# Vanguard Launching New ETF



## Gator13 (Jan 5, 2020)

A new ETF from Vanguard that might be of interest.


VRIF ETF is made up of eight existing low-cost underlying Vanguard index ETFs and features a management fee of approximately 0.31%.
The stocks-bonds mix is 50-50.
Designed to pay monthly income targeting a real-world 4-per-cent yield.
Dividends and interest income will account for about 60 cents per $1 of income, with capital gains providing the other 40 cents.
An ETF designed for generating income, not for growing your money.


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## Beaver101 (Nov 14, 2011)

^ Finer print: use of ROC (as needed ... hopefully, not every 12 months).


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## Gator13 (Jan 5, 2020)

Definitely ROC if the capital gains do not materialize, but potentially a good all-in-one solution at 0.31% MER.


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## Beaver101 (Nov 14, 2011)

^ I'm no beancounter but wouldn't that 4% be off or inflated then? Maybe the .31% MER is the most attractive thing versus its competitors.


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## AltaRed (Jun 8, 2009)

There is a good thread going on at FWF on Vanguard (VRIF) Digging into the details via SEDAR provides more perspective on how Vanguard is playing this one. As J4b is likely to note... this will be a highly actively managed asset allocation ETF. Vanguard must think there is a Canadian market for this sort of thing because they just recently threw in the towel on the US equivalent when they could no longer sustain initially 5%, and then more recently 4%.


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## andrewf (Mar 1, 2010)

Gator13 said:


> Definitely ROC if the capital gains do not materialize, but potentially a good all-in-one solution at 0.31% MER.


It's useful if you don't want to deal with transacting to raise cash to meet your income plan. However, you won't get a fixed stream of cashflow for a specific upfront investment. The 4% cash flow will vary with time, so in some ways if it performs well it may be spinning out more cash than you want/plan, and will need to be reinvested, or less cash due to market decline and you may need to sell additional units to hit your income goal.


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## andrewf (Mar 1, 2010)

Beaver101 said:


> ^ I'm no beancounter but wouldn't that 4% be off or inflated then? Maybe the .31% MER is the most attractive thing versus its competitors.


Would depend if they can hit a 4% real return to be sustainable. If they can, the fund will tend to increase in value over time. If not, it will decline (along with the stream of payments).


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## hfp75 (Mar 15, 2018)

4% in todays world is good but I'm not after ROC....

I can just draw from my savings on my own and skip the .31% MER


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## AltaRed (Jun 8, 2009)

The intention is 4% at launch for a starting position. If you read the link I provided, the actual monthly distribution will likely vary, presumably going up with CPI and perhaps some real growth as the underlying assets outpeform and grow their distributions correspondingly. Or the market will NOT cooperate and Vanguard may have to sell some assets (ROC) from time to time to maintain the distribution. Vanguard's analysis suggests once in every 10 years on average. 

Lots of 'ifs' which may not pan out over time. Not something I'd be interested in BUT for the majority of retirees who are really looking for a 4% SWR, this may catch on. After all, it IS called Vanguard Retirement Income Fund, focused on that 4% SWR retiree.


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## andrewf (Mar 1, 2010)

Can't be a true fixed SWR unless they are content with a % chance of it blowing up and going to zero due to sequence of returns risk.


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## james4beach (Nov 15, 2012)

AltaRed said:


> There is a good thread going on at FWF on Vanguard (VRIF) Digging into the details via SEDAR provides more perspective on how Vanguard is playing this one. As J4b is likely to note... this will be a highly actively managed asset allocation ETF. Vanguard must think there is a Canadian market for this sort of thing because they just recently threw in the towel on the US equivalent when they could no longer sustain initially 5%, and then more recently 4%.


If it's actively managed asset allocation targeting a high yield, isn't that exactly what XTR does?

XTR is a "balanced fund" that pays a high yield using all the income producing stuff you can think of. It also ran into similar problems where it initially had a higher yield, then found it was not sustainable (was eroding capital rapidly) so they had to reduce the payout.

Wondering how the Vanguard fund will be different than XTR? Even the policies on payouts sound the same.


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## AltaRed (Jun 8, 2009)

andrewf said:


> Can't be a true fixed SWR unless they are content with a % chance of it blowing up and going to zero due to sequence of returns risk.


IT isn't and Vanguard is not saying that. They will do what is reasonable, including ROC from time to time, to meet that criteria, but not once have they said it is a true fixed SWR.


