Q. My husband and I currently have RRSPs at our bank, with the money invested in mutual funds. We have been contributing bi-weekly for about two years to save for retirement and to receive a tax deduction. Would it be smarter for us to invest in ETFs instead of mutual funds? Would we still receive the same tax break and use the funds for retirement?
A. Choosing the right investment products is important, but sometimes the “mutual funds vs. ETFs” debate misses the larger point. It often overlaps with other more important decisions, such as your strategy, how much you’re paying, and whether you need an advisor or are willing and able to manage your own portfolio. Lesley, before we consider whether ETFs are right for you and your husband, let’s consider these issues.
The first step is to understand whether your mutual funds are appropriate for your situation. Do they have the right balance of stocks and bonds, or are they too risky or too conservative? Are they well diversified or narrowly focused? Do they carry reasonable management fees or are you among the many Canadians paying more than 2%?
Now consider the level of service you are getting from the bank that holds your RRSPs. Are you working with an advisor who has prepared a retirement plan for you? Are you in regular contact, or do you have trouble remembering her name because you haven’t had a review meeting since the other Trudeau was prime minister?
Add up all these factors before you decide to fire your bank. If you’ve got an appropriate mutual fund portfolio and are paying a reasonable fee for good advice, you probably don’t need to make a change. If your portfolio is an expensive mess of poorly diversified funds and you’re not getting any service from an advisor, then it’s time to break up. But that doesn’t necessarily mean ETFs are the solution.
Lesley, your questions suggest you don’t have experience managing your own investments, so the do-it-yourself route is probably not appropriate for you. Managing on your own involves buying and selling ETFs on stock exchanges in an online brokerage account and this can be intimidating for first-timers. You also mention you are making biweekly contributions to your RRSP, which is an excellent habit. However, buying ETFs with small dollar amounts every couple of weeks would be costly and inefficient.
If you are confident you want to manage your own RRSPs, I would suggest a couple of easier options. One would be to open an account directly with a low-cost mutual fund company, such as Tangerine (if you want to follow a Couch Potato strategy) or Steadyhand (if you prefer actively managed funds). These firms will help you build a diversified portfolio with the right amount of risk, and you can arrange for those biweekly contributions to be invested automatically.
If you’re adamant about getting started with ETFs, consider one of the many robo-advisor options now available. These online services help you choose an appropriate asset mix and then they build and manage an ETF portfolio. You don’t need to choose your own funds or make your own trades, and you can set up regular contributions without paying excessive trading commissions.
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