All-in-one funds, also known as asset allocation or wrapper funds, have become increasingly popular over the past ten years and are offered by practically every bank or fund company. They are marketed as a one stop shop for building your portfolio. The premise is: why manage a portfolio of 3 or 4 ETFs like we teach people in our investment workshop when you can only buy that one fund?
It’s a bit of an engaging pitch because who doesn’t want more simplicity, and you can’t get simpler than a single fund, right? So if people email me asking if it’s a good idea to buy these all-in-one funds because they don’t want to go to the hassle of following our workshop, they are probably expecting me to offer them say that while these funds are not ideal, they are probably okay for the most part, right?
Here is my problem with all-in-one funds and why it doesn’t make sense for anyone ever to own one.
You are getting no value for your money
If you were to rank all ETFs by the value you pay for the fees, passive index funds would be at the absolute top as they pay incredibly little (Vanguard’s VTI fund currently calculates 0.03%!) And benefit from enormous values as they manage thousands of individual holdings on your behalf. On the shitty end of the value spectrum would be actively managed funds, which charge much higher fees (1% +) for a fund manager trading stocks on your behalf in the hopes that your fund will outperform the index. Most don’t, but that’s the hope.
All-in-one funds are an even worse value proposition because they don’t even try to outperform the index, nor do they manage thousands of positions on your behalf. Instead, all-in-one funds simply hold the index ETFs for you in certain percentages and then charge you a fee for the privilege. So now you pay fees for the index ETFs plus the fees for the all-in-one fund and don’t even stand a chance of beating the index.
When you buy an all-in-one fund you are guaranteed to underperform the Investment Workshop portfolio as we both hold the same index funds, but you pay a continuous annual wrapper fee and I don’t.
You cannot optimize your portfolio for tax purposes
Another thing that you can’t do with all-in-one funds is tax optimization. I’ve written an entire article about it here, but in a nutshell, tax optimization means holding the right asset classes in the right accounts in order to minimize taxes. You hold bonds in an RRSP / 401 (k), domestic stocks in a TFSA / Roth IRA, and the rest in an unregistered or taxable investment account. It gets a little more complicated when you have other things like REITs or foreign stocks, but for most people this is the right arrangement.
However, this is only possible if your portfolio holds each asset class in its own ETFs. All-in-one funds keep everything under a ticker symbol. So if you just buy this own fund and replenish all of your various accounts with it, you will keep bonds in your taxable account or stocks in your RRSP / 401 (k) and as a result you will pay more tax than necessary each year.
In a sense, the inability to optimize your portfolio for tax purposes means a fee for fee negative Value. You pay a fee for the ability to overpay your taxes year after year.
You can do it yourself in 5 minutes
But the best argument against owning all-in-one funds is that you can replicate their work for free in around 5 minutes.
Every listed ETF or mutual fund is required by law to publish a prospectus, and in that prospectus they must list the 10 most important holdings they own and the percentages in which each of these holdings is weighted.
For an index ETF this is relatively useless information as 10 stocks represent a tiny fraction of what the fund actually holds, and for an actively managed ETF this is also useless as stocks change over time depending on the manager’s whim change, but an all-in-one fund typically has fewer than 10 positions and their weights don’t change, so the top 10 stocks basically give away their entire game.
That means you can just steal it and build it yourself for free.
Let’s do this now for a true all-in-one fund. I went to one of the big banks (who won’t I say they send lawyers after me) and clicked on one of their all-in-one funds.
If I scroll down the fund’s website I find the section that lists all of the documents they need to provide. Look for anything that sounds like “Portfolio Summary”, “Fund Facts” or “Simplified Prospectus”.
From there I find the right document and hit the jackpot: The top 10 fund holdings.
|Scotia US Equity Index Tracker ETF (SITU)||40%|
|BMO Canadian Bond Index Tracker ETF (ZAG)||25%|
|Scotia International Equity Index Tracker ETF (SITI)||22%|
|iShares Core MSCI Emerging Markets IMI Index ETF (XEF)||11%|
|Vanguard Canadian Large Cap Equity Index Tracker ETF (VCN)||2%|
Okay, now that we have the stocks we can start a portfolio automation tool and plug them in. Fortunately, we already have one on hand that we use: Passive!
Passiv just released a new feature called “My Models” which is the perfect timing for this article as it does exactly what I need for this demonstration.
In the menu on the left, click first on “My Models” and then on “New Model”.
We call this model “Stolen All-In-One Fund …”
Let us now enter all the ticker symbols that we have received from this prospectus in this way.
Finally, let’s go back to the model list and click Apply. I will apply this model to my Portfolio B investment account.
And we’re done! If we go to my Portfolio B investment account, we can already see that Passive has marked this account as far from target and has suggested a number of trades to implement the model portfolio I have been using.
When I click on “Preview Orders” and then on “Perform Trades”, Passive carries out the trades on my behalf and my Portfolio B account now follows the all-in-one model I stole.
Do you remember when I said that practically every bank has all-in-one funds? The reason is because these things are cash cows. All-in-one funds are almost always structured so that the funds they own are managed by the same company, so the mutual fund company now makes twice money on you: once on the fees of the wrapper fund and again on all underlying lying stocks. I looked at the financial statements of one of these funds and it brought in $ 70 million in fees last year. $ 70 million! For something I can replicate in 5 minutes.
But, you know what? I am not blaming them. If I could create these funds, market them to lazy people, and keep making $ 70 million a year, I would. It’s a pretty cute bat. Well, for the bank, not for investors. Investors are being fleeced.
So there you have it. Now that we have tools as easy to use as passive and inexpensive broker accounts like Questrade, there is absolutely no reason anyone should ever own one of these funds. Unless, of course, they’re so incredibly lazy that they don’t even bother opening and reading a prospectus, but at that point I’d argue that they shouldn’t be investing at all.
And just as a reminder, Passive is free if you also have a Questrade account. So if you haven’t tried it yet, please use this referral link to open an account. Many Thanks!
Edit: The Passive team reached out to me after this article to point out that they can share models that you have created with other users. So if you want to import this model into your account, you can do it here. Hey, I basically run my own all-in-one fund! Where are my $ 70 million?!?
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