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## AltaRed (Jun 8, 2009)

james4beach said:


> If it's actively managed asset allocation targeting a high yield, isn't that exactly what XTR does?
> 
> XTR is a "balanced fund" that pays a high yield using all the income producing stuff you can think of. It also ran into similar problems where it initially had a higher yield, then found it was not sustainable (was eroding capital rapidly) so they had to reduce the payout.
> 
> Wondering how the Vanguard fund will be different than XTR? Even the policies on payouts sound the same.


About half the MER for one thing.....That may require Blackrock to stop gouging! Once again, Vanguard comes in for fee rescue. Love or hate Vanguard, but it has single handedly been responsible for causing Blackrock and BMO to lover fees over time.

Not sure there is any other real difference albeit it appears Vanguard may more actively manage VRIF to be closer to a continuous 4% yield.adjusted for CPI. Time will tell.

No doubt there will be the upcoming comparisons over time by Justin Bender, MoneySense, Rob Carrick, etc.


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## james4beach (Nov 15, 2012)

AltaRed said:


> About half the MER for one thing.....That may require Blackrock to stop gouging! Once again, Vanguard comes in for fee rescue. Love or hate Vanguard, but it has single handedly been responsible for causing Blackrock and BMO to lover fees over time.
> 
> Not sure there is any other real difference albeit it appears Vanguard may more actively manage VRIF to be closer to a continuous 4% yield.adjusted for CPI. Time will tell.


The fee reduction is very good so the competitive pressure is nice. I've come close to suggesting XTR because it really does provide large payments, so it's basically a balanced fund with auto-withdrawals. Some people want that.

The main difference from XTR that I see is the lower fee plus an explicit target of 4% as per SWR.

It will be interesting to see how well they manage this. I suspect that it will underperform a passive (couch potato) equivalent. The other alternative for an investor is to just use VBAL and take dividends, interest, plus withdraw/liquidate to generate 4% themselves.

But we know that people hate selling shares to generate income, which is why VRIF and XTR eixst


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## like_to_retire (Oct 9, 2016)

james4beach said:


> But we know that people hate selling shares to generate income, which is why VRIF and XTR eixst


Yeah, I suppose these securities sell the share's for you, so you don't have to see what's behind the curtain. They work out great as long as they can supply the desired cash flow, but when they can't there's always ROC, and then eventually they would have to reduce the payout.

I detect that you feel these securities are illaudable, but what's the alternative? If someone doesn't want to sell shares, these seem like a good idea to me.

ltr


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## james4beach (Nov 15, 2012)

like_to_retire said:


> I detect that you feel these securities are illaudable, but what's the alternative? If someone doesn't want to sell shares, these seem like a good idea to me.


If someone absolutely refuses to sell shares on their own, these are good options. The person just has to be aware that they are paying a premium/fee for the "service".

Generally I think someone is better off holding Mawer Balanced / VBAL / VCNS / XBAL and selling units themselves.


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## like_to_retire (Oct 9, 2016)

james4beach said:


> The person just has to be aware that they are paying a premium/fee for the "service".


Yep, I agree. 

I also see every week that there are actually people that pay over 2% MER's for mutual funds, so the "_Premium_" is relative.......

ltr


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## AltaRed (Jun 8, 2009)

We have supposedly savvy, experienced and knowledgeable investors here who get mental blocks over selling invested capital such as shares (deer in headlights?) as part of their withdrawal plan, and that suggests to me more investors could be better served having that decision process taken away from them for some 20-30 basis points of arm's length management.

In retirement, one is is SUPPOSED to be withdrawing from their portfolio at some withdrawal rate that for most, is likely more than the investment income yield of their portfolio. Do we really need to have this conversation for the 15th (or 150th) time?

Added: Behind paywall but Rob Carrick discusses VRIF today. He makes no judgement on it but has a few generalized comments


> 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?
> <snip>
> 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.
> <snip>
> 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.


Rob doesn't recognize as James did that XTR does a somewhat similar thing but without necessarily the same rigor.


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## curioso (Nov 22, 2018)

I have a very noob question (and forgive my noobiness) : if you have a portfolio of this new ETF on your TFSA account, would the income generated be tax free?


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## Retired Peasant (Apr 22, 2013)

Yes it would - it's all within the TFSA (tax free savings account)


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## hfp75 (Mar 15, 2018)

curioso said:


> I have a very noob question (and forgive my noobiness) : if you have a portfolio of this new ETF on your TFSA account, would the income generated be tax free?


