The high cost of living for families means it’s often falling to grandparents to contribute to registered education savings plans.
Many of the RESP inquiries I get are from grandparents who want to help their grandchildren afford the cost of a postsecondary education. The latest query comes from a grandfather who has already made an important decision about RESP investing – he wants to use exchange-traded funds. “What is the best ETF for an RESP,” he asked.
Helpfully, he provided the ages of his four grandchildren. They range in age from 1 to 7 years old. That’s key information for using balanced ETFs, which are a universal investing tool that happen to work extremely well for RESPs. A balanced ETF, also known as an asset allocation ETF, is a fully diversified portfolio available in a single fund.
There are basically five flavours of balanced ETF – conservative, income-focused, balanced, growth and all-stocks (the balancing comes in the form of exposure to Canada and global markets). Look to Vanguard, BMO and BlackRock’s iShares series of ETFs for a good, basic selection of these funds.
Let’s figure on an RESP beneficiary starting college or university at the age of 18. By age 15 or 16, you’d want to make capital preservation a priority and use guaranteed investment certificates for all or most of an RESP. Prior to that, your choice of balanced ETF should be guided by the age of the beneficiary and your feelings about stock market risk. Here are some rough guidelines:
- Growth-oriented funds: With roughly 80 per cent of their holdings in stocks and 20 per cent in bonds, they make sense for RESPs of children up to age 13 or thereabouts. After that, you’ll want to think about dialling down the risk level in anticipation of the student reaching graduation.
- Balanced funds: The more modest tilt to stocks over bonds (figure on 60 per cent stocks, 40 per cent bonds) makes sense for parents and grandparents who take a somewhat more cautious approach to investing; also a candidate for RESPs for early teens.
- Conservative funds: An alternative to the balanced fund for people who want a less volatile investing experience that limits downside risk and upside gains through a higher weighting to bonds over stocks (something like 60 per cent bonds, 40 per cent stocks). Well-suited as a bridge between the aggressive investing years of an RESP and the capital preservation years, when a student is approaching graduation and then moving on to college or university.