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Inside the Market Don't like high fees? Then consider these ETFs for RESPs

A few weeks ago I wrote an article about investing strategies for Registered Education Savings Plans (RESPs). In it, I used mutual funds as examples in illustrating the various evolutionary stages of an RESP portfolio.

Frankly, I was surprised by the amount of negative feedback it generated. It appears there is a lot of animosity towards mutual funds out there, apparently based mainly on their high costs relative to exchange-traded funds (ETFs). Some people even accused me of shilling for the mutual fund industry.

Since some people cannot get past the high MERs (management expense ratios) of mutual funds I decided to take another run at suggested RESP portfolios, focusing exclusively on ETFs. Here we go.

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Stage one
Growth should be the primary goal of this stage. It's most suitable for children up to 10 years old.

iShares S&P/TSX 60 Index ETF
This fund replicates the returns of the 60 largest companies listed on the Toronto Stock Exchange. They include the major banks, Suncor Energy, CN Rail, Enbridge, etc. This is the closest index we have to the Dow Jones Industrial Average. The MER is a very low 0.18 per cent. Weighting: 25 per cent

iShares S&P/TSX Small Cap Index ETF
This gives us exposure to the Canadian small-cap sector which can be volatile but which also offers above-average return potential. Some of the stocks in the portfolio that you're probably familiar with include Air Canada, Capital Power, and Trinidad Drilling. The MER is 0.6 per cent. Weighting: 10 per cent.

Vanguard S&P 500 Index ETF
You won't find a much cheaper way to invest in Wall Street's S&P 500 Index, which includes the largest 500 companies in the U.S. Vanguard only recently set up business in Canada but it was a pioneer in low-cost ETFs in the States. The MER is only 0.16 per cent. Weighting: 25 per cent.

iShares U.S. Small Cap Index ETF
This fund tracks the performance of the Russell 2000 Index, the most watched small-cap index in the U.S. The MER is 0.36 per cent. If you don't want the Canadian dollar hedging buy the cheaper U.S. version, which trades on New York as IWM. It has an even cheaper MER of 0.25 per cent. Weighting: 10 per cent.

Vanguard FTSE Developed ex North America ETF
This fund invests in a portfolio of mid-cap and large-cap companies located in developed countries outside Canada and the U.S. The major names will be familiar to almost everyone: Nestle, Royal Dutch Shell, Roche, HSBC, Toyota, Samsung, etc. The fund is not yet a year old so we don't have an MER but it will be a point or two higher than the management fee of 0.28 per cent. Weighting: 20 per cent.

SPDR Health Care ETF
Despite all the problems with Obamacare, health care stocks have been doing very well. This ETF gained almost 26 per cent in the year to March 31 and is still going strong. The MER is 0.35 per cent. Weighting: 10 per cent.

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Stage two
Now we take our foot off the pedal a bit and become somewhat more conservative in our approach as the beneficiary moves into the tweens and then the teens. For the 10- to 14-year old age group, we'll keep some of the same ETFs and add a couple of new ones.

iShares S&P/TSX 60 Index ETF
We'll leave the weighting unchanged at 25 per cent.

Vanguard S&P 500 Index ETF
Here again, the 25 per cent weighting remains the same. These two ETFs form the core of the portfolio.

iShares Balanced Growth Core Portfolio Fund
One of the advantages that mutual funds offer compared to ETFs is a much broader range of balanced products. The choices for ETF investors looking for a mix of stocks and bonds in a single package are extremely limited. As far as I could determine, only iShares offers a selection of multi-asset products and they are all funds of funds. This one holds units from 19 iShares ETFs in its portfolio, with a bond to stock mix of 15 per cent/85 per cent. The MER is unusually high for an ETF at 0.89 per cent. Weighting: 15 per cent.

iShares Balanced Income Core Portfolio Fund
Same concept as CBN but this one is more conservative with a bond weighting of about 41 per cent. The MER is 0.72 per cent. Weighting: 15 per cent.

Vanguard FTSE Developed ex North America ETF
This one remains in the portfolio with a 20 per cent weighting.

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Stage three
Now it's time to be more conservative. The plan beneficiary is in the 15- to 18-year old age range and will be starting post-secondary education in a few years. You want to protect the profits you've made over the years and minimize the chances that a catastrophic market crash will wipe out a big chuck of the savings. This means refocusing our emphasis from equities to fixed-income ETFs. Here are some suggestions.

iShares Canadian Short Term Bond Index ETF
We've used this for years as a low-risk bond ETF that offers respectable returns for this type of portfolio plus a low MER of 0.28 per cent. Weighting: 40 per cent.

iShares Floating Rate Index ETF
As I mentioned in answer to a question last week, this ETF invests in a portfolio of floating rate bonds, which are not as susceptible to the negative impact of rising interest rates as fixed-rate issues. As well, virtually the entire portfolio is invested in short-term bonds with maturities of five years or less. This is a very stable low-risk/low-return type of fund. The MER is 0.2 per cent. Weighting: 20 per cent.

iShares Conservative Core Portfolio Builder Fund
This is another iShares fund of funds. It invests in units of 16 ETFs with a strong emphasis on fixed-income funds, which represent 68 per cent of the portfolio. As with all the funds at this stage, your RESP won't make a lot of money from this fund (2.18 per cent in the past year) but the risk is low. Weighting: 20 per cent.

iShares Diversified Monthly Income ETF
This fund of funds is almost equally divided between stock and bond ETFs (46.4 per cent/53.6 per cent). It contains a little something of everything: Canadian stocks, U.S. stocks, preferred shares, REITs, and several different types of bond funds. Over the longer term it has been an above-average performer in its category although the 3.86 per cent gain in the latest 12 months was below par. The MER is 0.57 per cent. Weighting: 20 per cent.

As I said in my previous column on this subject, you can use any type of security you want to build a RESP. It's getting the strategy right that is critical to the long-term success of the plan.

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