RRSP (Spring) Cleaning Continues: Funds to ETFs

Well, it’s another busy week, both professionally and on the personal finance front. Since blogging about work is pretty boring, let’s focus on the personal finance stuff! My wife and I recently completed the transactions to get her RRSP brokerage account activated. It’s not a long process by any means, but it takes time to get documents through the bank’s processes. This was one step forward in our walk to the 2010 financial goals we established months ago – clean-up our RRSP accounts. Not that we have/had dismal performing securities, rather, you might recall one of our 2010 goals was to get out of high-MER funds and into ETFs that would have better long-term performance. Much has been written about mutual funds versus ETFs.

For many years, I held dividend growth and bond mutual funds in my RRSP. In recent years, I’ve become an owner/holder of dividend-paying stocks in unregistered accounts. While building my non-registered portfolio, I started to reassess the purpose of mutual funds in my RRSP:

-Why I am holding these?
-What returns am I getting?
-Are these funds performing better or worse than other funds? Why is that?
-What are the best returns for mutual funds anyhow?
-What fees am I paying on these things? Will I pay more fees if I sell them or buy more?
-How do my funds compare with my new (dividend-stock) nonregistered investments? Will the performance be the same?

Needless to say, I had lots of questions and I wanted to get my answers. Through months of reading and research, although the funds I held were good performers, I realized that over the long-haul (10 years), the chances of these funds keeping pace with their respective indices (TSX 60, DEX Universe Bond for examples) are slim-to-none. Beyond 15 years, I’ll wager “slim” will leave town and “none” will stay behind. That’s not good news for me, Mr. Investor.

The reality is, only the very, very best mutual funds stand a chance to beat their index in the long-run. Given my mutual funds charged me almost 2% for my returns (that’s $200/year/fund for every year I own each fund on $10,000 invested – excluding the magic of compounding…) it gave me serious pause to reflect there must be a better way. There was and there is; this is where my journey and use of ETFs started. Over the last year, we’ve been busy restructuring our RRSP accounts to hold a few ETFs for indices the mutual funds and their active managers try to consistently beat. Personally, I’m a fan of iShares ETFs but there are others from Claymore and BMO that are great too. I haven’t sold any of my dividend-paying stocks for ETFs (I don’t plan to and actually, I’ve added a few dividend-payers this year), but I think investors who cannot yet diversify through a balanced portfolio of dividend-paying stocks should strongly research what ETFs can offer. To me, the benefits of low-cost index-based ETFs outweight almost all mutual funds. I’m an ETF “convert” because over time I’m going to keep much more of that $200 invested in me instead of a mutual fund manager and, I’ll get index returns in the process.

In closing, I’m pretty happy to say our personal finance RRSP spring cleaning is well underway. However, once this goal is accomplished the fun is over and I’ll need to turn my attention to the house.

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