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Consider ETFs for your RRSP

(Special) - RRSP season has arrived and with it comes the many decisions that plan holders may have to make - do I contribute, how much and in what to get growth but not to expose my portfolio to too much risk?

One investment option that is often overlooked and underused in RRSPs is Exchange Traded Funds.

ETFs have been around for about 20 years and their use is growing worldwide but they still remain one of the least understood investment vehicles among Canadians.

An Exchange Traded Fund usually consists of a portfolio of stocks or bonds that track a specific market index, sector or commodity. They were first introduced around 1990 in the form of index participation shares in the U.S. tracking the S&P 500 and the TSE 35 here in Canada, and have been growing ever since.

Today ETF assets in Canada are estimated at $50 billion and more than $1 trillion in the United States. Between 30 and 40 per cent of all exchange trading volume in the U.S. now is in ETFs.

In spite of this, Canadian investor knowledge about ETFs remains low.

A recent report issued by BMO Wealth Institute found that only 19 per cent of Canadian investors claim to be knowledgeable about ETFs compared to more traditional investments such as guaranteed investment certificates (GICs) (58 per cent) and mutual funds (55 per cent). However, once told about ETFs, 60 per cent said they would add them to their portfolios.

ETFs also are the least held investment in RRSPs in Canada. GICs make up 21 per cent of RRSP investments followed by cash at 20 per cent, stocks 11 per cent, bonds nine per cent and ETFs only four per cent.

"It's really a matter of financial literacy," says Kevin Prins, vice president of ETFs at BMO Bank of Montreal. "While the demand for ETFs is growing worldwide, most investors are in the early phases of becoming aware of these products."

ETFs provide RRSP investors a number of benefits including low-cost access to a wide range of indices, asset classes and geographic regions. Because they come as a basket of investments, dealing with a single transaction can simplify the process of rebalancing a portfolio, reduce risk and increase diversification.

ETFs generally have lower costs than mutual funds and investors can choose among index, stock, bond, commodity, and currency, active, passive and even inverse and leveraged ETFs.

ETF fees generally are about half a per cent lower than mutual funds. Based on an initial investment of $100,000 which grows at six per cent annually for 30 years, the lower costs will provide additional accumulated savings of more than $75,000.

"ETFs are very straightforward," says Prins. "They can be traded throughout the day, like stocks but unlike mutual funds which are traded at the end of the trading day. They are very transparent as you can see exactly what's in the basket; they are accountable because you can follow an index's performance every day and, through corporate class mutual funds that hold ETFs, very tax efficient as well."

Corporate class funds that hold ETFs allow investors to move from one portfolio to the next without triggering any tax until the money is withdrawn.

With more than now available in Canada, investors could have their entire portfolio made up of ETFs.

The most important thing about RRSPs, however, is not necessarily what you invest in but that you one and it has a dominant position as part of an overall financial plan.

"We certainly are seeing that more financial planning is being done around the RRSP - it should be a dominant component of any financial plan because it can really help towards building a solid retirement," Prins says. "ETFs are a great way for investors to reduce costs, minimize risk and still get great diversification and asset and geographic reach."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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