RESP ETF picks for children at three different stages of growth

Building a nest egg to finance university or college education is becoming more important as Canadian students face rising tuition and living expenses.

An individual or family registered education savings plan (RESP) is key because it also opens the door to government grants. Ottawa, for instance, offers a Canada Education Savings Grant totalling 20 per cent of contributions to a $500 annual limit and a $7,200 lifetime limit per child. Each child has a $50,000 contribution cap.

RESPs are tax-sheltered and can also grow by being invested in the stock market through exchange-traded funds (ETFs).

Globe Advisor asked three investment experts for their top ETF picks for children in their early, middle and final years before needing the money for post-secondary schooling.

Daniel Straus, managing director of ETF research, National Bank Financial Inc., Toronto

Early years: ages 0 to 9

The pick: iShares Core Equity ETF Portfolio (XEQT-T)

This global equity ETF, which holds five iShares funds, is suitable for young children because their long investment horizon lets them withstand market volatility, Mr. Straus says.

This ETF is about 95 per cent invested in the Canadian, U.S. and international markets, and the rest in emerging markets. It gained an annualized 13.42-per-cent return for five years ending July 31.

With assets of $22.1-billion, this giant ETF is also popular with self-directed investors who try to convince others of its merits on the social media platform Reddit, he notes.

Its management expense ratio (MER) – a lagging metric - is cheap at 0.20 per cent, but the ETF is effectively charging 0.19 per cent now due to a management-fee reduction, he says.

The pick: CI Morningstar Canada Momentum Index ETF (WXM-T)

This ETF tracks a Morningstar index of 30 Canadian stocks with positive earnings and price momentum, but can decline sharply during market pullbacks, Mr. Straus says.

Still, the fund’s 14.27-per-cent annualized return for 10 years ending July 31 has outperformed the 12.48-per-cent annualized gain for the S&P/TSX Composite Total Return Index, he notes, despite charging a 0.65-per-cent MER.

With assets of $1.3-billion, the CI Morningstar ETF holds 30 equally weighted stocks that are rebalanced quarterly. Its holdings include Great-West Lifeco Inc. (GWO-T), Bombardier Inc. (BBD.B-T), DPM Metals Inc. (DPM-T) and Royal Bank of Canada (RY-T).

Richard Orrell, portfolio manager, R.N. Croft Financial Group Inc., Toronto

Middle Years: ages 10 to 14

The pick: BMO Growth ETF (ZGRO-T)

This BMO ETF, which is 80 per cent invested in equity and 20 per cent in bond ETFs, is still in a growth mode, and that’s necessary in these middle years as “the cost of education tends to go up,” Mr. Orrell says.

“Your best protection against inflation is the equity market,” he says, and teens in the 14-and-under age bracket still have time to recoup losses from any market corrections.

This ETF, which has $810-million in assets, holds eight BMO funds. The equity exposure is 60 per cent North America and 20 per cent in international and emerging markets.

The fund has returned an annualized 10.88 per cent for five years ending July 31. A management-fee reduction has effectively taken the MER down to 0.17 per cent from 0.18 per cent, he says.

The pick: Fidelity All-in-One Growth ETF (FGRO-NE)

This $5.4-billion Fidelity ETF holds 18 mainly equity and fixed-income funds, as well as 3 per cent in bitcoin, Mr. Orrell says.

Bitcoin has gained enough institutional backing so it’s a serious investment class, he adds. “The fund’s bitcoin exposure is not going to have a huge impact on the overall portfolio, but it can give some upside if the U.S. dollar doesn’t hold its value. Some people think bitcoin will.”

This ETF is 85 per cent invested in factor-based equity funds focused on momentum, value, high quality and low volatility.

The 0.42 per cent MER is on the higher side, but there is value, he notes, as the Fidelity ETF posted a 13.34-per-cent annualized return for five years ending July 31.

Mary Hagerman, senior portfolio manager and investment advisor, The Mary Hagerman Group, Raymond James Ltd., Montreal

Final years: ages 15 to 18+

The pick: Vanguard All-Equity Portfolio (VEQT-T)

This $16.2-billion ETF, which holds four equity funds, is suitable for a family RESP with withdrawals over multiple years by the beneficiaries, Ms. Hagerman says.

An all-equity ETF is preferable in a family RESP because it’s not possible to access just the fixed-income portion in a balanced ETF when withdrawing money for the first child, she says. Instead, that money could be withdrawn from the all-equity ETF two years before it’s needed and transferred to a cash-savings ETF (see below).

“The only thing to do is to decide how much you are taking out every year and prepare for that,” she says.

The Vanguard fund is 45-per-cent invested in the Vanguard Morningstar U.S. Total Market Index ETF (VUN-T) and 30 per cent in the Vanguard FTSE Canada All Cap Index ETF (VCN-T). The rest is in international and emerging market funds.

Over five years ending July 31, this ETF has posted an annualized 13.39-per-cent return. Its MER is expected to be reduced to 0.19 per cent next year to reflect a declining management fee, she adds.

The pick: Purpose High Interest Savings Fund (PSA-T)

This Purpose ETF, which invests in treasury bills and high-interest savings accounts, is a convenient place to park cash redeemed from the Vanguard All-Equity Portfolio ETF, Ms. Hagerman says.

Capital preservation is important when the teenager gets closer to needing the money for university or college, she says, and this $4.1-billion ETF will keep the funds safe. “What we’ve seen, especially in 2022, is that bonds can lose money.”

Cash withdrawals from the ETF will take some planning as the student may need money not only for tuition, but perhaps to also pay for an apartment and a car, she adds.

For the period ending July 31, the ETF has posted an annualized 3.22-per-cent return over five years, and 2.27 per cent over 10 years. The 0.17-per-cent MER is reasonable, she adds.