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Best Asset Allocation ETFs 2021

In this article, I am going to take a look at what are some good asset allocation ETFs and stocks in Canada. Why Asset Allocation is important now?

The U.S. stock market has been performing the best in the world for over a decade. That’s because we have been living in a dollar/US-dominated world order since 1944 after World War II ended. As a result, many investors myself included heavily relied on the U.S. stock market; however, I started to doubt this idea.

Big Debt Cycle

According to Ray Dalio who is the founder of Bridgewater Associates, the US is in the late stage of the Big Debt Cycle. The US government has been pumping trillions of dollars into the economy. As you can see below, GDP per debt has already reached after WW2 level.

US Government Debt / GDP Ratio

Here’s how Big Debt Cycle works. According to Ray, the US is in the Printing Money and Credit stage which is just before the Revolutions and Wars stage.

At the end of the Printing Money and Credit stage, there is a large wealth gap, big debt problems, and an economic contraction, there is often fighting within countries and between countries over wealth and power. These typically lead to revolutions and wars that can be either peaceful or violent.

The Big Cycle of Money, Credit, Debt, and Economic Activity
Big Debt Cycle
Big Debt Cycle

Asset Allocation?

If you are interested in Ray’s analysis, please read through his article on Linkedin. Total 3000 words long informative post starts with bonds market and ends with below conclusion.

 For these reasons, I believe a well-diversified portfolio of non-debt and non-dollar assets along with a short cash position is preferable to a traditional stock/bond mix that is heavily skewed to US dollars. I also believe that assets in the mature developed reserve currency countries will underperform the Asian (including Chinese) emerging countries’ markets. I also believe that one should be mindful of tax changes and the possibility of capital controls. 

Why in the World Would You Own Bonds When…

This post was kind of shocking to me since Ray has been advocating a traditional stock/bond mix portfolio. His well-known ‘All-Weather Portfolio’ consists of over 50% of bonds. He pointed out that we need to be more exposed to non-dollar assets which could be Precious Metals, non-US stock markets, Cryptocurrencies, etc.

Also, I believe Consumer Defensive Stocks that provide consistent dividends and stable earnings could be an alternative to traditional Bonds. Bridgewater Associates increased its weight in consumer defensive stocks by over 14% in 3Q 2020 from the 2Q 2020 weight of 1.34%.

Consumer Staples ETFs

ETF Name
Ticker
MER %
# of Holdings
Main Holdings
Vanguard Consumer Staples ETFVDC0.10%96Procter & Gamble Co.
Coca-Cola
Consumer Staples Select Sector SPDR FundXLP0.12%32Procter & Gamble Co.
Coca-Cola
iShares Global Consumer Staples ETFKXI0.46%90Procter & Gamble Co.
Nestle SA

Consumer Staples ETFs include food and retailing, household products, food beverages and tobacco and personal products companies. Consumers will buy regardless of the economic conditions or their financial situation.

The most popular Consumer Staples ETFs are VDC and XLP. They are pretty much the same when it comes to portfolios. I would go with VDC since it has a lower MER. If you are looking for a global exposure ETF, I would recommend KXI from iShares.

Emerging Market ETFs

ETF NameTickerMER %# of HoldingsMain Holdings
Vanguard FTSE Emerging Markets ETFVWO0.10%5,060Taiwan Semiconductor Manufacturing Co. Ltd.
Tencent Holdings Ltd.
iShares Core MSCI Emerging Markets ETFIEMG0.11%2,512Taiwan Semiconductor Manufacturing Co. Ltd.
Tencent Holdings Ltd.
iShares MSCI Emerging Markets ETFEEM0.70%1,201Taiwan Semiconductor Manufacturing Co. Ltd.
Tencent Holdings Ltd.

China is the only competitor to the US without a doubt. These Emerging Markets ETFs are heavily focused on China, Taiwan and Korea markets. As you can see, they are pretty much the same, so I would go with VWO which offers the lowest MER. Also, there is a Candian version of VWO in TSX which is VEE.TO.

Precious Metals

I already delved into precious metal in how to buy gold? post. I prefer physical gold or silver, but I know it is a hassle to store and carry around! The easiest and convenient, cost-effective way to invest in Gold and Silver would be the Gold/Silver ETFs.

Gold/Silver ETFs are typically structured as trusts. These ETFs hold gold/silver bars for each share of the ETF issued. The most popular gold ETFs are SPDR Gold Shares ETF (GLD) and iShares Gold Trust (IAU). iShares has a silver version of IAU which is iShares Silver Trust (SLV).

Cryptocurrencies

Many people believe that Cryptocurrencies could be a safe haven during the economic crisis. I am pretty new to the crypto world, so I am not going to delve into this subject; however, I see a lot of potential in Cryptocurrencies to hedge against inflation and use them as an asset allocation, over precious metals.

Conclusion

Warren Buffet’s most famous quote is “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.”.

We need to be mindful that we are living in unprecedented times. Anything can happen that has never happened last 50 years. I strongly believe that this is a time to take a look into asset allocation ETFs.

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