ETF News

The March 1st deadline for a Registered Retirement Savings Plan (RRSP) contribution for the 2022 tax year is fast approaching. This year investors can contribute up to 18% of their 2022 earned income, subject to a maximum of $30,780. For earners in high income brackets, the RRSP is a critical tool when it comes to reducing your tax burden. 

In addition, Canadians can also make use of the highly versatile tax-free savings account (RRSP), which recently had its contribution limit for 2023 increased to $6,500. Those who turned 18 prior to 2009 and have yet to open a TFSA can contribute up to $88,000. The tax-free nature of capital gains, dividends, and withdrawals from a TFSA make it a priority for many investors. 

With these tools at your disposal, you may be wondering: "how should I invest?" A great way to create a low-cost, passively managed portfolio is via ETFs. Today, I'll be outlining the two main types of retirement-oriented ETFs that investors can use for the core of their portfolio. Read on to find out how to pick an ETF portfolio for retirement.

Retirement Investing: Some housekeeping items

For the purpose of this article, I will be sticking to Canadian-listed ETFs that trade in Canadian dollars (CAD). While investors can avoid the IRS' 15% foreign withholding tax on dividends in an RRSP if they hold U.S. listed ETFs, this approach requires currency conversion.

Unless you're familiar with Norbert's gambit or invest with a brokerage that charges low currency conversion fees (like Interactive Brokers) the additional cost of currency conversion may not be worth the savings from holding a U.S. listed ETF in your RRSP. 

Retirement Option 1: An aggressive ETF

The Canadian ETF industry boasts a slew of asset allocation ETFs from providers like Vanguard, iShares, BMO, Fidelity, Mackenzie, Horizons, and TD to name a few. Since their launch in 2018, asset allocation ETFs have become highly popular with Canadian investors. 

The current asset allocation ETFs all share some similarities, despite being from varying ETF providers. Common characteristics include:

• A 20-30% overweight to domestic Canadian equities, which is called a home-country bias. This helps reduce currency risk and volatility and improves tax efficiency. 
• The remainder of the equity allocation is split between U.S., internationally developed, and emerging market equities based on market cap. 
• The bond allocation usually consists of Canadian, U.S., and international aggregate (government & investment-grade corporate) issues of an intermediate duration.
• The asset allocation is rebalanced according to set absolute or relative percentage bands and payout distributions on a quarterly or annual basis.
• Expense ratios vary, but usually range from 0.15% - 0.25% and cover all the costs of the underlying ETFs. 
• The following asset allocation ETFs fall into the "growth" category and are all 80/20 stocks/bonds. These are primarily intended for younger investors with a higher risk tolerance.

Many of these ETF providers also offer 100% all-equity, 60/40 "balanced", 40/60 "conservative", and 20/80 "income" variants. Be sure to check their holdings and not rely on the name, as there are some providers that use more unorthodox allocations like 90/10 or 70/30. 

• Mackenzie Growth Allocation ETF (MGRW)
• Fidelity All-in-One Growth ETF (FGRO)
• Vanguard Growth ETF Portfolio (VGRO)
• BMO Growth ETF (ZGRO)
• iShares Core Growth ETF Portfolio (XGRO)

Retirement Option 2: A balanced or conservative ETF

An 80/20 allocation is still fairly aggressive, with most of the risk in the portfolio being contributed by the large holding of equities. Historically, toning down risk further meant increasing the allocation of high-quality bonds, whether government or investment-grade corporate.

I say "historically" because there are occasions where intermediate-duration aggregate bond ETFs can lose as much value as equities (like in 2022). To remedy this, I suggest reading this article, which outlines a few alternative ETFs that investors can add to their asset allocation ETFs to address these weaknesses. 

That being said, allocations like 60/40 ("balanced") and 40/60 ("conservative") are usually more appropriate for an older investor with a lower risk tolerance. While the expected returns may not be as high as 80/20, the volatility and drawdowns are usually quite smaller. 

• Mackenzie Balanced Allocation ETF (MBAL)
• Mackenzie Conservative Allocation ETF (MCON)
• Fidelity All-in-One Balanced ETF (FBAL)
• Fidelity All-in-One Conservative ETF (FCNS)
• Vanguard Balanced ETF Portfolio (VBAL)
• Vanguard Conservative ETF Portfolio (VCNS)
• BMO Balanced ETF (ZBAL)
• BMO Conservative ETF (ZCON)
• iShares Core Balanced Portfolio ETF (XBAL)
• iShares Core Conservative Balanced ETF Portfolio (XCNS)

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.