Scroll down to end of this article for a quick 2-minute summary!
Let’s first take a tour around the concept of diversification. Putting it simply, diversification in investment is the idea that you should not be investing your money in one single company, i.e. you should not put all your eggs in one basket. This is because if that one company happens to be doing poorly in the future, so will the entirety of your investment. Now, compare this to a situation where you are investing in ten different companies. If two companies in your investment portfolio are doing poorly, there are still eight others you can count on to hopefully see a return. Essentially, this means that the more your investments are spread out across different companies, the more diversified and the less riskier it would be.
By nature, an ETF is already quite diversified on its own, because one single ETF typically tracks the performance of multiple companies. If one of those companies is performing poorly, all other companies tracked by the ETF can still even out the performance of the ETF itself or render the poorly-performing company completely irrelevant.
- Read more: Putting It Simply: What Is an ETF?
VFV, XEQT, VEQT, and VGRO are already quite diversified in that they are all tracking the performance of many different companies. However, there are variations in terms of the investment types and the location of companies tracked by these ETFs, making some of them to be relatively less diversified when compared to one another.
Vanguard S&P 500 Index ETF (VFV)
VFV stands to be one of the most-commonly recommended Canadian-listed ETF to purchase. VFV is the Canadian equivalent of U.S.-listed VOO (Vanguard 500 Index Fund ETF) which tracks the 500 largest companies in the United States. Because of this, VFV is the least diversified when compared to XEQT, VEQT, and VGRO because it is unlike these three ETFs that track the performance of companies outside of the U.S. (where investing in them would essentially spread out your investment across the world).
Regardless, when compared to all other ETFs in general, ETFs that track S&P 500 companies such as VFV and VOO aren’t actually that risky to invest in because S&P 500 companies do have a track record of providing decent long-term returns. Oftentimes, these are major companies that have international influences and if the majority of them is performing poorly, chances are you would have other things to worry about in the world aside from your investments.
Read more: List of S&P 500 companies
XEQT vs. VEQT
iShares Core Equity ETF Portfolio (XEQT)
Vanguard All-Equity ETF Portfolio (VEQT)
Both XEQT and VEQT track U.S. companies, including S&P 500 companies as well as companies in Canada and around the world, making them more diversified than VFV. Investing in XEQT or VEQT would mean that you are spreading out your investment around the world instead of companies in the U.S. only.
When it comes to comparing XEQT and VEQT, XEQT has more U.S. exposure compared to VEQT, making VEQT slightly more diversified than XEQT. At the end of the day, the differences in the diversification between these two ETFs can be considered insignificant enough to be negligible, so it would make sense to invest in either one instead of both. Here is a comparison on the asset allocations of XEQT vs. VEQT.
|U.S. Equity||± 46%||± 42%|
|Canadian Equity||± 25%||± 31%|
|Global Equity||± 29%||± 27%|
Another Detour on Diversification
Making an ETF investment decision based on company locations and markets is a diversification strategy, but another method also involves looking at the asset allocations of an ETF.
VFV, XEQT, and VEQT are 100% equity. Essentially, they track the performance of companies in the stock market and the return on investment you can obtain is based on those stocks. However, aside from equity, there are also ETFs with fixed income assets that track the performance of companies in the bond market such as term deposits and treasury bills.
Equity ETFs are typically considered riskier but it may provide higher returns (or losses) in the long run. Those with fixed income assets are more stable, but it might not provide as high of a return (or a loss) compared to equity ETFs.
Vanguard Growth ETF Portfolio (VGRO)
Unlike VFV, XEQT, and VEQT, VGRO contains 80% equity and 20% fixed income assets in the U.S., Canada, and around the world. This makes VGRO the most diversified compared to the other three ETFs when taking into consideration the type of asset allocation it has and the companies it tracks around the world.
|U.S. Equity||± 46%||± 42%||± 34%|
|Canadian Equity||± 25%||± 31%||± 25%|
|Global Equity||± 29%||± 27%||± 21%|
|Fixed Income||± 0%||± 0%||± 20%|
Over and Out
Deciding on which ETFs to purchase can be quite a personal decision, as it all comes down to your diversification preferences. An ETF by itself is already diversified, but if we were to sort the four ETFs in this post based on how diversified they are relative to one another, then VFV would be the least diversified, followed by XEQT, VEQT, and the most diversified would be VGRO.
Of course, there are many other ETFs aside from the four of these, so you can certainly do some extra research if you would like to explore more options.
If you are considering to purchase any of the four ETFs in this post, there are basically two main things to ponder upon:
- how confident you are in investing in companies in the U.S. as well as outside of the U.S., and
- whether you prefer having an investment portfolio that consists of equity only or with some fixed income assets.
Here is a quick summary on the asset allocations of VFV, XEQT, VEQT, and VGRO:
- VFV: S&P 500 (U.S. only), 100% equity
- XEQT: U.S. + worldwide, 100% equity
- VEQT: U.S. (in lesser proportion than XEQT) + worldwide, 100% equity
- VGRO: U.S. + worldwide, 80% equity + 20% fixed income