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Many retirees prioritize a consistent stream of income, often preferring regular distributions even if it means a corresponding decrease in their fund’s net asset value. Economically, receiving a distribution is equivalent to selling shares, but a tangible monthly payout provides psychological reassurance.Recognizing this preference, a harm-reduction approach focuses on optimizing outcomes within this framework by prioritizing low costs, simple construction, and avoiding complex strategies.
The Appeal of Managed Distribution Policies
Sensible monthly income ETFs typically employ a managed distribution policy, targeting yields between 4% and 6%. This involves funding income through a combination of dividends,interest,capital gains,and,when necessary,a modest return of capital to ensure consistent payments. This approach offers retirees a predictable income stream without the need for frequent, possibly ill-timed, asset sales.
With this in mind, two Canadian ETFs – from Vanguard and BMO – stand out as potentially suitable options for retirees.
Vanguard Retirement Income Fund (VRIF) – A Conservative Approach
Vanguard Retirement Income Fund (VRIF) is explicitly designed for retirees, a fact reflected even in its name. Despite this, it often goes unnoticed within Vanguard Canada’s broader asset allocation lineup, however, the 4% distribution target may be insufficient for retirees relying on Registered Retirement Income Funds (RRIFs), as withdrawal requirements increase with age.A higher income target would be a notable improvement.The fund’s management expense ratio (MER) is 0.32%, competitive with older monthly income ETFs but higher than Vanguard’s growth-oriented offerings. An MER closer to 0.24% would align better with vanguard’s overall pricing strategy.
BMO Balanced ETF fixed percentage Distribution units (ZBAL.T) – Simplicity and Value
BMO takes a different approach with its Balanced ETF Fixed Percentage Distribution Units, identified by the “.T” suffix. Instead of creating a separate retirement income ETF, BMO applied a fixed distribution feature to its existing asset allocation ETFs. ZBAL.T, based on a classic 60% equity/40% fixed income allocation, stands out with a 6% annualized distribution.
Crucially,the underlying portfolio remains unchanged. There are no active management layers, option strategies, or leverage involved.ZBAL.T essentially replicates the standard ZBAL ETF, which pays quarterly distributions, but uses realized capital gains and return of capital to maintain a steady monthly payout.
This structure is ideal for retirees who prefer a customary 60/40 portfolio but want to avoid the complexities of manually selling shares to fund withdrawals. ZBAL.T automates this process, removing emotional decision-making during market volatility.
The fund’s fixed income holdings include Canadian discount bonds – offering tax efficiency – and U.S. aggregate bond exposure. On the equity side, ZBAL.T provides broad market exposure through the S&P 500, the S&P TSX composite Index, the MSCI EAFE Index, and the MSCI Emerging Markets Index, with smaller allocations to U.S. mid-cap and small-cap stocks.
Perhaps the most attractive feature of ZBAL.T is its pricing. The expense ratio remains a remarkably competitive 0.20%, identical to the non-income version. For retirees seeking simplicity, predictable cash flow, and low costs, this combination is challenging to overlook.
Ultimately, the choice between VRIF and ZBAL.T depends on individual circumstances and risk tolerance. Both etfs offer a compelling solution for Canadian retirees seeking a reliable monthly income stream.
Disclaimer: The information provided by ETF Portfolio Blueprint is for general informational purposes only. All information on the site is provided in good faith, though, we make no depiction or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information on the site.Past performance is not indicative of future results. ETF Portfolio Blueprint does not offer investment advice, and readers are encouraged to do their own research (DYOR) before making any investment decisions.
