TaxTips.ca - Recommended stocks (ETFs) for inside or outside of your RRSP

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Recommended Stocks (ETFs)

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RRSPs and RRIFs
Stocks, Bonds etc.

Recommended stocks (ETFs) for inside or outside of your RRSP or TFSA

If you have read our Risk article, you will notice that cash and bonds are rated less risky than stocks. This is true in the short term, but if you look at our table of investment returns, you will see how stocks have greatly outperformed bonds over time. You won't see the volatility that happened along the way. From our point of view, the asset which provides the best return over a long period of time is the least risky. Therefore, we consider a well diversified portfolio of exchange-traded funds (ETFs), which are funds which hold stocks) to be less risky than bonds. When you own stocks, you actually own part of a company. When you own bonds, you are lending money to a company or a government. Would you rather own a company, or lend money to it? We don't hold any bonds now, but we have held Canadian federal and provincial bonds in the past, when they were yielding over 9%. If their returns go that high in the future we may buy them again, but only inside RRSPs.

You can eliminate some of the volatility from stocks by following 4 simple guidelines.

	Buy stocks slowly (dollar cost averaging). Don't try to time the market. Buy stocks at fixed intervals 2 to 4 times a year over a long period of time (20 years or more).
	Buy stocks in all global markets (diversification). This reduces currency fluctuations.
	Buy stocks across all sectors of the economy (diversification).
	Hold stocks for a long time (buy and hold). You can hold the recommended ETFs from the day you are born till the day you die (we buy them for our grandchildren).

Unfortunately, you can't eliminate all the volatility from your portfolio. The individual ETFs will rise and fall continually, and the whole portfolio will suffer a large drop (10% to 20%) approximately once a decade. Over a long period of time the ETFs will rise, because the stocks that make up the ETFs slowly increase in value. If the value of an individual stock falls continuously, it will gradually represent a lower percentage of the ETF, and eventually it will be replaced with another stock.

For your RRSP:

We recommend that you buy the following ETFs, in equal amounts. The order in which you purchase them doesn't matter. Just buy at market (market order), because the spread between bid and ask is only pennies. We believe that this portfolio of investments will provide an average annual return of 9% or more. Regarding the holding of foreign stocks in your RRSP, see our articles on Washing Trades and Currency Risk.

The table below shows how the ETFs are diversified by country:

Ticker
Symbol Traded
on Fund
Name Issuer MER Holdings

XIU TSX IShares Cdn Large Cap 60 Barclays 0.17% 60 largest Canadian stocks

SPY Amex S&P Depositary Receipts PDR Services 0.10% 500 largest US stocks

VGK Amex Vanguard European Vanguard 0.18% approximately 500 stocks from 16 European countries

VPL Amex Vanguard Pacific Vanguard 0.18% approximately 500 stocks from Japan, Australia, Hong Kong, Singapore, and New Zealand

VWO Amex Vanguard Emerging Markets Vanguard 0.27% approximately 800 stocks from 22 countries including South Korea, Taiwan, Brazil, Russia, China, South Africa, India and Mexico

XLU Amex Select Sector SPDR Utilities State Street 0.21% over 30 US utility stocks

For your Tax-Free Savings Account (TFSA)

Of the above ETFs, the best one to put into a TFSA would be VWO, because the return is mainly capital gains, not dividends. There is 15% withholding tax deducted from dividends paid into a TFSA from any of the above ETFs except for XIU.

For your non-registered account:

Use the same investments as for an RRSP, but replace the Select Sector SPDR Utilities (XLU) with Canadian dividend-paying stocks, to take advantage of the enhanced dividend tax credit. These stocks should be pipeline, utility, and telecommunications companies. There is no ETF for this category. The following are the largest of the Canadian companies that fit this category, with their ticker symbols on the Toronto Stock Exchange. If you are a novice investor, you should buy these large companies, and diversify among the three sub-categories.

Pipelines:

TransCanada Corp. (TRP)

Enbridge Inc. (ENB)

Utilities:

Canadian Utilities (CU)

Emera Inc. (EMA)

Fortis Inc. (FTS)

TransAlta Corp. (TA)

Telecommunications:

BCE Inc. (BCE)

Cogeco Cable Inc. (CCA)

Manitoba Telecom (MBT)

Rogers Communications Inc. (RCI-A and RCI-B)

Shaw Communications Inc. (SJR-B)

Telus Corp. (T)

Make sure that the foreign ETFs from the above table are held in a US$ brokerage account, so that there are no exchange premiums charged except when funds are deposited or withdrawn. Regarding the holding of foreign stocks, see our articles on Currency Risk, and Tax Treatment of Investments in Foreign Shares.

The table below shows how the ETFs are diversified by economic category.

World Economy by Category

Sectors Industrials
Materials
Energy Consumer Discretionary
Consumer Staples
Healthcare
Technology Pipelines,
Utilities
Telecommunications
Financial
Real Estate

Volatility high medium low medium

Interest Rate Sensitivity medium low high high

% of ETF Holdings in Each Category

XIU 48% 13% 4% 35%

SPY 24% 50% 6% 20%

VGK 26% 32% 12% 30%

VPL 27% 37% 9% 29%

VWO 38% 29% 14% 19%

XLU 0% 0% 100% 0%

average % when equal amounts of each of the above are held 27% 27% 24% 22%

Information on these funds can be found on the following websites:

NYSE Euronext Exchange Traded Funds (previously American Stock Exchange)

IShares

SPDRs

Select Sector SPDRs

Vanguard ETFs

The advantages of following the above plan are:

	low management expense ratio (MER)
	holds largest public companies worldwide (world diversification)
	industry diversification (holds all sectors of the economy)
	reduced volatility because of diversification
	buying slowly reduces volatility
	"buy and hold" reduces the number of decisions you have to make
	"buy and hold" defers taxes on capital gains outside of RRSPs
	stocks outperform other investments over the long term
	stocks protect against inflation
	easy to buy or sell (widely traded)
	easy to liquidate part of your investment, not like real estate or a business
	no front-end or back-end loads
	XIU - holding Canadian $ reduces currency fluctuations
	XIU - large commodity % reduces interest rate sensitivity
	VWO - high growth but volatile
	XLU - utilities reduce volatility
	The risk of the overall portfolio is less than the risk of the individual ETFs
	The risk of an ETF is less than the risk of the individual stocks it holds

RRSPs and RRIFs Stocks, Bonds etc.

Recommended stocks (ETFs) for inside or outside of your RRSP or TFSA

For your Tax-Free Savings Account (TFSA)

RRSPs and RRIFs
Stocks, Bonds etc.