Should I Use ETFs In My RRSP?
ETFs in a RRSP
An RRSP allows you to invest in several different asset classes for your retirement. In the last few years, ETFs have become a popular option for Canadian investors.
Now that ETFs are more accessible, Canadians are becoming aware of this option. For the most part, they are a safe alternative that offers long-term benefits. The only issue is that many Canadians are unaware of the pros and cons of ETF investments. Others are also unaware of what ETFs are in the first place.
If you’ve been offered ETFs for your RRSP by your broker, read on to find out more.
What Are ETFs?
An exchange-traded fund (ETF) is a bundle of securities traded on stock exchanges. The fund tracks an underlying index but can contain shares from a mix of industry sectors.
In some ways, they are like mutual funds, but they also offer some of the same benefits as stocks. That’s because these funds provide low-cost access to many different asset classes. Unlike mutual funds, you can find ETFs listed on exchanges that trade throughout the day. Mutual funds, on the other hand, are traded based on their price at closing.
What Exactly Is In An ETF?
ETF can contain a diverse range of securities. They often include:
- Inverse (shorting stocks)
- Cash/currency investments
Some ETFs focus on specific industries, such as real estate REIT, ETFs. There are also multi-asset ETFs that invest in several markets at the same time.
When you go to your financial institution of choice, you can ask for a list of an ETF’s holdings. They will list each holding and provide details such as their tickers and what percentage of the fund is in each holding.
Benefits Of ETFs In An RRSP
First of all, ETFs offer investors low average costs. Buying each particular asset inside an ETF individually would be a much costlier choice.
With an ETF, you only need to conduct one transaction to buy, and one more to sell. This eliminates all the individual broker fees that you would need to pay if you bought every holding yourself.
Your RRSP is meant to help you save money and invest it towards your retirement. Minimizing waste through commissions and broker fees will help you keep more for yourself.
You can gain a diverse RRSP portfolio by choosing ETFs. Depending on your choice in ETF, you can invest in many securities in a particular industry. Or, you can go even further with a more diverse ETF.
To gain the most of this benefit, consult your broker for information on all the ETFs they offer.
As a side note to the diversity benefit, your ETF portfolio will carry less risk as a result of its diversity. For example, if your ETF has a stock that performs poorly, your investment will still contain other stocks as well which hopefully will do better.
Even if you invest in an ETF that is in only one industry, your risk is mitigated through diversity. But you can invest in an ETF with a more diverse portfolio as well. These funds are even more robust.
ETFs aren’t necessarily “passive” investments. But an all-in-one ETF can make a great addition to an RRSP. There is not much work in managing them.
Most of the management work comes when it’s time to choose an ETF to sell to fund RRSP withdrawals. Normally, you should choose an ETF that you’re more heavily invested in so you can withdraw from and rebalance your portfolio.
Drawbacks Of ETFs In An RRSP
While ETFs are lower-risk than many other investments, they have their unique risks. Just because ETFs are usually quite diverse doesn’t mean they are immune to volatility. But the exact level of risk an ETF carries depends on its scope.
To avoid this issue, try focusing on ETFs that track a broader market index. If the ETF tracks just one industry, volatility in that industry will be bad news for you and your ETF.
Incongruence Between Price & Value
The price of an ETF might not reflect its underlying value. This problem is one that ETFs share with stocks. In some cases, you may be paying a premium for the ETF’s underlying assets.
Summary Benefits and Drawbacks
|Advantages: ETFs in a RRSP||Disadvantages: ETFs in a RRSP|
|Lower Cost||Unique Risk|
|Diversity||Incongruence Between Price and Value|
|Risk Mitigation||Market Risk|
|Easy Management||Cost of Maintenace|
Should I Consider Adding ETFs To My RRSP?
You should consider ETFs if you want to diversify your retirement portfolio. Just make sure you consider the underlying assets in your assessment.
Investing in ETFs offers benefits you’d receive from stocks and mutual funds while being distinct from both. The benefits ETFs are advertised as offering are true, but you’re still responsible for your due diligence.
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.