Should I Use ETFs In My TFSA?
ETFs in a TFSA
If you’re looking for long-term, tax-free growth, a TFSA (Tax Free Savings Account) is the best option for you. Among the options you have, ETFs are among the most popular. If you’re considering investing in ETFs through a TFSA, there are several things you should know.
What Are ETFs?
An exchange-traded fund (ETF) is a financial vehicle that includes a group of securities. All the securities in an ETF are traded on stock exchanges.
ETFs track an underlying index, but they may contain shares from different industry sectors. This is why ETFs are often compared to mutual funds.
ETFs offer some of the same diversity that mutual funds do. They provide low-cost access to a diverse range of assets. But unlike mutual funds, ETFs are listed and traded on exchanges throughout the day. Mutual funds are traded based on their price at closing.
What Exactly Is In An ETF?
ETFs typically contain a diverse range of securities. Some of your options include:
- Inverse (shorting stocks)
- Cash/currency investments
There are ETFs that track specific industries. But there are also other ETFs that contain more diverse securities and track a broader market index.
You can ask your broker for a list of their ETFs and go over their holdings yourself. Every holding will appear with a ticker and the percentage of the fund that is in each holding.
Benefits Of ETFs In An TFSA
ETFs are potentially diverse investments. Depending on the choice you make, your ETF can track an industry of your choice, but with a profile of many different securities. You could also invest in a more diverse ETF if you’d like.
You will need to ask your broker for information on the ETFs they offer. They will share ETF portfolios with you and you can decide which ones are right for you.
ETFs generally come at a low cost, relative to similar investments. Buying each particular asset inside an ETF individually would cost more and take a lot more of your time.
An ETF offers you a way to buy and sell many assets at a low cost. You buy once, you sell once. That’s it.
This means that you can bypass all the individual broker fees that you’d have to pay with direct investments.
If you’re holding ETFs in a TFSA, you’re investing in them with your after-tax dollars. All the profits you make from them are tax-free, even when you choose to withdraw from your TFSA. While you’re protecting your investments from taxes, you’re avoiding the high costs of direct investing, so you end up keeping much more money.
More diversity will mitigate the risks inherent in investing. If your ETF has a stock that fails, your investment will still contain other stocks as well. Your portfolio will always have assets that will perform unequally.
Even if you invest in an ETF that is in only one industry, having shares in different companies will mitigate your risks. But you can invest in an ETF with a more diverse portfolio as well. Those ETFs are more robust.
Easy To Manage
ETFs require little work on your part. You’re still responsible for your due diligence in purchasing and following the developments of your ETFs. But you have less work to do than if you directly invest in each security yourself.
Drawbacks Of ETFs In An TFSA
ETFs come with measures meant to reduce risk. However, they still all have inherent risks you must accept if you invest in them.
If you have an ETF that tracks a single industry, a downturn in that industry will bode very poorly for you. But all ETFs are subject to at least some wider market risk.
You may not always get your ETFs at a completely fair rate. Like stocks, ETFs may be overvalued. This risk is mitigated by the diversity of assets in an ETF. But if you don’t do thorough research, you may end up paying more than you should for an overvalued portfolio.
Summary Benefits and Drawbacks
|Advantages: ETFs in a TFSA||Disadvantages: ETFs in a TFSA|
|Low Cost||Incongruence Between Price and Value|
|Risk Mitigation||Market Risk|
|Easy Management||Cost of Maintenace|
Should I Consider Adding ETFs To My TFSA?
Yes, you should at least consider investing in ETFs through your TFSA. If you’re averse to direct investments in stocks and several other assets, ETFs are a great compromise.
When you hold ETFs in a TFSA, you get tax-free growth on your successful investments. ETFs offer you a path of moderate risk with high returns. By eliminating the taxes you would normally have to pay for that, ETF investing through a TFSA is a smart way to save for long-term goals.
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.