Should I Use ETFs In My RRIF?

etf rrif

ETFs in a RRIF

When your RRSP reaches maturity, you have a few options. One of the most powerful (and common) options is to shift your savings into a RRIF.

Holding ETFs in your RRIF is one of the best ways to continue generating income during retirement. Holding them in your RRIF will also help you avoid the taxes that come with cash withdrawals.

So, let’s go over whether investing with ETFs in your RRIF is a good idea. But first, let’s start with what ETFs are.

What Are ETFs?

An exchange-traded fund is a fund containing a mix of securities that are listed on exchanges. ETFs track an underlying index, but will contain mixes of securities from different companies, and often from different industries.

ETFs are sometimes compared to mutual funds, which are another popular retirement investment choice. But ETFs can be found listed on exchanges and are traded throughout the day. Mutual funds are valued based on their closing price.

As an investment fund, ETFs provide access to a diverse range of securities at a low cost. You can use them to almost auto-pilot part of your investment portfolio for moderate risk with the potential for higher returns.

What's In An ETF?

ETFs are a mixed bag when it comes to individual securities. They may contain:

  • Stocks
  • Industry-tracking
  • Commodities
  • Bonds
  • Inverse (shorting stocks)
  • Cash/currency investments

Keep in mind that ETFs’ tracking is diverse, just like the securities they hold. They can track a major index such as the S&P 500. Or, they can be made to track a particular industry sector or even commodities.

Make sure you ask your broker for information on ETFs. You can see the list of holdings and the percentage of investments in each one. That way you can also do your research and understand exactly how each ETF works before investing.

Benefits Of ETFs In An RRIF

Diversity At A Low Cost

ETFs can bolster your retirement investment portfolio by providing a diverse range of securities at a low cost. You don’t need to go through the trouble and expense of directly investing in each asset.

Because ETFs are so streamlined, you save both time and money if you want to invest in them. For example, if you want to follow a major stock index but don’t have the time to do it yourself, you can invest in one of the ETFs that will do that for you.

Risk Mitigation

Because they’re so diverse, investing in an ETF also offers risk mitigation by default. Depending on the ETF in which you invest, you can gain a certain level of security.

If lower risk for moderate returns is your goal, you have a wide selection of ETFs to choose from. If you choose not to invest in ETFs that track just one industry, you avoid the risk of an industry downturn hurting your portfolio.

Less Management Needed

You are responsible for making the right decision in an ETF investment. However, you don’t need to worry about tracking a broader index or portfolio on your own. It’s difficult to do that, anyway.

ETFs will do much of the work that you don’t have time to do. You can enjoy your retirement while your ETF produces measured returns in your RRIF.

Drawbacks Of ETFs In An RRIF

Tracking Error Risk

While ETFs do mitigate risks in some ways, they come with their unique risks.

Tracking error risk can affect ETFs and can cause unexpected problems for investors. Tracking error is the difference between the returns of an index and the target index. Normally, the error is as small as a few tenths of a percent. But sometimes the gap can open up to a few percentage points.

Price & Value Don’t Line Up

The price you pay to invest in an ETF doesn’t necessarily line up with the market value of all the securities you’re getting. This is a problem that ETFs share with stocks. Sometimes, you might end up paying more than you should.

Summary Benefits and Drawbacks

Advantages: ETFs in a RRIF Disadvantages: ETFs in a RRIF
Diversity At A Low Cost Tracking Error Risk
Risk Mitigation Price & Value Don’t Line Up
Less Management Needed Cost of Maintenace

Should I Consider Adding ETFs To My RRIF?

Equity ETFs can be a great option for an RRIF. Overall, ETFs are good additions to retirement portfolios. For RRIFs in particular, lower-risk ETFs that track a reliable index are good options.

What to do now?

  • We supply you with the best ETFs and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your ETF please use our ETF Form.

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