Investing

New ETF from Vanguard

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  • Sep 19th, 2020 1:18 am
[OP]
Sr. Member
Nov 16, 2013
624 posts
156 upvotes
GTA

New ETF from Vanguard

This has been announced today and starting tomorrow. Ticker is VRIF. Promising 4% return. Nothing special but surely will provide peace of mind to some

https://www.theglobeandmail.com/investi ... to-be-big/

For those who do not have paid Globe. Here are the details.

—————————

A new ETF offering 4-per-cent retirement income is going to be big

You can tell an investment product is going to be a hit when you instantly see a huge and hungry market for it.

The new Vanguard Retirement Income ETF Portfolio, which makes its debut on Wednesday, is designed to pay predictable amounts of monthly income to retirees. To underscore this purpose, the ticker symbol is VRIF. V is for Vanguard and RIF is a play on registered retirement income fund, which is where people have all, most or some of their retirement savings.

A big question with RRIFs, and it’s more pressing than ever, is what do you stick in your account to generate income to live on in retirement? We have an aging population of investors who are going to be saddled with low interest rates for a long time. Dividend-paying stocks are going to be essential, but how do you pick the ones that will provide reliable income rather than grief to investors?

VRIF attacks the problem by bundling eight Vanguard equity and bond funds (the stocks-bonds mix is 50-50) into a single package designed to pay monthly income targeting a real-world 4-per-cent yield. “That is what clients will get in their pocket, or bank account,” said Scott Johnston, head of product for the Americas at Vanguard.

Dividends and interest income will account for about 60 cents per $1 of income, with capital gains providing the other 40 cents. Basically, Vanguard will strategically sell holdings that have risen in price to top up dividends and interest. This approach highlights the fact that this is an ETF designed for generating income, not for growing your money.

You could build and manage a portfolio of individual ETFs or stocks and bonds to accomplish the same total-return approach of VRIF, but some exacting work is required to ensure you get the income you need.

Vanguard does it all for you in a cost-effective way. The management expense ratio for VRIF is projected to be 0.31 or 0.32 per cent – that’s not the cheapest fee in ETF-land, but it’s a fair value. The cost of the eight underlying funds is included in the published MER, as is the practice with fund-of-fund ETFs. One additional cost is the brokerage commission to buy and sell an ETF or stock.

At a time when the investment industry is prying up every rock in sight to find new ways to generate bond-beating income, the components of VRIF come across as basic or even bland. In a 50-50 mix of stocks and bonds, the fund holds Canadian, U.S. and international stocks (including a minuscule 1 per cent weighting in emerging markets), plus bonds.

There are no preferred share, high yield bond or emerging market bond funds, or use of a covered call strategy, where financial instruments called derivatives are used to augment income. Mr. Johnston said these securities can add risk to a portfolio as well as higher levels of income. “What we have with VRIF is a simple, broadly diversified portfolio – that is it.”

VRIF is the latest iteration of one of the most popular types of ETFs – the balanced ETF, also known as asset allocation ETFs. Since Vanguard introduced the category in January, 2018, it has attracted $4.5-billion from DIY investors and advisers who understand that low-cost, index-tracking investments are a prime way to build long-term wealth.

An additional benefit of VRIF is tax efficiency in non-registered accounts. Only 50 per cent of a capital gain is taxable, and dividends benefit from the dividend tax credit.

There’s nothing particularly exotic about VRIF’s total return approach to generating a payout targeting 4 per cent, but it does raise the question of what happens when there aren’t enough capital gains to augment dividends and bond interest. Vanguard says it would use a return of capital in such situations, which it expects to do (in other than negligible amounts) roughly one in every 10 years.

Return of capital in non-registered accounts can be an annoyance to investors and a sign that a fund’s holdings are unable to deliver the promised level of income. A return of capital is an amount above and beyond the usual kinds of income from bond interest, dividends and capital gains. A return of capital is not taxed when you receive it, but it reduces the cost of an investment and thus increases your capital gain when you sell.

VRIF, like many equity ETFs, may also use trace amounts of return of capital to ensure that identical amounts of income can be paid every month. This is necessary because dividend stocks pay quarterly and bonds pay semi-annually.

If you’re a retiree managing investments to produce income, ask yourself this: How have you found the challenges of the past year, and how confident are you that you can navigate the next 12 months? If you’d like help, it’s now at hand. Expect competing products shortly.
22 replies
Deal Addict
Nov 9, 2013
3912 posts
3598 upvotes
Edmonton, AB
That's very interesting, I wonder how successful this will be. It almost seems too good to be true, but Vanguard is a reputable firm that I would trust. I wonder what sort of financial engineering will be behind this.
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May 31, 2018
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Saskatchewan
Definitely looking forward to this, in a cautiously optimistic way. Could consolidate some balanced/income/bond etfs into this one for simplicity if it looks good.

Edit: Looks like the management fee is .29, and the equity side is global all cap index ETF's (22% ex NA, 18% US, 9% Canada) and the majority of the bonds are 24% Canadian corp, 22% global ex US aggregate.

https://www.vanguardcanada.ca/individua ... ocId=30867

Current price is ~$25.20
Deal Addict
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Oct 14, 2015
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I wonder what is different about this ETF from other asset allocation ETFs that justifies an estimated 0.32% MER

VRIF.png
Member
Jul 30, 2012
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IrwinW wrote: I wonder what is different about this ETF from other asset allocation ETFs that justifies an estimated 0.32% MER
VRIF.png
I think overall ETF providers are now stretching to come up with "new" products to attract capital. Some are trying to provide "actively-managed etfs" (aka cheaper mutual fund, lol) for higher fees, others are trying to re-basket as it appears Vanguard is doing. I doubt the Alpha of this would produce any significant results over a targeted diversification model of geography / sector / bond based etfs. While it may be a "one-stop shop" model, it also technically increases risk (especially for a RIF) by using a singular product. Likely better IMO to use multiple providers (even etfs) to produce similar outcome or results and risk adjustment.
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May 11, 2014
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IrwinW wrote: I wonder what is different about this ETF from other asset allocation ETFs that justifies an estimated 0.32% MER

