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The best ETF options for RESPs

Four experts offer suggestions for conservative and aggressive approaches to building an educational nest egg with ETFs

INVESTMENT FUNDS REPORTER

Exchange-traded funds can offer compelling investments when building an educational nest egg.

The big attraction is that ETFs, which are typically sold through discount and full-service brokers, charge low annual fees. Thinking about fees is important because they can eat away at the precious returns, especially in an environment of low interest rates and highly unpredictable stock markets. By saving through a registered education savings plan (RESP), students also get access to "free money" from government grants. The Canada Education Savings Grant, for instance, is worth 20 per cent of each dollar contributed to a maximum of $2,500, or a total of $500 a year.

We asked several experts to suggest conservative and aggressive ETFs for a diversified portfolio. The iShares S&P/TSX Canadian Dividend Aristocrats ETF was top of mind for three of them.

John Gabriel, ETF strategist, Morningstar Inc.

iShares S&P/TSX Canadian Dividend Aristocrats ETF (CDZ-TSX) (conservative)

This ETF, which tracks companies whose dividends have grown consistently for at least five years, has a "good mix of yield and growth," Mr. Gabriel said. The ETF, which has a small-cap tilt, has handily outperformed the broader Canadian market, he added.

WisdomTree Emerging Markets Small-Cap Dividend ETF (DGS-NYSE) (aggressive)

This ETF, which holds about 550 high-yielding small-cap securities, is an attractive long-term investment given that the companies are in developing markets, he said. "Higher anticipated growth rates in emerging markets should drive strong performance for this fund relative to developed market equities."

Vikash Jain, portfolio manager, archerETF Portfolio Management

iShares S&P/TSX Canadian Dividend Aristocrats ETF (CDZ-TSX) (conservative)

This ETF, which tracks 58 Canadian dividend growers, has outperformed the widely followed S&P/TSX 60 Index by nearly 30 per cent cumulatively over four and half years, Mr. Jain said. "That's pretty powerful" in addition to the fact that the dividend-focused ETF is less volatile, he added.

iShares S&P 500 Canadian hedged ETF (XSP-TSX) (aggressive)

This ETF, which tracks companies in the S&P 500 index, is attractive because its U.S. stocks trade at the lower end of their historical range due to Europe's financial woes and a weak U.S. economy, he said. From 1990 to June 30, the U.S. market has outperformed the Canadian market, he added.

Deborah Frame, vice-president of investments, Cougar Global Investments

iShares S&P/TSX Canadian Dividend Aristocrats ETF (CDZ-TSX) (conservative)

This ETF tracks companies that inspire more confidence that they can grow their dividends over time, said Ms. Frame. The ETF has also outperformed the competing iShares Dow Jones Canada Select Dividend ETF over one, three and five years.

iShares Dow Jones Canada Select Dividend (XDV-TSX) (aggressive)

This ETF, which holds 30 companies, is dominated by Canada's big banks. It charges a slightly lower fee than the iShares S&P/TSX Canadian Dividend Aristocrats ETF, but has the potential to outperform if its concentration in Canadian banks does well, she noted.

Pat Chiefalo, ETF analyst at National Bank Financial

BMO Short Corporate Bond ETF (ZCS-TSX) (conservative)

This ETF, which holds 155 short-duration corporate bonds, is a "good compromise" in an environment of low yields and volatility from riskier equity assets, he said. The BMO ETF has a "good record of consistent performance relative to competing ETFs," he added.

Vanguard U.S. Total Market ETF (VTI-NYSE) (aggressive)

The ETF is one of the most inexpensive ways to gain access to more than 3,000 U.S. securities for a rock-bottom 0.06-per-cent fee, he said. The ETF counts names like Apple, Exxon and IBM among its top holdings.

*****

TOP ETF PICKS FOR RESPS

FUND.......................BMO Short Corporate Bond Index ETF

CATEGORY............Cdn. Short Term Fixed Income

SYMBOL..................ZCS-T

MER..........................0.34%

ASSETS ($ mil.).....$3,84.2

1 YEAR**.................4.05%

FUND.......................iShares Dow Jones Canada Sel. Dividend

CATEGORY............Cdn. Dividend and Income Equity

SYMBOL..................XDV-T

MER..........................0.55%

ASSETS ($ mil.).....$942.7

1 YEAR**.................-3.51%

FUND.......................iShares S&P 500 Index (CAD-Hgd)

CATEGORY............U.S. Equity

SYMBOL..................XSP-T

MER..........................0.24%

ASSETS ($ mil.).....$1,649.4

1 YEAR**.................3.43%

FUND.......................iShares S&P/TSX Cdn. Div. Aristocrats

CATEGORY............Cdn. Dividend and Income Equity

SYMBOL..................CDZ-T

MER..........................0.67%

ASSETS ($ mil.).....$6,63.5

1 YEAR**.................2.33%

FUND.......................Vanguard Total Stock Market ETF*

CATEGORY............Large Blend

SYMBOL..................VTI-N

MER..........................0.06%

ASSETS ($ mil.).....$181,800.0

1 YEAR**.................3.95%

FUND.......................Wisdom Tree EM Small Cap Dividend ETF*

CATEGORY............Emerging Markets

SYMBOL..................DGS-T

MER..........................0.64%

ASSETS ($ mil.).....$915.3

1 YEAR**.................-14.82%

* U.S. dollars

** To June 30, 2012

THE GLOBE AND MAIL

SOURCES: LIPPER; ETF PROVIDERS

© 2007 The Globe and Mail. All rights reserved.

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