Using ETFs to get the most out of your TFSA contribution room

by Ann deBruyn

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Photo by George Pak from Pexels

Financial experts have long stressed that cash is a poor savings vehicle and that money should be put to work by investing. This especially makes sense when you consider the bite of inflation and the current environment of low interest rates.

In addition, holding cash means missing out on the magic of compounding—and the turbo-boost of growing an investment inside a tax-free savings account (TFSA). Despite its name, a TFSA is not just savings account, and it can hold a wide range of qualified investments, including exchange-traded funds (ETFs.)

What are ETFs?

ETFs are large baskets of individual stocks or bonds, similar to mutual funds. They come in many flavours: some track a broad market index, while others focus on a specific sector, region or factor. Unlike mutual funds, ETFs trade on exchanges, and their prices change throughout the day based on supply and demand. You can purchase shares of an ETF, known as units, and gain exposure to the performance of securities within the fund, without owning the securities themselves.

ETFs are constructed and managed by investment firms. Management fees are included in an ETF’s management expense ratio, or MER, which is expressed as a percentage of the fund’s assets under management. ETF fees are typically lower than those of mutual funds—one reason why ETFs are immensely popular with investors.  

How popular? Canadians have invested a record $48 billion in ETFs so far this year—surpassing 2020’s inflows, according to the Canadian ETF Association. Issuers are now devising new ways to tap into a wider pool of securities, across factors, sectors and geographies, to maximize long-term capital growth while minimizing risk.

One investment instrument that fits the bill is the all-in-one ETF, such as Fidelity’s All-in-One Balanced ETF (FBAL) or Fidelity All-in-One Growth ETF (FGRO). An all-in-one ETF invests in a selection of low-cost ETFs to create a globally diversified portfolio of stocks and bonds that caters to different investment styles.

Take advantage of tax-free growth

A great way to get the most out of ETF investments is to hold them within a TFSA. Introduced in 2009, the TFSA enables Canadian residents aged 18 or older to grow their savings and investments tax-free. Contributions to a TFSA, as well as any income earned in the account—including capital gains and dividends—are not taxed. You can withdraw your holdings anytime, and unlike an RRSP, there is no time limit on having a TFSA account.

With the ability to grow and withdraw investments tax-free, it’s no wonder TFSAs are so popular. As of 2018, an estimated 15 million Canadians held nearly $300 billion worth of investments inside about 21 million individual TFSAs, according to the most recent Canada Revenue Agency statistics.

While Canadians love their TFSAs and ETFs, and they are piling record funds into both, the idea of investing in ETFs inside a TFSA is still eluding many people—and some investors aren’t aware that all-in-one ETFs such as FBAL and FGRO can further help them meet their goals. Here’s how:

Capitalize on your contribution room

As of this year, the maximum contribution room for a TFSA is $75,500, the total of the annual contribution limits from 2009 to 2021. The most recent CRA data show that in 2018 only about 1.4 million of Canada’s nearly 15 million TFSA holders had contributed their maximum amount. On average, Canadians were holding nearly $20,300 in their TFSAs at the end of 2018, according to the CRA. This means most of us have catch-up room to fill.

Whether you’re catching up or planning ahead, an all-in-one ETF is a great and simple option with built-in diversification. Whatever your investment goals—retirement, a down payment or a renovation, for example—FBAL and FGRO can make your money work for you with a single purchase. What’s more, you don’t have to worry about the selection of individual securities.

FBAL and FGRO offer a mix of equities and fixed income. The equities component targets known factors like value, momentum, low volatility and quality to enhance the risk and return profile of the portfolio, while the fixed income sleeve provides diversification and downside protection in turbulent times. With all-in-one ETFs, investors really can have the best of both worlds.

The sooner, the better

Any unused TFSA contribution room in a given year gets rolled over to the next year; however, it’s best to stay on top of your yearly contributions, in order to benefit from the power of compounding.

An all-in-one ETF makes it easy to max out your TFSA contribution room. In the short term, the fund’s growth can serve as a hedge against inflation, protecting your savings from its corrosive effects. In the long term, the value appreciation of these ETFs can help grow your savings. All you need is the discipline to invest regularly.

Leave the heavy lifting to experts

By design, an all-in-one ETF means contributing is a light lift. Once you determine which ETF has the right balance of investments for your goals and risk tolerance, it’s a single trade through your online or conventional brokerage.

Fidelity’s All-In-One ETFs are suitable for a wide range of investing goals. If you favour a balanced approach and have a lower risk appetite, FBAL may be the right solution. The fund employs a global multi-asset strategy comprising a neutral mix of approximately 60% equities and 40% actively managed fixed income assets.

FGRO is tailored for investors who are looking for long-term capital growth. It has a greater emphasis on equities, which make up approximately 85% of the portfolio, while approximately 15% is allocated to fixed income investments.

Both ETFs are structured to be a one-ticket, lower-cost solution diversified across regions, market caps and investment styles. Each comes with the benefit of professional management that does most of the heavy lifting for you.

For a lower, indirect management fee of 0.37% (FBAL), as at December 14, 2021, or 0.39% (FGRO), as at December 14, 2021, you have the peace of mind of owning a well-diversified investment portfolio with strategic asset allocation consistent portfolio rebalancing.

For important information regarding Fidelity All-in-One ETF’s, click here.