Yes, all income in a TFSA is Tax Free


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## newfoundlander61 (Feb 6, 2011)

Here is an article from Moneysense regarding this new ETF:

The lowdown on Vanguard's Retirement Income ETF: can you rely on its 4% payout target? | MoneySense


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## AltaRed (Jun 8, 2009)

newfoundlander61 said:


> Here is an article from Moneysense regarding this new ETF:
> 
> The lowdown on Vanguard's Retirement Income ETF: can you rely on its 4% payout target? | MoneySense


A good summary. Two key takeaways for me: 1) It will mostly, but not always, have a 4% distribution rate, without tapping into capital appreciation and/or return of capital, and 2) it sidetracks the endless debate on CMF about investment yield mostly via dividends vs total return


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## james4beach (Nov 15, 2012)

AltaRed said:


> A good summary. Two key takeaways for me: 1) It will mostly, but not always, have a 4% distribution rate, without tapping into capital appreciation and/or return of capital, and 2) it sidetracks the endless debate on CMF about investment yield mostly via dividends vs total return


Definitely a parallel to our ongoing total return vs yield discussions.

I read the same link but don't see the same message you do. I'm not sure why you wrote "without tapping into capital appreciation", but maybe you meant RoC. I think Vanguard is pretty explicit in saying that they *will* tap into capital appreciation, i.e. capital gains occur, they sell underlying shares to generate income.

Notice the link also says the ETF is about getting past the "_psychological barrier_ of having to sell shares to generate their retirement income" -- which is great.

In this boomerandecho article, it's even a bit more clear:

Investors with a keen eye will notice that the underlying holdings of VRIF don’t generate 4% income. Mr. Johnston says with the total-return focus, VRIF will naturally pay out about 60% of its distributions through interest and dividends,* with the remaining 40% coming from capital appreciation.*​
Meaning that of the 4% distribution yield, the underlying investments naturally spin off about 2.4% yield (seems right) and another 1.6% will come from liquidation of securities. That is absolutely in line with my own portfolio and sounds completely plausible to me.

My reading of this is that the new ETF will _routinely_ sell underlying shares to generate the needed income. That is likely from capital appreciation and therefore would distribute taxable capital gains. But they will try to avoid RoC.

All of that sounds fine to me. The total return approach is a good way to generate distributions from an investment portfolio, and the only reason it's usually hard to do is the psychological barrier of selling shares. This ETF helps get past that barrier.


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## AltaRed (Jun 8, 2009)

You are correct in that I should have said 'tapping into capital appreciation and without tapping into return of capital except as may be necessary'. I did not re-read what I wrote before posting and don't know why I wrote what I wrote at the time. My apologies.

It is clear the 4% cannot come from investment income alone, but the 4% should be able to be covered by investment income PLUS capital appreciation in most years. This is classic 4% SWR. The fund will rarely need to distribute ROC except in some down years when there may not be sufficient unrealized capital gains to fund the distribution and even then, Vanguard also does not explicitly guarantee the 4% distribution either which, in severe down years, is also prudent. Their caveats are a lot better than the managed payout funds marketed by the likes of RBC (and others) where the risks are not sufficiently disclosed.

While this fund has no history yet, I see this fund as the way for investors to get over the mental block of crystallizing cap gains through the selling of underlying assets. It is a mental block that does great disservice to the majority of retirees and I expect the fund to do well. There is finally an adult in the room (Vanguard) which has the depth of professional expertise to optimize the difficult years. Time will tell how well they do with this...

I will be watching with some interest, with a view to potentially recommending my spouse and my ex to switch their RRIFs from VBAL to VRIF at some point. Perhaps even some of their non-reg accounts too. In withdrawal, one should be intentionally tapping into capital appreciation along the way, and even ROC. One can't take it with them in their coffins so there is much worse to be done than incurring some ROC from time to time.


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## james4beach (Nov 15, 2012)

AltaRed said:


> This is classic 4% SWR
> . . .
> The fund will rarely need to distribute ROC except in some down years when there may not be sufficient unrealized capital gains to fund the distribution and even then, Vanguard also does not explicitly guarantee the 4% distribution either which, in severe down years, is also prudent. Their caveats are a lot better than the managed payout funds marketed by the likes of RBC (and others) where the risks are not sufficiently disclosed.


I agree, and like what I see here as well. It's interesting that RBC's managed payout funds start at 5% (which is likely too high to be sustainable long term) and have 1.62% MER.

In comparison VRIF is doing basically the same thing at only 0.31% (meaning a theoretical +1.3% CAGR performance boost versus RBC's!) plus they are targeting a more reasonable and sustainable 4%.

Just purely based on these quantitative factors, VRIF already looks superior to RBC managed payout funds. It really does appear to be "VBAL + total return withdrawal" which is absolutely perfect.


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## AltaRed (Jun 8, 2009)

Dan Hallett of HighView Financial Group, among others, has commented on the RBC managed payout type funds in the past (as discussed in the FWF thread on VRIF). RBC has had to lower distributions over time and its NAV has declined over the years accordingly. It couldn't help but do so with the high MER and original 5% payout.


