VEQT vs VGRO – Which ETF is Best for Canadian Investors

Posted on November 29, 2021 by Dan Kent

Investing in an exchange traded fund (ETF) is one of the best ways to immediately establish highly diversified equity position. Among Canadian ETFs, the Vanguard Equity Index Group offers several different ETFs for investors, most of which have been able to achieve stable growth over time.

Two of the most popular ETFs offered by the Vanguard Equity Index Group are the Vanguard All Equity ETF Portfolio (VEQT) and the Vanguard Growth ETF Portfolio (VGRO), both of which are broadly considered to represent “all in one” equity positions.

VEQT vs VGRO quick comparison table:

VEQT VGRO
AUM: $1.61B $3.2B
Annual Fee: $2.20 per $1000 $2.20 per $1000
Allocation (KEY DIFFERENCE): 100% Equities 80% Equities/20% Fixed Income
Total Holdings: 13,448 Over 30,000
Top Holding: Microsoft Microsoft
Dividend Yield: 1.23% 1.66%
1 Year Returns: 23.86% 18.11%
Returns Since Inception: 51.48% 44.09%
Max Drawdown: 30.45% 25.36%

In this article, we're going to compare VEQT vs VRGO, as they do contain some key differences.

Investing in either (or both) ETFs is a great way to immediately diversify your holdings and position yourself for long-term, relatively predictable growth. You won't have to deal with things like diversification, rebalancing, or the purchase of individual stocks. They truly are a one-fund solution. 

The best part? You'd be hard pressed to find online brokerages that don't allow you to buy these ETFs. Some of them you can even buy commission free, resulting in zero trading fees to purchase the ETFs! It's easy to check with your brokerage account provider to see their list of commission free ETFs.

But considering all investment decisions must be made on the margin, you are probably asking yourself—which has historically been the better investment between VEQT and VGRO?

VEQT vs VGRO comparisons - lets start with the VEQT ETF

Vanguard Equity Index Portfolio (VEQT)

The Vanguard All-Equity ETF is a portfolio that, as the name implies, is primarily focused on achieving growth through investments in equity securities. Naturally VEQT is going to be directed more towards growth portfolios, ones that are looking for long-term capital growth.

According to Vanguard, “the sub-advisor will strive to maintain a long-term strategic asset allocation of 100 percent equity securities”, though during unusual market conditions, some of the portfolio may be directed away from equity securities and towards other investments such as fixed-income securities.

The portfolio was originally introduced on January 29, 2019, making it younger than its VGRO counterpart. Since its inception it has grown by 49.21 percent, meaning that if you had invested 10,000 CAD at the time of its inception (33 months ago), you would currently have 14,921 CAD.

A significant portion of this growth has occurred over the course of the past year, in which VEQT has witnessed an impressive 31.31 percent rally. The growth has slowed a bit over the course of 2021, with a YTD return (as of 10/31) of 16.39% and a three month return of 2.88%. Over the course of its somewhat brief history, the fund has consistently performed well, with positive returns occurring nearly every quarter, other than a COVID-19 related decline in early 2020.

As stated, the fund is nearly entirely concentrated in stocks, with 99.98% of it allocation distributed across a group of 13,448 stocks and the remaining 0.02 captured in short-term reserves. 

One very important note. Different investors have different levels of risk tolerance. As a DIY investor you need to figure out what your tolerance is for risk in order to see if an all equity portfolio is right for you.

The median market cap as of October 31 is 172.7 billion CAD and the price to earnings ratio stands at 15.6x. The distribution yield is in the low 1% range. So, this is not an ETF you utilize for a passive income stream.

In terms of equity allocation, nearly 80% of the ETF is allocated to large cap stocks, with less than 5% allocated to small caps. So, considering the overall exposure in terms of the amount of stocks, plus the fact most all of them are large caps, this ETF can be thought of as somewhat of a "blue chip" option.

The bulk of the fund is also situated in North America, with about 43% of exposure to the United States and 30.4% to Canada. And in terms of sector exposure, it has the heaviest weighting towards financials and technology companies at just shy of 20% to both.

Even though the fund primarily contains underlying ETFs, if we look to the top holdings no stock makes up more than 2.1% of total allocation. Microsoft is the top holding, followed by Canada's largest publicly traded company in Shopify. Toronto Dominion Bank and Royal Bank also make a top 5 appearance in the fund.

The ETF has a relatively low management expense ratio of 0.22%, meaning you'll pay only $2.20 per $1000 invested on an annual basis.

Overall, VEQT is an excellent way to gain exposure to the equity markets, and contains a low enough weighting to each individual equity that a disappointment from one will likely not increase volatility.

How exactly does VEQT compare to VGRO? Lets take a look at how a small allocation change in terms of the equity/fixed income makeup can change the look of these two ETFs.

Also don't miss our comparison between VGRO vs XGRO.

VEQT vs VGRO comparisons - VGRO ETF for lower volatility and fixed income exposure

Vanguard Growth ETF Portfolio (VGRO)

The Vanguard Growth ETF Portfolio, which is slightly older than its VEQT counterpart, originally debuted on the Toronto Stock Exchange on January 25, 2018. According to Vanguard, the fund strives to “maintain a long-term strategic asset allocation of equity (approximately 80 percent) and fixed income (approximately 20 percent) securities like bonds and debentures.”

