ETF watchers reveal their picks

When building a diversified nest egg, mutual funds are no longer the only game in town.

With the proliferation of exchange-traded funds, investors have an alternative way to build a portfolio in a registered retirement savings plan.

A big appeal of ETFs are their low fees. You can buy and sell ETFs like stocks through a full-service or discount broker. Some ETFs offer one-stop shopping because they invest in both stocks and bonds, while others, such as emerging-markets ETFs, should be part of a balanced portfolio.

As the March 1 deadline looms for RRSP contributions, we asked four ETF watchers for their top picks.

John Gabriel, ETF strategist with Morningstar Inc.

iShares Diversified Monthly Income ETF

This ETF, which was formerly known as iShares S&P/TSX Income Trust ETF, was overhauled late last year so that it is now similar to a balanced mutual fund, in addition to producing a monthly income stream. It invests in nine other iShares ETFs, such as iShares S&P/TSX 60, iShares S&P/TSX Capped REIT and iShares DEX Hybrid Bond ETFs. The manager will change the asset allocation depending on the market environment so it's a "set it and forget it" fund for investors, he said.

Claymore S&P/TSX Canadian Dividend ETF

This ETF, which invests in companies that have raised dividends for five consecutive years, reduced its securities to 39 from 56 at the end of last year. There are no longer any Canadian banks or life insurers in this fund. Because many Canadian investors have exposure to the financial sector, reducing holdings in this area of the market is not a concern to Mr. Gabriel. Holding this ETF means owning quality companies, he said. "Companies paying dividends and raising them consecutively for five years are not companies that fall by the wayside."

Vikash Jain, portfolio manager with archerETF Portfolio Management

iShares S&P/TSX Capped REIT

This ETF, which invests in 13 real estate investment trusts, is attractive for income seekers, Mr. Jain said. "This ETF offers a great yield at just over 5 per cent. Add in an expected capital appreciation of about 3 to 5 per cent, and total return should be near 10 per cent for the year." As the economy recovers, revenue of the REITs should rise, while dividends should stay steady and possibly grow, he added. While four names - RioCan, H&R, Canadian REIT and Calloway - make up 54 per cent of this ETF, the overconcentration is not a concern because "they are fairly major companies in a stable sector," he said.

Vanguard Emerging Markets ETF

This ETF holds more than 800 stocks, with five countries - China, Brazil, South Korea, Taiwan and India - making up 65 per cent of the weighting. Because China is now the world's second-largest economy, and emerging markets are outpacing the developed world in terms of growth, long-term Canadian investors should have emerging markets exposure, he said. "This ETF is a bargain at just 0.27 per cent in fees … . While this ETF trades in U.S. dollars, its real currency exposure is to the various emerging market currencies, most of which should strengthen over time."

Tyler Mordy, director of research, Hahn Investment Stewards & Co.

WisdomTree LargeCapWisdomTree LargeCap Dividend Fund

It invests in 300 high-dividend-yielding U.S. large-capitalization stocks, with 30 per cent in the consumer staples and health-care sectors. Top names include AT&T, Exxon Mobil, Pfizer and Johnson & Johnson. Multinationals can weather the current economic climate better because of brand recognition, pricing power and revenue from fast-growing foreign markets, Mr. Mordy said. "Their valuations are much more attractive than their small-cap brethren."

WisdomTree Emerging Markets Local Debt Fund

The ETF invests in sovereign debt denominated in local currencies of emerging market countries such as Brazil, Indonesia, Malaysia and Mexico. The debts of such countries are "likely to do better than developed world counterparts given more fiscally sound government balance sheets and improving credit quality," he said. "Yields are also higher, with the additional return prospect of currency appreciation."

Deborah Frame, vice-president of investments, Cougar Global Investments

Vanguard Emerging Markets ETF

This ETF of 887 companies "gives broad exposure to the emerging markets," which are expected to dominate global growth, Ms. Frame said. "The United States is going to continue to have its challenges … . We expect emerging markets to have a better return than the Canadian stock market this year." This ETF has an attractive fee of 0.27 per cent, but it is also denominated in U.S. currency. "You also have to make a call on whether you feel comfortable being exposed to U.S. dollars," she added.

iShares Dow Jones Canada Select Dividend Index Fund

This ETF, which holds 30 companies, is dominated by Canada's seven largest banks, but about 14 per cent is also invested in the resource sector, she said. Canadian financials will continue to do well because the domestic banks are sounder, and are recovering more quickly than their counterparts around the globe, she added. "We think emerging markets is going to continue to be the best asset class [this year] so our exports of oil and gas, as well as materials, are also going to do better because of that."