Using ETFs to get the most out of your TFSA contribution room

In addition, holding cash can mean missing out on the magic of compounding—and the turbo-boost of growing an investment inside a tax-free savings account (TFSA). Despite its name, a TFSA is not just savings account, and it can hold a wide range of qualified investments, including exchange-traded funds (ETFs.)

What are ETFs?

ETFs are large baskets of individual stocks or bonds, similar to mutual funds. They come in many flavours: some track a broad market index, while others focus on a specific sector, region or factor. Unlike mutual funds, ETFs trade on exchanges, and their prices change throughout the day based on supply and demand. You can purchase shares of an ETF, known as units, through a registered dealer and gain exposure to the performance of individual securities within the fund, without owning the securities themselves.

ETFs are constructed and managed by investment firms. Management fees are included in an ETF’s management expense ratio, or MER, which is expressed as a percentage of the fund’s assets under management. ETF fees can be lower than those of mutual funds—one reason why ETFs are immensely popular with investors.  

One investment that may fit your needs is an all-in-one ETF, such as Fidelity’s All-in-One Balanced ETF (FBAL) or Fidelity All-in-One Growth ETF (FGRO). An all-in-one ETF generally invests in a selection of lower-cost ETFs to create a globally diversified portfolio of stocks and bonds that can cater to different investment styles.

Take advantage of tax-free growth

You can hold ETFs within a TFSA. Introduced in 2009, the TFSA enables Canadian residents aged 18 or older to grow their savings and investments tax-free. Contributions to a TFSA, as well as any income earned in the account—including capital gains and dividends—are not taxed. You can withdraw your holdings anytime, and unlike an RRSP, there is no time limit on having a TFSA account.

With the ability to grow and withdraw investments tax-free, it’s no wonder TFSAs are so popular. As of the end of 2020 (the most recent statistics available from the Canadian government), about 16.1 million Canadians had one or more TFSAs.

While Canadians love their TFSAs and ETFs, and they are piling record funds into both, the idea of investing in ETFs inside a TFSA is still eluding many people—and some investors aren’t aware that all-in-one ETFs such as FBAL and FGRO are eligible to be held in a TFSA. Here’s how:

Capitalize on your contribution room

As of 2024, the maximum contribution room for a TFSA is $95,000, the total of the annual contribution limits since 2009. (On January 1, 2025, that number changes to $102,000). The most recent CRA data show that in 2020, only about 1.4 million of Canada’s nearly 16.1 million TFSA holders had contributed their maximum amount. On average, Canadians were holding $26,614 in their TFSAs at the end of 2020, according to the CRA. This means most of us have catch-up room to fill.

Whether you’re catching up or planning ahead, an all-in-one ETF can be a great and simple option with built-in diversification. Whatever your investment goals—retirement, a down payment or a renovation, for example—FBAL and FGRO can make your money work for you with a single purchase. What’s more, you don’t have to worry about the selection of individual securities.

FBAL and FGRO offer exposure to a mix of global equities and fixed income securities. The equities component targets known factors like value, momentum, low volatility and quality, with the aim of enhancing the risk and return profile of the ETF, while the fixed income sleeve provides diversification and can provide downside protection in turbulent times.

The sooner, the better

Any unused TFSA contribution room in a given year gets rolled over to the next year; however, it’s wise to stay on top of your yearly contributions, in order to benefit from the power of compounding.

An all-in-one ETF can make it easy to max out your TFSA contribution room. In the short term, the fund’s growth can serve as a hedge against inflation, possibly protecting your savings from its corrosive effects. In the long term, the value appreciation of these ETFs can help grow your savings. All you need is the discipline to invest regularly.

Leave the heavy lifting to experts

By design, an all-in-one ETF generally means that contributing is a light lift. Once you determine which ETF has the right balance of investments for your goals and risk tolerance, it’s a single trade through your online broker, conventional brokerage or registered dealer.

Fidelity’s All-In-One ETFs are suitable for a wide range of investing goals. If you favour a balanced approach and have a low-to-medium risk appetite, FBAL may be the right solution. The fund employs a global multi-asset strategy comprising approximately 59% equities, approximately 39% fixed income and approximately 2% cryptocurrencies (as at Oct. 31, 2023).

FGRO is tailored for investors who are looking for long-term capital growth and has a medium level of risk. It has a greater emphasis on equities, which make up approximately 82% of the portfolio. Approximately 15% is allocated to fixed income investments, and approximately 3% to cryptocurrencies. (Read more about crypto in Fidelity ETFs.)

Both ETFs are structured to be a one-ticket, lower-cost solution diversified across regions, market caps and investment styles. Each comes with the benefit of professional management that does the heavy lifting for you.

For a lower, indirect management fee of 0.36% (FBAL) or 0.38% (FGRO), as at Oct. 31, 2023, you have the peace of mind of owning a well-diversified investment portfolio with strategic asset allocation and consistent portfolio rebalancing.

Read more on investing:

• Building a “core and explore” portfolio with an all-in-one ETF
• Taking an active approach to ETF investing in Canada
• Five ways to worry less about your investments with an all-in-one ETF
• What investment can I put in my TFSA?