Ultimately, it is the inclusion of fixed income securities that make this fund notably different from its counterpart.

Since its inception, the fund has grown by 38.16%, though once the fund overcame a few bumps in the road following its inception, it has performed even better—the growth over the past three years has been 43.37%.

In the 12 months leading up to October 31, the fund experienced a 23.87% upswing and its YTD performance has been 12.10%, with both figures being below VEQT during the same time period. This makes sense though, considering the pressure on the fixed income market due to inflation fears and rising rate rumors.

Overall, the directional price movements for VGRO have been generally similar to that of VEQT (as well as the stock market, as a whole), though both its upward and downward price swings have been less dramatic. We view something like this called the "max drawdown" of a stock or in this situation, an ETF.

TSE:VGRO vs TSE:VEQT

As we can see by the chart above, during the peak of the COVID-19 market crash, VGRO held on much better than VEQT. In fact, if you had $100,000 in both of these funds, during the bottom of the COVID-19 crash, you would have had just over $75,000 in VEQT and just over $80,000 in VGRO. This looks like a relatively small impact, but it's notable, especially if you have a sizable portfolio.

This is almost certainly due to the fact that a portion of the fund is allocated to fixed-income securities, which have been historically less rewarding and less risky than their equity alternatives. While equities witnessed the fastest crash in stock market history, many reliable bond funds fell only 9-10% during the crash.

Like VEQT, VGRO is distributed across 13,448 stocks and has had a price/earnings ratio of 15.6x. The median market cap is a bit smaller than VEQT’s, last reported to be about $113.3 billion CAD. For the bond portion of the portfolio, the average yield to maturity is 1.9% and the average duration is 7.9 years. This exposure to fixed income will ultimately lower the risk rating of the ETF, and may require the fund to rebalance during years where each asset outperforms the other.

Much like VEQT, VGRO is extremely low-cost. Management fees come in at $2.20 per $1000 invested on an annual basis. So, even though the fund contains 20% fixed income, you're not getting a lower MER.  

In terms of exposure to countries, size of companies and sectors, it is virtually identical to VEQT, give or take maybe a few basis points.

In terms of the ETF's bond exposure, only 12% of the portfolio has a grade of BBB. The rest are either A, AA, or AAA. These are rock solid bonds inside of the ETF. In fact, over 60% of them are government bonds and treasuries.

The top holdings are much the same, with a slight reduction in overall percentages allocated to each. This is again due to the fact the fund has 20% allocated to fixed income.

The bottom line: VEQT or VGRO, which is better?

At first glance, it is clear that VEQT and VGRO are extremely similar. Both are managed by Vanguard, a US-based company that is the largest provider of mutual funds and the second largest provider of ETFs in the world (only BlackRock is larger). They also are both invested in the same group of equities.

However, the clear difference between these funds is that while VEQT, the “all equity” fund, is almost entirely concentrated in equities, about 20 percent of VGRO is distributed in fixed-income securities (bonds). It's really that simple.

Important to remember, especially for those learning how to buy stocks is that the ETF that is “right” for a specific investor will depend on the investor’s personal risk tolerance. Investors with slightly higher levels of risk tolerance could choose to invest in VEQT, while investors with lower levels of risk tolerance might opt for VGRO.

Overall, VEQT is ideal for investors who are hoping to achieve higher levels of growth, while simultaneously accepting deeper dips during poor market conditions, while VGRO is the better option for investors that are hoping to achieve slower, but more stable growth over time.

At the same time, investors whose risk tolerance is somewhere in between might consider investing in both funds.

Are these ETFs best held in an RRSP, TFSA, or cash account?

As with most investments, the answer to this depends. If you have room in a tax sheltered account, you'll often want to make investments inside of that account prior to investing in a taxable account.

There are extremely confusing rules when it comes to taxation of ETFs holding underlying foreign ETFs. For example, even if the ETF you own is Canadian, if it holds underlying foreign ETFs, you will be charged a withholding tax on the distribution.

This is much the same regardless of the trading platform you use. Whether it be Wealthsimple Trade, Questrade, or Qtrade, withholding taxes will be deducted from the distributions before you receive them.

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Dan Kent

About the author

An active dividend and growth investor, Dan has been involved with the website since its inception. He is primarily a researcher and writer here at Stocktrades.ca, and his pieces have numerous mentions on the Globe and Mail, Forbes, Winnipeg Free Press, and other high authority financial websites. He has become an authority figure in the Canadian finance niche, primarily due to his attention to detail and overall dedication to achieving the highest returns on his investments. Investing on his own since he was 19 years old, Dan has compiled the experience and knowledge needed to be successful in the world of self-directed investing, and is always happy to bring that knowledge to Stocktrades.ca readers and any other publications that give him the opportunity to write. He has completed the Canadian Securities Course, manages his TFSA, RRSPs and a LIRA at Qtrade, and has compiled a real estate portfolio of his primary residence and 2 rental properties, all before his 30th birthday.

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