ETFs can help RESPs to grow
I have three children. Two are still in university, both outside of Canada. From my experience as a mother and a financial planner, I can tell you it is not an exaggeration when we say it takes $10,000 to $15,000 a year to raise a child to the age of 18.
The RESP my husband and I set up over 25 years ago has been instrumental in funding my children’s school expenses, in no small part thanks to my ETF portfolio investment strategy.
When I created my portfolios over 10 years ago, I used them across my family accounts for our investments. The children were still young and I adopted a dynamic investment profile for their RESPs. Since it would be several years before I intended to withdraw money from the account and I had the flexibility to wait out any market corrections, I was comfortable using a 100% equities portfolio.
In my article on charitable giving, I explained that I’ve overweighed technology ETFs since I first created my portfolios.
I chose Boston-based State Street Corp.’s Technology Select Sector SPDR fund (NYSE Arca:XLK) for my technology position. In my most aggressive portfolio, this position has represented as much as 10% of my equities allocation.
I only maintain overweight positions if they perform better than the broad market index. In the past decade, XLK has returned 20.08% annually compared to 14.44% for SPY, State Street’s S&P 500 ETF.
During the pandemic, I used a good chunk of the growth of XLK over the years in my non-registered investments to set up a charitable foundation. This same investment has played a substantial role in my RESP portfolio.
Setting up an RESP for my client’s children and grandchildren is something I do regularly and is part of a tax-efficient family investment strategy. It is one of the few ways left to earn money on a tax-deferred basis and get additional assistance from the government through grants.
There are several factors to take into consideration when choosing an investment profile for an RESP. Usually there is a long investment horizon for these funds, but as the beneficiary approaches the minimum withdrawal age of 18, it can be wise to have cash-equivalent investments in the account for disbursement.
In the case of a family RESP, the age of all the children should be taken into consideration when adjusting the risk profile of the portfolio, since the investment horizon will vary with age of each beneficiary.
Life after RESPs
University students are now within a few months of their winter semester ending, which for some means graduation. During this time of year, I often get asked to give advice to my client’s children on how they can start saving once they are finished school and begin earning a steady income.
People new to the workforce are usually suited for TFSAs (and sometimes RRSPs if they have a high starting salary). If earnings are low in the initial years of work, RRSP deduction room will be low as well. It could be a good idea to let some or all RRSP contribution room accumulate to be used when income is higher. This should be evaluated on a case-by-case basis.
These accounts are usually under $80,000, and I have created three ETF portfolio models for these smaller accounts: balanced, growth and dynamic growth.
These models are based on my standard discretionary investment portfolios but hold fewer ETFs — six to eight, instead of the 15 or more in my main models. The ETFs include the BMO S&P/TSX Capped Composite Index ETF for Canadian equities exposure, Vanguard US Total Market Index ETF for U.S. equities and BMO MSCI EAFE Hedged to CAD Index ETF for international exposure. The portfolios have few if any satellite or sector positions. As a result, the average management fee is relatively low.
Once these portfolios grow to above $80,000, we switch to the standard portfolio model.