The Best Balanced ETFs for an RESP

Though there are no target date ETFs available, low-cost balanced funds can work in the same way.

Danielle LeClair 31 August, 2023 | 2:45AM
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Child in School

Earlier this week, I tackled the topic of how to save for post-secondary education using target date mutual funds. If you prefer investing in exchange traded funds (ETFs), don’t fret, that’s the topic I’m tackling today!

There Are No Canadian Target Date ETFs – But Balanced ETFs Work in a Similar Way!

Investors who have done their homework may have already discovered that target date ETFs do not exist in Canada. That said, there are a few low-cost balanced ETFs that can be used in a similar way to beef up your child’s registered education savings plan (RESP).

Investors use target date funds because their asset mix adjusts between equity and fixed income based on the investor’s anticipated withdrawal date. The explicit consideration of investment time horizon means investors do not need to intervene.

Balanced funds on the other hand, have an asset mix between equity and fixed income that matches an investor’s risk profile. These funds therefore explicitly considering the investment risk tolerance. Although time horizon and risk tolerance are not exactly the same, they can be compared to help guide investors who have a specific investment end date, such as an anticipated post-secondary education start date.

The Best Balanced ETFs for an RESP

Using the Morningstar Risk Score (which gauges the risk of a given portfolio based on its underlying holdings) and current asset mix of Canada’s largest target date fund suite Fidelity ClearPath as a guide, I compared the top 4 cheapest balanced ETF suites from BMO, Vanguard, iShares and Mackenzie to see which of their risk profile aligns best with each of Fidelity’s time horizon portfolios. Here are the results:

The above list illustrates that investors who anticipate needing to withdraw from an RESP in the short term would be best suited to invest in conservative ETFs, investors who withdraw in the next 10-12 years would be best suited to invest in balanced ETFs and investors who have a withdrawal date beyond 12 years would be best suited to invest in growth ETFs.

How to Turn a Balanced ETF into a Target Date ETF for an RESP?

To replicate the concept of a target date fund however investors would need to manually shift between growth, balanced and conservative products as their end date approaches.

For example, if the iShares suite of ETFs was chosen for an RESP opened for a child who is born today the investment would be placed in the iShares Core Growth ETF Portfolio. When the child was between 8-10 years of age, it would need to be moved to the iShares Core Balanced ETF Portfolio and moved again when the child was between 18-20 years of age to the iShares Core Conservative Balanced ETF. Each of these shifts would mimic the automatic asset allocation adjustment of a target date fund by gradually increasing the amount of fixed income exposure and gradually decreasing the amount of equity exposure.

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Danielle LeClair  Danielle LeClair is Director of Manager Research for Morningstar Canada

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