Why Vanguard’s retiree-focused ETF is currently cautious in its asset allocation

After the Liberation Madness of April 2025, I became increasingly defensive, although my asset allocation is not (yet) at the point where the rule of thumb would advise that your age should equal your fixed income. If that were the case, I would have 28% equities and 72% fixed income, and I’m not that conservative (yet).

As we stated in the previous column about the Purpose Longevity Pension Fund, I plan to live long (Lord willing); That’s why I also believe that stocks (at least quality stocks that pay dividends or ETFs that hold them) should always make up at least half of an investment portfolio – even in retirement.

A core fund for retirees is the Vanguard Retirement Income Fund, or VRIF, trading on the TSX. The ETF name describes exactly what it does and is one of several funds often mentioned by the Retirement Club (see this introductory blog about the Club, co-founded by blogger Dale Roberts).

I started a position in VRIF shortly after launch in 2020. At the time, the asset allocation consisted of roughly 50% equities and 50% fixed income, spread across all regions in the normal proportions; However, as 2025 progressed, I noticed VRIF starting to reduce its equity exposure and increase its fixed income share, almost to the point from 70% bonds to just 30% equities.

Semi-retired Globe & Mail financial columnist Rob Carrick mentioned this in his book biweekly column at the end of January: “A big supporter of bonds is the investment giant Vanguard, which took an unusual position last year by proposing a portfolio of 70% bonds and 30% stocks. The underlying idea here is sound: stocks have soared and bonds are undervalued.”

I had noticed several as well YouTube videos from VanguardIts U.S. parent is signaling a similar caution: a retreat from the big U.S. growth mega-cap stocks in favor of other developed and emerging economies around the world.

On January 21, Vanguard Canada held a media briefing from two of its top economists at its Toronto headquarters, which allowed me to ask questions about this perception of increasing caution. (You can find at least two news stories on the Internet posted shortly after the event by Bloomberg News And Investment manager.)

Targeted 4% payout in line with Bengen’s famous 4% rule

Our focus here is on VRIF. The original press release highlighted that the goal is to provide income-seeking investors with a “targeted 4% annual payout.” That happens to be in line with William Bengen’s famous 4% rule, which is “fine for me,” as I joked during the media briefing.

In response to my question, Vanguard Canada spokesperson Matthew Gierasimczuk said VRIF’s asset allocation “varies over time,” but the target is the 4% return target: Vanguard sees a “more optimistic view of bonds and fixed income.”

Kevin Khang, head of global economic research at Vanguard, reiterated that the ETF wants to fund a “certain level of payout. Bonds, in our view, can achieve the desired certain level of payout” and “the U.S. stock market is quite expensive for obvious reasons.” After the Great Financial Crisis, bonds did not yield much “but now they are reasonably valued: relative to inflation, they provide a decent real return.”

For this column, I was then referred to Aime Bwakira, Head of Product for Vanguard Canada. In my view, the rationale for VRIF’s high fixed income exposure appears to be one of not taking on more risk than necessary, an eminently reasonable attitude that suits the retirees VRIF is targeting.

Bwakira confirmed that Vanguard has “relied more on bonds – particularly higher quality and corporate bonds – than in recent years, while staying within equity limits” of a minimum of 30% and a maximum of 60%. This positioning “reflects the current environment and the results of our capital market projections.”

Threefold reason for increasing the share of fixed income securities

The reason for this is threefold.

First, there is the higher interest rate. Bonds – especially corporate bonds – are paying higher than many years after the Great Financial Crisis (GFC) of 2008: “This makes them well suited to supporting the 4% VRIF income target without taking on unnecessary stock market risk.” VRIF includes exposure to corporate bonds specifically to help improve returns for investors.

Second, given the current market outlook, the fund’s model has shifted toward fixed income, as bonds “currently offer a more favorable balance between expected return and risk.” I was also referred to Vanguard’s current VCMM 10-year projections (VCMM = Vanguard Capital Markets Model) for various asset classes. It is also published in the US for US investors Forecasts from Vanguard Capital Markets Model®.

The document, dated January 22, 2026, states: “Even at current high valuations, rising earnings growth could provide near-term momentum for equities. However, our belief is growing that the long-term outlook for US equities is subdued. Our model expects annualized returns of around 3.9% to 5.9% over the next decade.” It adds: “Our moderate long-term return projection for US equities is fully consistent with our more bullish outlook for an AI-led economic boom in the US.”