Three ETF experts, Daniel Straus, Richard Orrell, and Mary Hagerman, weigh in on their top core and satellite ETF picks for a registered retirement savings plan (RRSP). They offer insights into bond ETFs, international high-dividend ETFs, U.S. equity ETFs with strategies like covered calls and those focused on specific sectors like technology.
Rental Bank Financial's Daniel Straus, Croft Financial Group's Richard Orrell, and Raymond James' Mary Hagerman provided their top core and satellite ETF picks for an RRSP . When building a retirement nest egg with exchange-traded funds (ETFs), a core-satellite investment strategy can help spread risk without limiting potential returns. Broad-based equity and/or bond ETFs should make up the core of a retirement savings plan.
Satellite ETFs, which will have much smaller weightings, can invest in themes, sectors or different geographies to provide more diversification or potential alpha. Globe Advisor asked three ETF experts for their top picks for a registered retirement savings plan (RRSP). \Mr. Straus recommends Fiera Capital Corp.'s actively managed short-term corporate bond ETF as a good core holding for conservative investors or the fixed-income portion of a balanced RRSP portfolio. He notes that bond ETFs are better kept inside an RRSP, where interest income can grow tax-free until withdrawal. This ETF holds Canadian corporate bonds and uses derivatives, such as interest rate swaps, to create a floating-rate income. Mr. Straus explains that when interest rates spiked in 2022 and 2023, this ETF delivered positive returns because of those swaps, while its active and passively run bond ETF peers were slightly in the red. He acknowledges that an economic downturn caused by a trade war with the U.S. is a risk, but adds that the ETF's 0.49-per-cent management expense ratio (MER) is “pretty competitive” for an actively run fund. \For a satellite holding, Mr. Straus suggests an international high-dividend ETF to offer diversification if investors are concerned about an overvalued U.S. stock market and a possible pullback. He explains that while the U.S. market is a core holding for everyone, international exposure serves as a satellite. The benefit of having this ETF inside an RRSP is that dividends are tax-sheltered, although there may be withholding taxes that could be a trade-off. The ETF is about 15 per cent invested in Japan, 13 per cent in Italy and 8 per cent in Switzerland. Its 0.34-per-cent MER is very competitive given its complex index methodology, he adds. The risk, he says, is that it's an all-equity ETF, so it could have significant drawdowns, but also slightly lower volatility and risk mitigation due to the stocks chosen for the index. \Mr. Orrell recommends a U.S. equity ETF suitable for a core holding because it offers diversification from the domestic market – as Canadians can have a home bias – but also screens for high-quality stocks. The fund owns companies with a high return on equity, stable year-over-year earnings growth and low financial leverage. He adds that its distributions are also tax-sheltered within an RRSP. The ETF’s risk stems from owning only stocks. Its annualized five-year return of 16.8-per-cent to Jan. 23 outpaced the 14.7-per-cent gain of SPDR S&P 500 ETF Trust. For a tactical satellite play, Mr. Orrell suggests a U.S. equity ETF given the uncertainty new U.S. President Donald Trump’s policies have caused. The market could “get rattled,” so this fund can benefit from its covered-call strategy. “If the market moves sideways or slightly lower, that covered-call component should generate a bit of extra income and reduce the volatility of the underlying portfolio.” The ETF holds 245 U.S. stocks screened by JP Morgan Asset Management. Although launched last autumn, its U.S.-listed version began trading in 2020. The 0.35-per-cent MER is also reasonable given that covered-call ETFs are often pricier, he says. The risk is the ETF will lag if the U.S. market rises dramatically, he says. If the market drops substantially, the covered-call strategy can help somewhat, “but won’t cushion the equity blow.” \Ms. Hagerman suggests a U.S. equity ETF as an attractive core holding within a balanced RRSP portfolio because it is a highly diversified fund with some 3,600 stocks. About 82 per cent of the fund is invested in S&P 500 index names while the rest is in small- and-mid-cap stocks. Its 0.17-per-cent MER is also very competitive, she adds. This ETF can face sharp market fluctuations, so it requires having a time horizon of four to five years, Ms. Hagerman says. “It’s virtually impossible to lose money with a broad-based index fund like this one if you hold it through market downturns.” For a satellite holding, Ms. Hagerman recommends a U.S. equity ETF to give investors more technology exposure. “It could be up to 5 per cent in the equity portion of a portfolio.” Tech stocks have had two blockbuster years, but “I still think we are still going to have good returns from them,” although perhaps from companies smaller than the Magnificent Seven, she says. The ETF tracks the Nasdaq 100 Index, which is 60 per cent invested in tech names that include Cisco Systems Inc
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