“As I approach maxing my registered accounts, I need to start thinking about perhaps opening up a non-registered account.To start with, R.V. is obviously handling his finances very well given that he has maxed out his RRSP and TFSA. He has also chosen good diversified low-cost index mutual funds and ETFs. If he can stay invested and not tinker too much with his asset allocation, I’m optimistic about his future.
At present, I do the following:
TFSA: TD e-series funds (25% each of Bonds, CAD Index, US Index, & Int'l Index)
RRSP: 70% VXC and 30% VAB via a brokerage account
For Non-reg, I was thinking of HXT. Benefits of a swap-based ETF is no dividend to worry about and only need to be capital gains tax upon selling.
Do you have any comments and/or recommendation on some non-reg ETFs? What do you normally buy for your non-reg account?”
I don’t give financial advice directly for a couple of reasons. For one, I don’t know R.V.’s situation well enough to be certain of what’s best for him. Another reason is that I’m a big believer in learning the right answer yourself instead of just trusting experts. However, I can describe the way I invest my own money and why I do it that way.
I split my money into short-term and long-term savings based on whether I’ll need it within the next 5 years. My short-term savings only go into safe investments that come due when I need them like GICs, government bonds, savings accounts, and cash. From here, on, everything I discuss applies to my long-term savings.
I treat all of my long-term savings as a single portfolio with a single asset allocation. I don’t mind having skewed asset allocations in each account if the whole portfolio mix is as I want it. I use VCN for my Canadian stocks and I fill up my non-registered accounts as much as possible with VCN to get the preferred tax treatment on Canadian dividends. It’s still better to have VCN in an RRSP or TFSA, but when there’s no room left, Canadian stocks are better in a non-registered account than non-Canadian stocks.
Some people choose to put their bonds in a non-registered account because they expect bonds to have lower returns than stocks. Bonds get poor tax treatment in a non-registered account, but this has to be balanced against the higher expected returns of Canadian stocks. I haven’t had to make this decision because I don’t own bonds in my long-term portfolio.
HXT is potentially a good choice for a non-registered account because the swap arrangement causes dividends to get turned into deferred capital gains instead of paying taxes on the dividends every year. I’ve chosen not to use swap-based ETFs because I’m uneasy with the counterparty arrangement. There are experts who say that counterparty risk is very low and that even if there is a default, the losses would be modest. Another potential risk is that the government could change tax rules for these swap-based ETFs. I’ve just decided that I don’t need these risks in my life.
I consider it more important to maintain my portfolio’s asset allocation than to focus solely on minimizing taxes. So, I’m content to have some U.S. and international stocks in my non-registered accounts even if it results in paying some taxes. Right now, my portfolio’s total costs (commissions, spreads, MERs, other fund costs, and foreign withholding taxes) are below 0.2% per year. Trying to save another basis point or two by distorting my asset allocation would be letting the tax tail wag the investing dog.
Whatever strategy R.V. settles on, it’s important to avoid tinkering too often. Our instincts can lead us to buy high and sell low. When we have intelligent-sounding reasons to modify our strategy, it’s often just fear keeping us from buying low and greed pushing us to buy high.