Understand Diversification First
To properly understand the differences between VFV, XEQT, VEQT, or VGRO, let's take a tour around the concept of diversification first.
Putting it simply:
Diversification is the idea of keeping your eggs in many different baskets.
If one of your baskets go missing, you'd still have eggs in another.
An ETF tracks the performance of many different companies, so if one of them is doing poorly, there are still many others you can count on.
Some examples to wrap your head around:
- An ETF that tracks 100 companies is less risky than an ETF that only tracks 10.
- An ETF that tracks 100 companies around the world is arguably less risky than an ETF that tracks 100 companies in Canada only.
Now, the difference between VFV, XEQT, VEQT, and VGRO lies in how much they are diversified. Some are more diversified, and thus, less risky than others.
Let's take a closer look into each of these 4 ETFs.
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 only.
Because of this, VFV is the least diversified when compared to XEQT, VEQT, and VGRO because these 3 ETFs track the performance of companies outside of the U.S. (which would make your investment more spread out and more diversified.)
However, when compared to all other ETFs in general, VFV isn't actually that risky to invest in because S&P 500 companies do have a track record of providing decent long-term returns.
These are major companies that have international operations 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
VEQT vs. XEQT
Vanguard All-Equity ETF Portfolio (VEQT)
iShares Core Equity ETF Portfolio (XEQT)
Both VEQT and XEQT 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 VEQT or XEQT would mean that you are spreading out your investment around the world instead of companies in the U.S. only.
XEQT has more global exposure when compared to VEQT, making XEQT slightly more diversified than VEQT.
Here is a comparison on the asset allocations between VEQT vs. XEQT as of August 2023.
|U.S. Equity||± 44%||± 46%|
|Canadian Equity||± 30%||± 23%|
|Global Equity*||± 26%||± 31%|
*In this post, "global" or "worldwide" refers to regions other than the U.S. and Canada.
Another Detour on Diversification
So far, we discussed diversification in ETFs based on:
- The number of companies it tracks, and
- Its exposure to the global market.
Generally, the more companies an ETF tracks + the more it is exposed to the global market, the less risky it is.
But there is another way to look at how ETFs are diversified, by looking at whether its asset allocation is in:
- Equity (stock market), or
- Fixed income assets (bond market, cash, term deposits, treasury bills).
Here's the difference between the two:
- 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.
VFV, VEQT, and XEQT are all >99% equity.
How about VGRO?
Vanguard Growth ETF Portfolio (VGRO)
Unlike the three other ETFs, 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 VFV, VEQT, and XEQT when taking into consideration the type of asset allocation it has, and the companies it tracks around the world.
|Fixed Income||± 0%||± 0.6%||± 20%|
|U.S. Equity||± 44%||± 46%||± 35%|
|Canadian Equity||± 29%||± 23%||± 23%|
|Global Equity||± 27%||± 31%||± 22%|
Table updated as of August 2023.
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 VEQT, XEQT, and the most diversified would be VGRO.
But, VFV also has the highest potential for growth (or losses), followed by XEQT, VEQT, and then VGRO. You can see below that VFV has grown >57% in the past 5 years, compared to VGRO which has only grown >19%.
If you are considering to purchase any of the 4 ETFs in this post, there are essentially 3 main things to ponder upon:
- What balance between diversification and growth/loss potential you are willing to accept,
- 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 mostly equity 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), almost 100% equity
- VEQT: U.S. + Canada + worldwide, almost 100% equity
- XEQT: U.S. + Canada + worldwide (in higher proportion than VEQT), almost 100% equity
- VGRO: U.S. + Canada + worldwide, ± 80% equity and ± 20% fixed income