VRIF is a fund of funds ETF designed to an all-inclusive ETF for those seeking income. For a 4.0% net yield, it is a good candidate for retirees hoping to improve their portfolio using this one-in-all ETF. The split between bonds and stocks is 50-50 and the ETF offers geographic diversification as well.

Source: Vanguard.ca 

Taking the sumproduct of dividend and interest yield, the yield comes to 1.50%. With a mix of stock and bonds, where bonds are offering near-zero rates, its equity positioning will need to perform to meet its yield target. In other words, Vanguard will have to sell holdings that have risen in price to effectively deliver the target yield. Alternatively, in an absence of enough capital gains to top up dividends and interest, a return of capital would be used. A return of capital (ROC) is the cash distributed from the cash portfolio of the fund. By paying this cash, the ETF effectively reduces the total value of the fund by a marginal amount, thereby reducing the fund’s Net Asset Value. ROC becomes a concern if the fund is unable to perform well over time and has to sustain the level of distribution.

Now, let’s say the dividend and interest yield is 1.50%, to achieve the target yield, the capital gains yield must equal or be greater than 2.5%. As it is a 50-50 mix between bonds and stocks, if bond prices moved by 0, 5, or 8 percent in either direction, stocks would have to move by the following degree to cover the 2.5% yield expected from capital gains:

On average, the capital gains yield is more doable given the strong performance seen in equities. However, with the recent volatility and low-interest-rate environment, investors need to be aware of the possibility of a return of capital.

Overall, it will be an interesting name to watch and see how they sustain the yield. Fees are decent at 0.29%, but we would wait on this one to see some history. It is only $2.5 million in assets currently but it will likely be quite popular. 

Happy Investing!

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Disclosure: Please note that the author does not hold a financial or other interest in stocks or funds mentioned at the time of publishing.