What are the best ETFs for my RRSP?
Let’s face it…the popularity of Exchange Traded Funds (ETFs) has come a long way in Canada in recent years – which is great news for investors.
I recall reading an article that mentioned last year alone, some $26-billion (that’s with a “b” folks) flowed into ETFs. Incredible!!
This is evidence that the barriers that used to exist to find and own lower-cost, more diversified, transparent financial products for retail investors like you and me has never been lower.
Is there a best of the best to own?
In recent years on my site, I’ve posted various articles that highlight what ETFs you might consider for your portfolio. However, these questions from readers below got me thinking a bit more on this subject given their situations.
I have some stocks in my portfolio and my wife’s portfolio but I’m tired of paying unnecessary money management fees. Plain and simple – what ETFs are best for my RRSP?
Another reader question…
Great stuff on your dividend income – wow. I hope I get there someday! I’m still new to investing so can you help me figure out some of the best ETFs to invest in, in my discount brokerage? I don’t want to worry about the stock market crashing and losing all my money. Just need some funds I can buy and hold and continue adding to over time. Thanks very much!
Thanks for your questions – let’s get into some answers!
Before that, briefly, I want to mention that determining “the best” ETF(s) for your RRSP might be subjective on a very good day. What I mean is, are you looking for supreme tax-efficiency or simplicity? Are you using a dual-currency account (U.S. dollar RRSP and Canadian dollar RRSP) or not? How old are you and what are your plans for assets inside this account – long-term multi-year growth or income or a bit of both?
I can’t answer all those questions for you (nor many more that you should probably consider) but I can give you some insights into what ETFs I would put on my short-list to buy and own and why.
Best ETF option #1 – Consider an all-in-one “GRO” ETF
There is beauty in simplicity.
Whether you own a Vanguard all-in-one fund (VGRO), an iShares product (XGRO), or ZGRO (a BMO solution) – I think these funds offer long-term growth potential for many investor needs who have a long investing timeline AND do not wish to worry about re-balancing their portfolio between stocks and bonds, nor amongst a number of ETFs. Buy one of these, keep buying one of these over many years of investing and don’t sweat any currency conversions – these funds can be bought and sold in Canadian currency. Which brings me to my next option.
Best ETF option #2 – Go with a low-cost U.S-listed ETF
I shared my top, low-cost dividend-oriented ETFs here but there other options worth considering.
Before I list those funds, I want to tell you I’m a fan of using my RRSP for U.S. assets more over time. I state this because I tend to use my TFSA and non-registered account today for strictly Canadian assets (Canadian dividend paying stocks in fact). There is a challenge in focusing on our country for stock investing only: our S&P/TSX composite index is largely 30-40% financials, around 20% energy, and a mix of other sectors although in far lower quantities.
By adding some U.S. ETFs or U.S. dividend ETFs (like I own) to your portfolio, inside your RRSP, I feel that’s a great way to diversify away from Canadian financials and energy stocks. By owning some diversified, low-cost U.S. ETFs, you will gain some deeper exposure to healthcare and consumer discretionary sectors to name a few (where our beautiful country is however very historically weak).
Beyond the U.S. dividend ETFs I highlighted in that post above, I think any of the following U.S.-listed ETFs could be outstanding choices for your long-term RRSP investing plan:
- VTI – MER = 0.03%
- IVV – MER = 0.04%
- *VT – MER = 0.09%
While you’ll need to invest in these U.S.-listed ETFs inside the USD $ portion of your RRSP, and therefore, you’ll need to deal with currency conversions to buy the U.S. assets from Canadian-dollar RRSP contributions, you should know U.S.-listed ETFs are probably one of the most tax efficient ways to own equities inside your RRSP. This is because U.S. ETFs held within your RRSP (or RRIF), your LIRA (or LRIF) escape 15% withholding taxes on distributions paid. (This is not the same tax treatment for U.S. ETFs inside the TFSA (these withholding taxes will apply to U.S. assets inside that account)).
*You’ll notice my asterisk above for Vanguard’s VT fund. While VT is a U.S-listed ETF, it invests in global stocks as well including ~3% of its holdings from Canada. For a puny 0.09% MER, you can own >8,000 global stocks via VT – an incredible bang for your investing buck.
Image courtesy of Vanguard
There are certainly many, many other U.S. ETFs you could consider for your RRSP, but you can also invest in U.S. stocks and/or international stocks via low-cost Canadian ETFs as well.
Best ETF option #3 – Go with a low-cost Canadian ETF
Whether you invest in Canadian ETFs that focus on Canadian content (like VCN, VCE, XIU, XIC, ZCN, ZLB and more), or, you invest in Canadian ETFs that own U.S and/or international stocks (like VFV, VUN, XAW, VXC and others) – this approach is absolutely one to consider.
The best part about owing low-cost Canadian ETFs that mimic the big U.S. listed ETFs (VFV, VUN are good examples) is you don’t have to worry about U.S. to Canadian dollar currency conversions.
On top of that, should you really want to be aggressive with your portfolio, you can consider owning the all-in-one, all equity ETF VEQT.
What, no bond ETFs Mark?
Correct. You’ll see above I did not include any bond ETFs whatsoever as part of my “best-of” RRSP ETF choices.
It’s not that I don’t think bond ETFs don’t have a place in some investor portfolios – on the contrary – bonds are an excellent portfolio parachute when stock markets tank. In fact, the “GRO” ETF options include some bonds.
Rather, historically speaking, if your investing horizon is measured in decades – be reminded bonds unto themselves do not generate nearly the same long-term returns as stocks have generated over many years of investing.
For that major reason, I think the tax-deferred RRSP is absolutely a great place to own mostly equities/stocks.
This way, you can strive to maximize returns from within this account during your asset accumulation years. This is THE TIME to allow investments inside that account to reach their maximum potential.
You can always consider owning fixed income, including bond ETFs, in far higher percentages across your portfolio as you age. This way, nearing retirement age(s), you can focus on more capital preservation and/or income protection using bonds.
There are dozens of ETFs I could have listed above. There are also dozens of factors why some ETFs in this list, could be right for you. I’ll leave that decision to you!
Regardless of what you decide, I hope I have provided some rationales for different ways you can invest in some great low-cost ETFs for your RRSP, and be wealthier for it!
Readers and experienced investors: what ETFs do you own in your RRSP? Why? Share away in a comment.