Your questions are pouring in faster than ever these days so let’s get to some of the latest.
TFSA for son
My 25-year-old son wants to set up a TFSA account. When we tried to do this through my financial institution, I was advised the account would only be allowed to invest in a select suite of products and they all seem to have significant management fees and so-so performance. That approach doesn’t interest us.
My wife and I have always managed our TFSA accounts, mostly invested in blue chip Canadian dividend-paying stocks. This approach seems to have handily outperformed what the funds offered by my financial institution do, especially when management fees are considered. They say “the rules have changed” and self-directed accounts are no longer offered. We smell a rat here. Can you recommend a financial institution where we could set up a self-directed TFSA account, so my son can get started?
There are many options. MoneySense ranks Questrade as the No. 1 discount broker in Canada with low fees for stock trades and no annual charge for a TFSA account.
The Globe’s Rob Carrick gives Questrade a B-plus rating in his annual review of discount brokers, calling it “a top choice for younger investors who want a fast, smart online investing experience, cheap commissions of 1 cent a share ($4.95 minimum, $9.95 maximum) and don’t mind the lack of online trading for bonds and guaranteed investment certificates.” He ranks Qtrade Investor and TD Direct Investing as his top choices, giving them ratings of A and A-minus, respectively.
Why is XGD doing poorly?
Could you comment on why this stock is languishing? What are the prospects ahead?
For starters, XGD is not a stock, it’s an exchange-traded fund. The official name is the iShares S&P/TSX Global Gold Index ETF. It invests in an international portfolio of gold miners, about two-thirds of which are Canadian. Top holdings include Newmont Corp., Barrick Gold Corp., Franco-Nevada Corp., Wheaton Precious Metals Corp., and Agnico Eagle Mines Ltd.
Given the nature of its assets, the fund’s performance is closely tied to the price of gold. When the metal went into a slump earlier this year, the price of the ETF dropped all the way to $16.69. Since then, both gold and the fund have rallied. The fund was up 3.2 per cent year-to-date.
Looking ahead, there are opposing forces at work. Inflation has been rising recently and gold is seen as a safe haven in that situation. However, there are also concerns that central banks may be forced to raise interest rates sooner than expected to deal with the inflation problem. High rates make it expensive to hold gold, which pays no interest, and could drive down the price.
On balance, I suggest you should own a small percentage of gold in a portfolio as an inflation hedge (say, 5 to 10 per cent). It can be done through a fund like XGD, that invests in mining stocks, or an ETF that invests directly in the metal, such as the SPDR Gold Fund (GLD-A) in New York or the Royal Canadian Mint – Canadian Gold Reserves (MNT-T).
I would like to buy an ETF that covers Canadian banks.
We have two bank ETFs on our newsletter recommended lists. Here they are.
BMO Covered Call Canadian Banks ETF (ZWB-T). This ETF invests in stocks of the six largest Canadian banks and writes covered call options to generate additional income on top of the dividend payments. It currently pays a monthly distribution of 10 cents a unit, giving it a yield of 5.2 per cent at the current price. The fund is up 52 per cent for the year to May 31 but that’s an aberration. The 10-year average annual compound rate of return of 9 per cent is more in line with what you should expect.
BMO S&P/TSX Equal Weight Banks Index ETF (ZEB-T). This ETF holds an equal weighted basket of the Big Six banks. Unlike ZWB, it does not sell covered calls against the shares, however it too pays a monthly distribution of 10 cents a unit. Because of its higher price, the yield is lower, at 3.3 per cent. But, overall, it has better return than ZWB with a one-year gain of 63.2 per cent and a 10-year average to May 31 of 10.9 per cent.
There are others from which to choose, of course, but we like the two BMO entries best. If you want a different option, take a look at the CI Canadian Banks Income Class ETF (CIC-T). Its structure is similar to ZEB, in that it holds positions in the top six Canadian banks and writes covered calls for extra income. On a trailing 12-month basis, it shows an impressive yield of 7.9 per cent. But writing call options puts a ceiling on capital gains. The fund returned 53.3 per cent in the year to May 31. The 10-year average annual compound rate of return to that point was a shade below 9 per cent.
Investing tax refund
I returned to university to complete an MA in 2017. I used $18,000 from registered retirement savings plans via the Lifelong Learning Plan to pay the costs.
At this point, I have completed my MA (2019) and in my tax returns (2018, 2019, 2020) I received about $8,500 back on my taxes. I chose to not spend those dollars and instead put them into a savings account, making a whopping 2 per cent.
My question is, how should I be going about investing these dollars back into my RRSPs (or should I)?
Also, in my mind, my adviser should be commenting on this, but has not been in touch or in any way followed up. My wife and I direct a small, but consistent, allocation of family savings to our adviser and we have worked with them for about 15 years.
My question is: Does it seem odd that no one has followed up with me on these investment dollars? My wife and I understand that we’re relatively small-time (our adviser represents most of the wealthy folks in our somewhat small town), but we’d like to look at moving our money into the hands of a more communicative adviser. We fear that we may not be important enough to be really growing our wealth. Who (certification wise), would you recommend that we work with to review our savings and advise if we’re being treated well?
Certainly that money should not be sitting in a savings account. Put it back in the RRSP and invest it conservatively – remember, an RRSP is really a pension plan.
Your adviser should be following up and making recommendations. You may not have a lot to invest now, but with your education you and your wife have the potential to become high-net-worth clients in the future. A good adviser should be motivated by that. Start by talking to your current adviser and expressing your displeasure. That may be all it takes to get the attention you need.
Withdrawing RRIF assets
My wife and I are both 71 and have converted our RRSPs to registered retirement income funds in anticipation of starting to withdraw funds this year. I believe I heard that it is possible to just transfer the appropriate amount of the funds we have into our non-registered account without actually selling anything. The value of the transferred funds at that time is taxable, of course. Please confirm that this is possible.
Yes. It’s called an in-kind withdrawal. The securities that come out of plan will be taxed on the basis of their market value at the time of withdrawal.
If you have a money question you’d like answered, send it to me at email@example.com and write Globe Question on the subject line. I can’t promise a personal response, but I’ll answer the most interesting questions in this space.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe
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