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ETFs and RESPs: It’s always a good time to invest in education

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With that in mind, here’s a key date to circle on your calendar: Dec. 31. That’s the deadline for making RESP contributions to maximize government RESP grants each year. The Canada Education Savings Grant (CESG) matches 20% of what you put in, up to a limit of $500 annually. To receive the full $500, your contributions must total at least $2,500 by the end of December. The lifetime CESG maximum per beneficiary (child) is $7,200, and you can only catch up one year at a time—so, you can see why that annual deadline merits attention. That’s especially true if you only have a few years to save before your child heads off to school.

Now is a great time to plan your contributions for this year. Here are some things to consider.

Despite its name, an RESP is much more than just a cash savings account. In fact, just holding cash in an RESP may not always be the best strategy, as inflation can erode its value over time. It’s worth looking into different ways to grow that money.

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There’s no one-size-fits-all answer for the best RESP investment options. The right mix for your family will depend on several factors, including your financial circumstances, how much time you have, and how comfortable you are with risk. To help you make the most of your RESP, the Canada Revenue Agency (CRA) provides a list of “qualified investments” for this account, including the following:

  • Bonds: These can be either government-issued or corporate-issued. Bonds are generally seen as a safer investment compared to stocks, offering fixed interest payments over time.
  • Guaranteed investment certificates: GICs are issued by financial institutions, and you can choose terms such as one, two, three or five years. At the end of the term, you’ll receive a guaranteed amount of interest. Generally, you must wait until then to access your money.
  • Stocks: Investing in individual stocks can offer high returns, but they generally come with higher volatility than bonds and GICs. It’s essential to thoroughly research the companies you’re thinking about investing in—and remember, picking stocks can be risky!
  • Mutual funds: These funds can hold a mix of stocks, bonds and other assets. They offer diversification and are managed by financial professionals. Investors pay a percentage of the value of their investment towards annual management fees.
  • Exchange-traded funds: ETFs are similar to mutual funds in that they can hold a mix of assets like stocks and bonds. However, ETF shares trade on stock exchanges, just like individual stocks. Most ETFs are passively managed, but more active ETFs are coming onto the market.

ETFs are a fast-growing asset class in Canada. They offer investors numerous benefits, including:

  • Built-in diversification: ETFs may bundle various assets, providing wide exposure across different sectors, asset classes and geographies, which helps in reducing investment risk.
  • Professional management: With ETFs, a fund manager oversees the selection and rebalancing of holdings, often trying to replicate specific stock market indices (such as the S&P 500), thus reducing the complexity of managing individual stocks and bonds.
  • Ease of transactions: ETFs are traded on stock exchanges and are accessible through financial advisors and online brokers.
  • Flexible asset allocation: ETFs offer a spectrum of asset allocation options, so they may be suitable for investors with different risk tolerances and investment timelines.

Choosing the best ETF for your RESP largely depends on two variables: your time horizon (how long until your child needs the funds) and your risk tolerance (how much market fluctuation and potential losses you can comfortably handle).

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To simplify this decision-making process, one option to consider is an all-in-one ETF, such as those offered by Fidelity. These ETFs offer different asset allocations and risk classifications. Fidelity’s All-in-One ETFs have the following target asset allocations and risk classifications (as at Oct. 31, 2023):

Fidelity All-in-One ETFs Conservative Balanced Growth Equity
Risk classification Low to medium Low to medium Medium   Medium
Ticker FCNS FBAL FGRO FEQT
Equity 40% 59% 82% 97%
Fixed income 59% 39% 15% 0%
Crypto 1% 2% 3% 3%
Source: Fidelity Investments Canada ULC

Fidelity’s suite of All-in-One ETFs offers strategic diversification, with most of them giving you exposure to global bonds and stocks from all market sectors. Interestingly, they even include a small exposure to cryptocurrency (1% to 3% depending on the fund), adding a modern twist to traditional investment portfolios. (Read more about crypto in Fidelity ETFs.)

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