Financing a postsecondary education isn’t cheap, but putting investments into a registered educational savings plan (RESP) early in a child’s life can help defray the costs.
RESPs are eligible for grants from Ottawa and some provinces as well. Under terms of the federal Canada Education Savings Grant (CESG), the child who is the beneficiary can earn 20 per cent on the first $2,500 contributed annually – or $500. Although the CESG tops out at a lifetime of $7,200, the maximum RESP contribution limit is $50,000.
To get the grant for 2019, contributions are required by Dec. 31. Unclaimed CESG entitlements can be carried forward, but the maximum grant is $1,000 a year. Assets held in an RESP compound tax-free until withdrawn for college or university expenses.
We asked three financial advisors for their top exchange-traded funds (ETFs) picks to help investors grow their assets in an RESP.
John De Goey, portfolio manager at Wellington-Altus Private Wealth Inc.
The pick: Vanguard Growth ETF Portfolio (VGRO-T)
Management expense ratio (MER): 0.25 per cent
This growth-oriented, global stock-and-bond ETF is appealing for an RESP because it is a “cheap, broadly diversified, single-ticket solution,” Mr. De Goey says. It invests in seven Vanguard ETFs with an asset allocation of 80 per cent in equities, including developed and emerging markets, and 20 per cent in bonds. This ETF is suitable for children up to the age of nine because they have a long time horizon to weather market volatility. Assuming $2,500 is deposited into an RESP, that amount should be left in cash until the arrival of the $500 CESG so that the combined $3,000 can be invested at once to avoid additional trading costs, he says.
The pick: Vanguard Balanced ETF Portfolio (VBAL-T)
MER: 0.25 per cent
This global stock-and-bond ETF would be a good match for children from 10 to 14 years of age because it has a higher fixed-income component, Mr. De Goey says. This ETF also is a cheap, single-ticket solution, but “you should be taking the foot off the gas a bit and have some more bonds to manage the risk.” The fund, which holds seven Vanguard ETFs, is 60 per cent invested in equities and 40 per cent in bonds. Additional RESP contributions after the age of 14 should go toward a bond-only offering such as BMO Ultra Short-Term Bond ETF (ZST-L-T) as its annual distributions are reinvested into more units, he says. “If markets are up, you can take money out of [the Vanguard ETF] to pay for university. If markets are having a down year, you can take money out of [the BMO bond ETF].”
John Hood, president and portfolio manager at J.C. Hood Investment Counsel Inc.
MER: 0.10 per cent
This ETF, which tracks the S&P 500 index, is compelling for an RESP because it’s cheap and the U.S. market is attractive despite trading at record highs recently, Mr. Hood says. “You have a very pro-business government” and a consumer-led economy that’s expanding. This ETF could make up 90 per cent of an RESP until the ages of 10 to 14, which gives time to withstand volatile markets. Making annual contributions is basically dollar-cost averaging, which could mean acquiring more units if the price falls, he says. The remaining 10 per cent in a RESP could sit in cash until there’s enough to buy a bond ETF. An alternative is buying a U.S. stock index fund through a bank to avoid trading costs.
MER: 0.17 per cent
This short-term corporate bond ETF is well-suited for an RESP as a child gets closer to postsecondary school age, Mr. Hood says. “My three criteria for bonds right now are cheap, short term and investment grade.” For children in their early teens, allocating a weighting of 30 per cent to 40 per cent in a portfolio to this bond fund would be appropriate in addition to an equity ETF. Seventy per cent of the bonds held in this ETF are in the financial sector. “Bond portfolios these days don’t contribute much to the yield but are there as a seat belt in case the equity component goes down,” he says. The securities in this ETF have a term to maturity of less than a year, meaning “there is no duration risk.” (With the L series, the distributions are reinvested annually.)
Terry Shaunessy, president and portfolio manager at Shaunessy Investment Counsel Inc.
The pick: Invesco S&P 500 Equal Weight ETF (EQL-T)
MER: 0.26 per cent
This equity ETF is appropriate in an RESP for children of all ages because the market risk is reduced by equally weighting stocks in the S&P 500, Mr. Shaunessy says. Although the U.S. market hit record highs recently, the gains have come from technology names such as Microsoft Corp. and Apple Inc., but they only represent a tiny fraction of the ETF’s holdings. The ETF’s fee is a lot pricier compared with a plain-vanilla S&P 500 ETF, but the “risk mitigation is worth it.” Holding 100 per cent equities in an RESP is an appealing strategy now given the long time horizon of younger beneficiaries to weather market swings – and fixed-income securities offer little returns after inflation, he says. Half of an RESP could be held in this ETF and the rest in an international equity fund for global exposure.
The pick: iShares MSCI ACWI ex U.S. ETF (ACWX-Q)
MER: 0.31 per cent
This U.S.-listed international equity ETF could be paired equally with a U.S. stock ETF to provide diversified exposure to world markets, Mr. Shaunessy says. This ETF has no comparable option in Canada and invests in all-capitalization stocks in developed and emerging markets. The largest country weightings are Japan, at 16 per cent; Britain, 11 per cent; and China, 8 per cent. Canada has a 7-per-cent weighting. Top holdings include companies such as Nestlé SA, Alibaba Group Holding Ltd. and Tencent Holdings Ltd. Despite concerns about investing in Europe owing to slowing growth and the Brexit uncertainty, it’s not a concern because many firms in the ETF are multinationals, he says. The ETF’s fee is reasonable given the high cost of investing internationally.