All-in-One funds, also called asset allocation or wrapper funds, have exploded in popularity over the past decade with practically every bank or fund company offering them. They’re marketed as a one stop shop for building your portfolio. The premise goes, why manage a portfolio of 3 or 4 ETFs like how we teach people to do in our Investment Workshop when you can just buy this one fund?
It’s a somewhat appealing pitch because who doesn’t want more simplicity, and you can’t get any more simple than a single fund, right? So when people email me asking whether it’s a good idea to buy these all-in-one funds because they don’t want the hassle of following our workshop, they’re probably expecting me to tell them that while it’s not ideal, these funds are probably fine for the most part, right?
Here’s my problem with All-in-One Funds and why it doesn’t make sense for anyone to ever own one.
You’re Not Getting Any Value For Your Money
If you were to rank all ETFs in order of value you’re getting for what you’re paying in fees, passive index funds would be at the absolute top since you’re paying incredibly little (Vanguard’s VTI fund is currently charging 0.03%!) and getting tons of value since they’re managing thousands of individual holdings on your behalf. At the shittier end of the value spectrum would be actively managed funds that charge much higher fees (1%+) for a suspender-snapping fund manager to trade 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 holdings 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’re paying fees for the index ETFs, plus the fees for the all-in-one fund, and you’re not even getting a chance to beat the index.
In fact, if you buy an all-in-one fund, you are guaranteed to underperform the Investment Workshop portfolio since we’re both holding the same index funds, but you’re paying a continuous annual wrapper fee and I’m not.
You Can’t Tax Optimize Your Portfolio
Another thing that you can’t do with all-in-one funds is tax optimization. I wrote an entire article about it here, but in a nutshell tax optimization means holding the right asset classes in the right accounts to minimize taxes. You hold bonds in an RRSP/401(k), domestic equities in a TFSA/Roth IRA, and the rest in a non-registered or taxable investment account. It gets a little more complicated if you have other things like REITs or foreign equities, but for most people, that’s the right arrangement.
But you can only do this if your portfolio holds each asset class in their own ETFs. All-in-one funds hold everything under one ticker symbol, so if you just buy this own fund and fill up all your different accounts with it, you’re going to be holding bonds in your taxable account, or equities in your RRSP/401(k), and as a result you will be paying more taxes than you need to every year.
So in a way, the inability to tax optimize your portfolio means that you’re paying a fee for negative value. You’re paying a fee for the opportunity to over-pay 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 about 5 minutes.
Every publicly traded ETF or mutual fund is required by law to publish a prospectus, and in that prospectus they’re required to list the top 10 holdings they own and in what percentages each of these holdings are weighted.
For an index ETF, this is relatively useless information since 10 holdings is a tiny fraction of what the fund actually holds, and for an actively managed ETF, this is also useless since the holdings change over time depending on the whims of the manager, but an all-in-one fund typically holds less than 10 holdings and their weightings don’t change, so the top 10 holdings basically gives away their entire game.
Which means you can just steal it and build it yourself for free.
Let’s do this for a real-life all-in-one fund now. I went to one of the big banks (I won’t say who because I don’t want them to send lawyers after me) and clicked on one of their all-in-one funds.
Scrolling down through the fund’s website, I find the section that lists all the documents they’re required 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%|
OK now that we have the holdings, we can fire up a portfolio automation tool and plug them in. Fortunately, we already have one handy that we’re using: Passiv!
Passiv just released a new feature called “My Models” which is perfect timing for this article since it does exactly what I need for this demonstration.
On the left hand menu, let’s start by clicking “My Models,” then “New Model”
We shall name this model “Stolen All-In-One Fund…”
Now let’s enter all the ticker symbols we got from that prospectus like so.
Finally, let’s go back to the models 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 Passiv has flagged this account as being way off target and has suggested a series of trades to implement the model portfolio I’ve applied.
If I were to click the “Preview Orders” and then the “Perform Trades” button, Passiv will make the trades on my behalf and my Portfolio B account will now be tracking the All-In-One model I stole.
Remember when I said that practically every bank offers all-in-one funds? The reason that’s true is because these things are cash cows. All-in-one funds are usually structured so that the funds they own are run by the same company, so now the fund company makes money off you twice: once from the wrapper fund’s fees and again from all the underlying holdings. I looked into the financial statements of one of these funds and it made $70M in fees last year. $70M! For something that I can replicate in 5 minutes.
But you know what? I don’t blame them. If I could create these funds, market them to lazy people, and make $70M a year on an ongoing basis, I’d be doing it too. It’s a pretty sweet racket. Well, for the bank, not for the investors. The investors are getting fleeced.
So there you have it. Now that we have such easy-to-use tools like Passiv and low-cost brokerage accounts like Questrade, there’s absolutely no reason anyone should ever own one of these funds. Unless, of course, they’re so incredibly lazy that they can’t even be bothered to open up and read a prospectus, but at that point, I’d argue they shouldn’t be investing at all.
And just a reminder: Passiv is free if you also have a Questrade account, so if you haven’t tried it out yet, please use this referral link to open up an account. Thanks!
Edit: The Passiv teamed reached out to me after this article went up to point out that you can share models you’ve created with other users, so if you want to import this model into your account, here you go. Hey, I’m basically running my own all-in-one fund! Where’s my $70M?!?
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