every investor profile: cautious, conservative, balanced, growth and aggressive.

Here are the best asset allocation ETFs for a “cautious” investor profile, i.e. 20% equities and 80% bonds:

Here are the best asset allocation ETFs for a “conservative” investor profile, i.e. 40% equities and 60% bonds:

Here are the best asset allocation ETFs for a “balanced” investor profile, i.e. 60% equities and 40% bonds:

Here are the best asset allocation ETFs for a “growth” investor profile, i.e. 80% equities and 20% bonds:

Here are the best asset allocation ETFs for an “aggressive” investor profile, i.e. 100% equities:

In short, the popularity of asset allocation ETFs is unequivocal. These ETFs offer an all-in-one investing solution that simplifies the management of your portfolio. By investing in a single fund, you are exposured to several asset classes (equities and bonds) and diversification (sector and geographic). This reduces the risk of your investment portfolio. What’s more, management fees are very low, and regular rebalancing is carried out without any intervention on your part, to maintain asset allocation targets. This is a handy feature for novice and passive investors.