Jonathan Chevreau -- Financial Post
Since it's a new year and all Canadian adults can make a new $5,000 contribution into their tax-free savings accounts, I thought it would be interesting to ask financial experts how they were investing their own TFSAs this year.
Several passed, including some financial advisors, not because they're hiding anything or afraid to eat their own cooking, but because their circumstances are so different from their clients. For instance, one advisor who begged off put his own TFSA into a single pipeline stock but is reluctant for his clients to follow suit. "My TFSA is a very small part of my overall portfolio and I am very comfortable owning one stock there on dividend reinvestment. But what I have there would not be appropriate for most clients."
His broad client recommendation is the BMO Guardian Dividend Growth Fund, which owns companies with a history of raising dividends. "Studies show companies that raise dividends over time outperform the market and do so with less volatility and risk. We treat TFSAs as lifetime investments so this type of investment fits this objective."
Interesting pick, and similar to my own thinking. This week, I suggested my wife invest her $5,000 TFSA contribution this year in a similar product, albeit a Canadian dividend ETF I'll reveal at the end of this column. But I thought I'd hold off following suit personally until I polled our experts.
Despite my own preference for ETFs - one shared by an increasing number of colleagues - many of our experts are still plumping for mutual funds. Last week, when I reviewed Gordon Pape's newest book, I mentioned Pape still prefers mutual funds to passively managed ETFs or index funds. His personal TFSA investment is split between the same two mutual funds he recommends in his January Mutual Funds/ETF Update: RBC Canadian Equity Income Fund and Dynamic Power American Growth Class.
Dan Richards, president of Client Insights, is adding to Brandes Global Small Cap Equity Fund. For those who can stand the roller coaster, he says small caps outperform large caps over time, and being a less-efficient market, active managers can add value. He also owns small-cap funds from other managers.
After writing the foreword about the importance of low fees in my 1998 book, The Wealthy Boomer, you'd expect actuary Malcolm Hamilton to plump for ETFs. Indeed, he has put his TFSA into iShares' U.S. High Yield Bond Index Fund (XHY/TSX), which is hedged back to the loonie. But like our other experts, he cautions his TFSA is a tiny part of his total portfolio. "I'm trying to find diversified investments that produce high taxable yields for my TFSA."
Jim Otar, author of Unveiling the Retirement Myth, has his TFSA parked in cash at ING Direct but is thinking of reinvesting it an ETF, probably "CPD or something similar, low maintenance at a reasonable risk." CPD is the ticker for the Claymore S&P/TSX Cdn Preferred Share ETF.
Fund analyst Dan Hallett hasn't made a final decision but is torn between a mutual fund and an ETF: "I will likely add to my exposure to global stocks via the combination of Vanguard Dividend Appreciation ETF (VIG/NYSE) for U.S. stocks and Mawer World Investment."
Paul Philip, financial planner with Don Mills, Ont.-based Financial Wealth Builders Inc., uses a monthly PAC to add to a balanced seg fund from Empire Financial, both for himself and his wife's TFSA. "Being self-employed, creditor protection is important to us. At our ages and funding pattern the TFSA accounts will add up to approximately $1million in the future - too much money to leave exposed. Empire offers two free resets a year which lock in growth via a death benefit and maturity guarantee."
I was surprised to discover two sources aren't using TFSAs. "I don't own a TFSA or RRSP," says Victoria-based Tim Paziuk, president of TPC Financial Group Ltd., "To do either would require I pull money out of one of my companies. I prefer to do all my investing corporately. For our clients we recommend not using TFSAs if they have non-deductible debt or if they have to take money out of their companies in the top tax bracket."
Similarly, chartered accountant David Trahair, author of Crushing Debt, doesn't have a TFSA. "It doesn't make sense to me for anyone who is still in personal debt and I still have a mortgage. To those investing in equities in their TFSAs: I hope it works out and you make awesome gains. But what if you don't? In a TFSA losses are useless. At least if you invested using a regular investment account you'd have an allowable capital loss to carry back against capital gains in the prior three years or forward against future capital gains."
I learned a lot from this exercise and hope you did too. But like others polled here, I'll eat my own cooking and go with the pick I suggested to my wife: the Claymore S&P/ TSX Canadian Dividend ETF (CDZ/TSX.) Not surprisingly, that's the personal TFSA pick of Claymore CEO Som Seif: "Put a DRIP on and enjoy the compounding."
However, I was torn between CDZ and Vanguard Canada's new MSCI Canada Index ETF (VCE/TSX).At0.09%,Vanguard's MER is much lower than the 0.6% charged by Claymore but is broader and doesn't have an exclusive dividend focus.
Note to Vanguard: If you can undercut Claymore with a comparable dividend ETF, that will likely be my 2013 TFSA pick!
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