VRIF.png
My assumption for this fund would be a certain level of return of capital as a means to achieve the steady distributions. The investments inside are fairly long-term investments and not term-set investments. For example, I would have thought a larger proportion of short term bonds instead of just using aggregate.
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Jul 30, 2012
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xgbsSS wrote: My assumption for this fund would be a certain level of return of capital as a means to achieve the steady distributions. The investments inside are fairly long-term investments and not term-set investments. For example, I would have thought a larger proportion of short term bonds instead of just using aggregate.
If the product goes too short-term on yield to maturities (aka A/B Grade Bonds), the yield would be too low and reduce the overall vehicle return. To get a decent return on short duration bonds, the credit risk would have to go up considerably (C/D Grade) which would defeat the defensive nature of the RIF product. Thus an aggregate with a longer average yield to maturity with higher grade credit(s) is required.
Deal Addict
Oct 16, 2013
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Seems like a "FIRE" ETF @ 4% payout and the rest is reinvested.
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May 11, 2014
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DealRNothing wrote: If the product goes too short-term on yield to maturities (aka A/B Grade Bonds), the yield would be too low and reduce the overall vehicle return. To get a decent return on short duration bonds, the credit risk would have to go up considerably (C/D Grade) which would defeat the defensive nature of the RIF product. Thus an aggregate with a longer average yield to maturity with higher grade credit(s) is required.
To be fair especially at this juncture where yield differentiation is so low, the overall returns on a long term bond and short term bond are going to be fairly low. Additionally as this is a retirement product, it is at a point where the risk of capital loss on long term bonds is greater IMO than the increased yield at these interest rates especially as this product such as this where capital return will likely be utilized to ensure 4% distributions. Mind you this might be seen as the product is rolled out and management makes decisions such as this.
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Jr. Member
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Oct 23, 2005
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Ottawa
Why not stick with VBAL during your retirement since it has a lower MER.. and on the day of the withdrawal for the money you need for the month, just do some math:

total value of holding of VBAL * 0.04 / 12

0.04 for 4% withdrawal which seems what VRIF is aiming to do.
dividing into 12 for each month of the year

So if the value of my holdings in VBAL is $100,000.. math above says that I can withdraw $333.33.

Only issue is if you're doing it through most brokers through banks or Questrade, you'll be paying a fee to sell. I've just started using WealthSimple Trade as there's no fees for buying or selling equities using the TSX only.
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May 31, 2018
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crackerjack wrote: Why not stick with VBAL during your retirement since it has a lower MER.. and on the day of the withdrawal for the money you need for the month, just do some math:

total value of holding of VBAL * 0.04 / 12

0.04 for 4% withdrawal which seems what VRIF is aiming to do.
dividing into 12 for each month of the year

So if the value of my holdings in VBAL is $100,000.. math above says that I can withdraw $333.33.

Only issue is if you're doing it through most brokers through banks or Questrade, you'll be paying a fee to sell. I've just started using WealthSimple Trade as there's no fees for buying or selling equities using the TSX only.
So all else being equal, at the end of year one I now have ~$98k withdrawing from VBAL ($100k x 2.14% distribution - $4k withdrawal -$120 commissions), or $100k in VRIF. After 5 years I’m down to ~$90k in VBAL, yet still have ~$100k in VRIF. After ten years VBAL is down to ~$88k.

I don’t see the .04 extra MER mattering much, if at all.
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Jul 30, 2012
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xgbsSS wrote: To be fair especially at this juncture where yield differentiation is so low, the overall returns on a long term bond and short term bond are going to be fairly low. Additionally as this is a retirement product, it is at a point where the risk of capital loss on long term bonds is greater IMO than the increased yield at these interest rates especially as this product such as this where capital return will likely be utilized to ensure 4% distributions. Mind you this might be seen as the product is rolled out and management makes decisions such as this.
VRIF has already set Bond products / exposure (50% weighting). Somewhat as expected given the initial release.

VCB_24% weighting_6.2 years average duration_Y-T-M (yield to maturity)_1.7%
VBG_22% weighting_8.3 year average duration_Y-T-M_0.4%
VAB_2% weighting_8.4 year average duration_Y-T-M_1.2%
VBU_2% weighting_6.5 year average duration_Y-T-M_1.1%

No high yield exposure (i.e. C+ Grade, etc)

VRIF Fact Sheet Link
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Sep 21, 2007
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"targeted 4% yield at launch" . Does that mean it's a variable yield and it is not guaranteed 4%?
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FarmerHarv wrote: ...After 5 years I’m down to ~$90k in VBAL, yet still have ~$100k in VRIF. After ten years VBAL is down to ~$88k.

I don’t see the .04 extra MER mattering much, if at all.
Not really as in up marketers both VRIF and VBAL will grow, providing enough capital appreciation for 4% withdrawals and in flat/down markets both will be depleting. So it’s more a matter of commissions in case of selling VBAL vs extra MER for VRIF (whose management will do the same for you) And of course extra 10% in bonds (depending on how they perform, could work out better or worse)

Personally, not interested.
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faken wrote: "targeted 4% yield at launch" . Does that mean it's a variable yield and it is not guaranteed 4%?
Yeah if the fund goes down 10%-20% - I’d rather have fixed distributions, not fix yield % (which usually happens with other high(er) yielding/RoC padding funds - you end up getting less and less payments over the years)

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