Which ETFs make sense for an 18-year-old starting a TFSA?

Q: My daughter, Alie, turns 18 this year and I plan to have her open a TFSA so she can start to invest. Our agreement is that we will match whatever she puts in her TFSA annually for at least the next 20 years, hoping this encourages her to save as she gets older. Should she be looking at an aggressive portfolio of low-fee ETFs? I would prefer that she manage her own portfolio so she develops an interest in investing and building up her savings. Any recommendations would be appreciated.

—Sam

A: Kudos to you, Sam, for encouraging your daughter to save and invest at such a young age. Saving can be frustrating when you’re starting from zero, because your account balance can seem like it’s barely growing, even during years when returns are solid. Giving her TFSA a jumpstart will help build some valuable momentum.

Before we talk about investing, though, it’s worth making the point that teenagers don’t necessarily need to concentrate on building a long-term portfolio. Over the next 10 years or so, Alie might have some more immediate needs. She might be offered a great job that requires her to buy a car, or she may want to take a specialized course related to her employment. She may even want to start saving for a down payment. At this stage of her life, these are reasonable priorities over investing for retirement.

That said, if she is looking to invest, I’d recommend a very simple approach for at least the first few years. Since the TFSA contribution limit is just $5,500 annually, her balance will be modest for the foreseeable future, so a portfolio of multiple ETFs is probably not the best fit.

One option is the Tangerine Investment Funds: this family of balanced index mutual funds allows you to own a diversified portfolio of socks and bonds with almost no maintenance. The Tangerine Balanced Growth Portfolio is 25% bonds and 75% equities, which may be suitable for a young investor with a long time horizon. The annual fee of 1.07% is high compared with ETFs, but this is less of an issue with small accounts: it’s less than $5 a month on a $5,500 investment.

Another option is to use a robo-advisor. These online services—particularly popular with tech-savvy millennials—are the easiest route to an ETF portfolio, since they choose the funds, place the trades, and do all the rebalancing. The fee structure varies, but expect to pay about 0.70%, including about 0.20% for the ETFs themselves and an additional 0.50% to the robo-advisor.

Finally, if Alie is keen to be a hands-on investor, you might consider opening an account at a discount brokerage, where she can learn to trade ETFs. With a small account, she would need to pay close attention to costs: she should choose a brokerage such as Questrade, which allows you to buy ETFs for free (commissions apply when selling). And a one-fund solution like the new Vanguard asset allocation ETFs would be ideal since she can build a diversified portfolio with a single trade. The Vanguard Growth ETF Portfolio (VGRO) holds seven underlying ETFs with a mix of 20% bonds and 80% stocks, for example. One day, when the portfolio grows larger, she might consider building a portfolio of multiple ETFs, so this will allow her to dip a toe in the water.

If I can leave you and Alie with some parting advice, never forget that when you’re just starting out, a disciplined savings habit is far and away the key piece of the puzzle. Choosing the right funds, settling on an asset allocation and keeping fees low is important, to be sure, but none of these will make any difference if you’re not socking away money. It’s surprising how many investors—young and old—forget this.

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