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New one-stop shop ETFs
RELATED: Best ETFs 2018 – One-stop portfoliosJoe, I think these ETFs are ideally suited to TFSAs for several reasons. First, because of their limited contribution room and relatively young age (TFSA have only been around since 2009), TFSAs are often relatively small compared with RRSPs. It’s not very efficient to build and maintain a diversified portfolio of multiple ETFs with a five-figure sum, as trading commissions can really add up. So a single product like the Vanguard asset allocation ETFs can make this cheap and easy: if you max out your TFSA with a single $5,500 contribution, all you need to do is make one trade per year. As for the tax implications, Joe, the TFSA is the ideal location in this respect, too. For starters, the bond component of the Vanguard asset allocation ETFs is likely to be quite tax-inefficient, so it’s best not to use these products in non-registered accounts if you’re in a relatively high tax bracket. In a TFSA, of course, all of the income and growth are tax-free.
RELATED: Best U.S. ETFs for 2018Moreover, while there’s nothing wrong with using the Vanguard ETFs in an RRSP, there are some more tax-efficient options for these accounts. Dividends from U.S. and international stocks in these ETFs are subject to foreign withholding taxes in both TFSAs and RRSPs: my colleague Justin Bender estimates these will cost investors between 0.12% and 0.18% annually. If you’re investing in an RRSP, using U.S.-listed ETFs rather than Vanguard’s one-fund solution can reduce or eliminate these foreign withholding taxes. In a TFSA, however, these taxes are unavoidable, so there’s no reason not to use the asset allocation ETFs: they’re as tax-efficient as any other option and a lot more convenient.
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