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## Gator13 (Jan 5, 2020)

Now closing in on 2 years. Comments?

Appears to be significantly more actively managed than I expected. (judging by allocation)


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## Covariance (Oct 20, 2020)

Gator13 said:


> Now closing in on 2 years. Comments?
> 
> Appears to be significantly more actively managed than I expected. (judging by allocation)


Only $326million in assets. So it doesn’t seem like a screaming success for the issuer.


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## AltaRed (Jun 8, 2009)

I don't think anyone can judge this one based on perhaps 2 of the most volatile years in recent times in the investment field. This ETF is primarily for retired seniors and it is not clear to me what seniors have been up to from an investing perspective over the last few years. Two years is a very short time at the best of investing environments. We probably have another year or two of whacky investment returns while inflation is brought under control. 

I still think VRIF is an appropriate investment, but perhaps for a very defined retirement situation. We will almost certainly see some ROC this year simply because of faltering bond and stock markets... the so called 'one in ten' situation discussed by Vanguard in the launch of this ETF. This and the following 2 years to come will be an excellent test of VRIF's ability to manage these down situations for future investors in this ETF. One couldn't ask for a better time for such a test.


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## Covariance (Oct 20, 2020)

AltaRed said:


> I don't think anyone can judge this one based on perhaps 2 of the most volatile years in recent times in the investment field. This ETF is primarily for retired seniors and it is not clear to me what seniors have been up to from an investing perspective over the last few years. Two years is a very short time at the best of investing environments. We probably have another year or two of whacky investment returns while inflation is brought under control.
> 
> I still think VRIF is an appropriate investment, but perhaps for a very defined retirement situation. We will almost certainly see some ROC this year simply because of faltering bond and stock markets... the so called 'one in ten' situation discussed by Vanguard in the launch of this ETF. This and the following 2 years to come will be an excellent test of VRIF's ability to manage these down situations for future investors in this ETF. One couldn't ask for a better time for such a test.


Agreed. I suspect the prospective client for this is limited for the reasons you state. Also a DIYer might conclude they can implement it themselves to achieve all the benefits while fine tuning to their circumstances. And advisors are unlikely to embrace it.


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## Eclectic21 (Jun 25, 2021)

AltaRed said:


> ... We will almost certainly see some ROC this year ...


Don't you mean an increase in RoC?

So far, it's reported as being something over a ten fold increase in the RoC listed in the annual distribution breakdown.





Retirement Income ETF Portfolio (VRIF) - en


Vanguard Retirement Income ETF Portfolio seeks to provide a combination of consistent income with the possibility of some capital appreciation by investing in equity and fixed income securities.




www.vanguard.ca





Cheers


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## AltaRed (Jun 8, 2009)

Eclectic21 said:


> Don't you mean an increase in RoC?
> 
> So far, it's reported as being something over a ten fold increase in the RoC listed in the annual distribution breakdown.
> 
> Cheers


Which is what I said.... 'will almost certainly see some ROC this year". It is a 'no brainer' ROC will go up this year considering the decline in market value of both stocks and bonds this year and 4% payout is most likely going to exceed the net yield of the underlying securities. That is what happens in 4% SWR withdrawal methodologies as well. VRIF is essentially nothing more than DIY 4%SWR with an MER attached to it for by a portfolio manager to mange the product. No one reviewing (or owning) the product should be assuming anything else. The Vanguard option is still far more cost effective than a similar 4%SWR portfolio managed by a 1-1.5% AUM financial advisor.

ROC is nothing to be alarmed about for a senior, especially an advanced senior 75+ who SHOULD be decumulating their portfolio. Too many members of forums are chastised and bullied by folks who simply don't understand decumulation and when managed payout products (and annuities) are an obvious answer. At my current age, ROC is a perfectly legitimate cash flow stream in my overall investment income stream. I get to enjoy the tax deferred cash flow stream now. What is not to like?

P.S. I do not own VRIF and may never own it but I see its value and have recommended it to a few individuals to consider. My spouse may be a perfect candidate for it in circa 5 years when she passes through 80 years of age. She has a limited portfolio and rather prefers a relatively steady annual RRIF withdrawal.


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## Eclectic21 (Jun 25, 2021)

I was reading "see some RoC" as meaning there hadn't any in the past ... sorry.

I wasn't worried about how good or bad RoC was perceived to be.


Cheers


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## AltaRed (Jun 8, 2009)

Eclectic21 said:


> I wasn't worried about how good or bad RoC was perceived to be.
> 
> 
> Cheers


I know you weren't addressing this. I chose to address it up front for completeness.


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