Using ETFs Inside Your RRSP

Exchange traded funds have become more popular as investors realize the benefits of lower investment costs and diversification.  Most ETFs track a specific index, like the S&P TSX 60, or the S&P 500, and they are traded on stock exchanges – just like individual stocks.

Unlike with mutual funds, which can be traded for free, investors pay up to $29 to buy or sell an ETF.  However, once your portfolio reaches $50,000 or more, the benefit of ETFs become much greater since most discount brokerages lower your trading costs from $29 down to $9 or $10.

ETFs also have much lower management expense ratios than mutual funds, even index funds.  For example, Vanguards’ US Equity ETF (VTI) has a MER of just 0.06%.

Using ETFs Inside Your RRSP

I don’t make regular RRSP contributions anymore because I have a defined benefit pension, but I still like to top up my RRSP by $3,000 – $5,000 per year.  I’m currently invested in dividend paying stocks, and planned to build this portfolio by reinvesting the dividends for the next few decades.

Related: How To Set Up A DRIP

The advantages of using ETFs is very compelling to me, since I have $50,000 sitting in my RRSP.  I could switch my RRSP portfolio over to ETFs and rebalance once a year after adding a lump sum contribution.

The immediate benefit is diversification, since 5-6 ETFs gives me exposure to thousands of stocks across the globe, rather than just holding 12-15 Canadian dividend stocks.

Initially, I’d set up a portfolio similar to how I have my RESP account set-up with TD e-Series.  Here’s what my new RRSP portfolio might look like using ETFs:

ETF type ETF name Allocation Expense ratio
Canadian Equity iShares S&P/TSX Composite (XIC) 20% 0.25%
US Equity Vanguard Total Stock Market (VTI) 15% 0.06%
International Equity Vanguard Total International Stock (VXUS) 15% 0.18%
REITs BMO Equal Weight REITs (ZRE) 10% 0.55%
Canadian Bonds iShares DEX Universe Bond (XBB) 20% 0.30%
Real Return Bonds iShares DEX Real Return Bonds (XRB) 5% 0.35%

According to the Canadian Couch Potato blog, this portfolio goes beyond the basics by adding three additional asset classes (emerging markets, real estate and real-return bonds) while staying extremely easy to manage.  It uses Vanguard ETFs (traded in US dollars) for the US and international components, which include almost 10,000 stocks in more than 40 countries.

Final Thoughts

Even though I haven’t used ETFs in my portfolio yet, it’s hard to ignore the advantages and simplicity of using ETFs for my RRSP.  Don’t get me wrong, I’m still a big fan of dividend growth stocks.  I’ll be adding dividend stocks to my tax free savings account over the next few months.

However, I’ve been wondering what to do with my RRSP account for a while and I think that selling my individual stocks and using ETFs makes sense.  I can add new money once a year and re-balance annually to get back to my target asset mix.  This should be a worry-free portfolio for the next two or three decades.

What do you think of using ETFs inside your RRSP?

  • Did you know you can buy ETFs for free online with Questrade?  Open a discount brokerage account with Questrade here – (link)
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  1. My Own Advisor on August 6, 2012 at 6:09 am

    Great post, but I’m biased because this is exactly what I do 🙂

    I keep ETFs like XIU, VTI and VWO in my RRSP. I also keep U.S. dividend paying stocks in there like PG, T, ABT and JNJ.

    This way, with the ETFs, I’m paying next to nothing in management fees and getting tons of diversification.

    For a lazy and successful RRSP portfolio, I think ETFs are the way to go.


  2. Joe on August 6, 2012 at 8:57 am

    I think it’s sophisticated insofar as it’s simple.

    When I setup a couch potato portfolio (I should but I’m apparently even lazier than a couch potato), I think I’ll use Questrade. The commish starts at about $5 and maxes out (if I recall) at $10. Combined with the low MERs of index ETFs, that’s an exceptionally low cost structure.

  3. Victor on August 6, 2012 at 1:19 pm

    I have not seen much if any information regarding Private Investment Adviser (PIA) value. Once a portfolio reaches a million plus are these strategies regarding ETFs redundant. Is it worthwhile to show this information with these advisers at a Big5 like TD who charge a flat fee of around 1%. They say they are unbiased and deal with non-retail funds and other instruments with the best returns and Trailing Fees and MERs etc. Is it better to have PIA in charge of the pension fund and administer the RRSP under one’s own control using ETFs. What has the best returns possibilities. What other information is out there validating the bank PIAs?

  4. TM @ Young and Thrifty on August 19, 2012 at 9:15 pm

    Sounds like a good plan. With the Canadian Dollar at such a great level right now, VTI looks like a solid longterm bet in my books. I’m a little overweight on it myself right now (relative to Canadian Couch Potato – who I’m a big fan of!).

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