Finally, a clear-cut case for an investor to start dumping high-fee mutual funds to buy something else.
One of the more common inquiries I’ve had from readers in the past two years or so is what to do about mutual fund with high management expense ratios. My usual answer is to investigate the funds in question to see how well they’ve performed. While high fees are a drag on returns, it’s possible a fund can still deliver decent returns relative to the risks they take on. Advice provided by the adviser selling the funds may also be a mitigating factor.
But recently, a reader presented a case where it makes sense to immediately start phasing out mutual funds and buying guaranteed investment certificates. The reader has a registered education savings plan for a 15-year-old that holds a mutual fund with an MER of 2.23 per cent. “I feel stuck because I know the fee is high,” she wrote. Her question: Should she sell the funds to buy GICs, or move into exchange-traded funds?
GICs make good sense here, but for a specific reason. A 15-year-old could be three years away from starting college or university, which means it’s time to start reducing risk in his or her RESP investments. Think of this situation like impending retirement. As you get closer to the pivot point where you move from accumulating assets to drawing down on them, you need to make your portfolio more conservative.
There’s no definitive approach to taking the risk out of an RESP, but it’s defensible to have half to two-thirds of a 15-year-old’s plan in GICs. At 16 or 17 at the latest, the portfolio could be 100 per cent GICs. A lot depends on how big the RESP is right now – is there enough in it to cover all or most educational costs for the beneficiary? If so, then there’s a case for eliminating stock market risk sooner rather than later.
A GIC ladder is a handy way to generate money a student can use annually to pay post-secondary expenses. With a four-year program, the GIC money could be evenly divided into one- through four-year terms. Maturity dates in early August are convenient for paying tuition costs for the academic year ahead.
-- Rob Carrick, Globe personal finance columnist
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Stocks to ponder
CGI Group Inc. (GIB.A-T). This stock appeared on the positive breakouts list (stocks with positive price momentum) earlier this week with the share price closing at a record high. The company has delivered strong returns to long-term investors and recently provided downside protection to investors during the fourth-quarter stock market meltdown. However, on a valuation basis, the stock is expensive relative to historical levels. Jennifer Dowty reports.
Look more closely, and there’s a lot to like in Berkshire Hathaway and the aging Warren Buffett
Maybe it’s just a trick of perspective, but Warren Buffett is looking rather dashing these days – or, at least, as dashing as any 88-year-old billionaire in a baggy suit can be expected to look. It’s not that he has suddenly developed an interest in grooming, but that the other parts of this long-running bull market are showing their age, too. For anyone who harbours doubts about Wall Street’s current euphoria, Mr. Buffett offers an appealing alternative. His company is flush with cash, ready to do deals and managed by smart people. Ian McGugan takes a look at why following Mr. Buffett still makes sense (for subscribers).
The week’s most oversold and overbought stocks on the TSX
There are 23 oversold, technically attractive index members by Relative Strength Index this week. Beleaguered SNC Lavalin Group Inc. is the most oversold benchmark stock, followed by CES Energy Solutions Corp., Mullen Group Ltd., Peyto Exploration Solutions Corp., Cameco Corp., and Arc Resources Ltd. The most technically vulnerable index company according to RSI this week is Shopify Inc., which jumped 16.4 per cent for the period. Scott Barlow reports (for subscribers).
Most stock picking pros failed to prove their worth as markets tanked last year
Last year’s heightened volatility was of little help to Canadian fund managers trying to outperform the stock market. More than 75 per cent of active Canadian funds failed to beat equity benchmarks in 2018, according to new data from S&P Dow Jones Indices, undermining the idea that a sell-off is the stock picker’s time to shine. Tim Shufelt reports (for subscribers).
Canadian equities: Why I’m still expecting mid-to-high single-digit returns over the next 12 months
Climbing to new highs, the S&P/TSX Composite Index continues to shrug off negative news – weaker economic data, resurfacing USMCA chatter and housing concerns to name a few. How is the index doing this and can it continue? Rachael Moir from MD Financial looks at what’s ahead for the TSX.
Experts warn of surging costs hitting insurance profitability if climate change strategies not made
When Intact Financial Corp. reports its first-quarter financial results on May 8, investors will be keen to learn what the Canadian property and casualty insurer says about its exposure to the devastating flooding in Eastern Canada – the latest in a series of natural disasters that is raising the awareness of climate change as a key stock market risk. David Berman reports (for subscribers).
Others (for subscribers)
Others (for everyone)
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Ask Globe Investor
Question: Is there withholding tax on the U.S. stocks in the Vanguard Balanced ETF Portfolio (VBAL), which is one of Vanguard’s all-in-one exchange-traded fund products?
Answer: Because VBAL is a Canadian-listed ETF, there is 15-per-cent U.S. withholding tax on dividends from U.S. stocks in the underlying portfolio. This tax applies regardless of the type of account in which you hold VBAL and is not recoverable in registered accounts. However, in a non-registered account you can generally claim a foreign tax credit for the amount withheld. Some tax may also be withheld on VBAL’s foreign bond and dividend income, but a majority could also be claimed as a foreign tax credit.
Justin Bender, a portfolio manager with PWL Capital, likes VBAL and Vanguard’s other asset-allocation ETFs because they provide a low-cost, single-fund solution for investors. He estimates that the total withholding tax drag on VBAL is about 0.19 per cent in a registered account, or just 0.02 per cent in a non-registered account, after foreign tax credits. Even with the tax drag, “I think it’s still a great option for do-it-yourself investors,” he said. (Mr. Bender took a detailed look at Vanguard’s asset-allocation ETFs, here.)
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What’s up in the days ahead
Shopify is the best performing stock in the TSX this year, and the sky seems to be the limit. Or is it? David Berman will take a look, and will have a curious finding about the analysts who cover it.
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Compiled by Gillian Livingston