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.
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)