The straightforward RESP

If you were to choose only one ETF for an RESP, which would it be? Bruce Sellery offers his top pick.

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Question

I am a self-directed investor using the Couch Potato program and I’ve just started an RESP account for my daughter. Is there an exchange-traded fund that you would recommend for this account? I plan to contribute to her account once a year with my bonus from work. I am hoping to keep it simple and would ideally like one fund that is well diversified. My daughter will be three this year so I don’t mind using an aggressive fund to start off with.

Answer

My daughter is just a bit younger than yours. Most of the time I live in this fantasy world where her time as a toddler is infinite. I am forever cool, fun and obeyed. Post-secondary education is so far in the future that it isn’t worth thinking about. Then I snap out of it. She utters a full sentence, demands sparkling water instead of still, and puts up a huge fuss when I won’t let her wear her fuzzy fuchsia slippers out in the snow.

Heartbreaking as it is, our daughters are growing up.  And the Registered Education Savings Plan is one of the best things we as parents can do to help our kids later in life.

You are looking for one, well-diversified fund to invest in, at least for the first few years. I’d consider buying “CDZ,” the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund, because of the securities it holds as well as a few other features in the fund.

One fund is enough at this point: The sums in an RESP are relatively small in the early years. You max out your government grant when you contribute $2,500 per year, and with a portfolio that is under $10,000 you could argue that you don’t need a bunch of different funds. And since you are willing to be more aggressive while your daughter’s still young, you don’t need a fixed income fund to balance out your risk.

Diversification by sector: CDZ holds around 60 securities. While you’ll only have exposure to Canadian companies, the fund has good representation across the Canadian economy. The financial services sector is the biggest weighting at 20%, but CDZ also holds retailers, pipeline operators and cable companies.

Performance has been solid: As any prospectus will remind you, past performance isn’t indicative of how the fund will perform in the future. That said, since the fund’s inception back in 2006 it has outperformed the S&P/TSX Composite. Over that period CDZ is up about 8% while the S&P/TSX is down 3%. The spread in performance is even larger when you factor in dividends.

The Dividend Reinvestment Plan (DRIP): I love simplicity and the DRIP is great for that. This particular ETF allows you to instruct your broker to reinvest the dividends you earn in additional units, automatically, and without having to pay trading commissions. Not all ETF’s have this feature. But before you invest in any ETF you should make sure your broker offers this service as not all do.

The Pre-Authorized Cash Contribution Plan: I know you said you’re going to fund the RESP with your bonus from work and contribute to it once per year, but in case that changes this ETF will allow you to make smaller monthly contributions without paying trading commissions each time. One of the drawbacks of investing in ETFs is that you pay a commission of between $9 and $30 for each trade so it doesn’t make sense to buy them in small quantities. But this ETF allows you to buy regularly, say monthly, in small amounts, without paying a commission each time you want to contribute to the fund.

The “Aristocrats” name is interesting: I don’t really know what “Aristocrats” means on an ETF, but at least it is interesting. ETFs have notoriously boring names. Plus, it reminds of “AristoCATS”, the animated movie from Disney. And that makes me think of my daughter. You know, the one who will stay young forever.

ask@moneysense.ca

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