Equity funds were the biggest beneficiaries of RRSP season, a contrast to last year when more cautious investors sought shelter in cash products.AnthonyRosenberg/iStockPhoto / Getty Images
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Investors put their money in international equity exchange-traded funds (ETFs) during this year’s registered retirement savings plan (RRSP) season, betting that interest rates would ease and markets outside of Canada – in particular, the U.S. – would see the biggest gains.
The first two months of the year, when investors choose where to put their RRSP contributions to work, can give a sense of the mood for the year ahead in markets. In comparison to 2023, when investors poured money into fixed income products, risk appetites changed as investors focused on U.S. and international equity ETFs.
In the first two months of the year, investors poured $7.4-billion into equity ETFs. Of that amount, $4.3-billion went into U.S. equity ETFs and $2.6-billion into international ETFs, according to data from National Bank Financial. Canadian equity ETFs drew in just $465-million.
Meanwhile, fixed income ETFs gained $2.1-billion in inflows, illustrating that investors were still looking for fixed income gains as interest rates remained high.
Last year, investors all but ignored equity ETFs in favour of investing $2.2-billion in fixed income and cash alternative ETFs to take advantage of higher interest rates. U.S. equity ETFs saw outflows of $273-million during the 2023 RRSP season, while international equity ETFs gained $833-million and Canadian equity ETFs added $68-million.
The January and February 2024 flows “present almost a perfect inversion of this pattern” from 2023, says Daniel Straus, managing director of ETF research and strategy at National Bank Financial Inc.
This year, the biggest inflows reflected the demand for U.S. stocks: Vanguard S&P 500 Index ETF VFV-T pulled in more than $1-billion, followed by Scotia U.S. Equity Index Tracker ETF SITU-NE with $681-million and Horizons S&P 500 Index ETF (now Global X S&P 500 Index Corporate Class ETF HXS-T), with $524-million.
The fourth ETF on the list showed that investors were still interested in cash alternatives, as the Horizons High Interest Savings ETF (now Global X High Interest Savings ETF CASH-T) pulled in $522-million.
“This suggests to us that investors were feeling quite a bit more buoyant at the start of 2024 than in 2023, when most people were still nursing the lingering bruises from 2022′s brutal year in both the stock and bond markets,” he says.
“In early 2023, scarred RRSP contributors probably looked toward ultra-safe investments outside the ETF ecosystem such as [guaranteed investment certificates (GICs)], and the ETF flows reflected their tentative attitude. In contrast, 2024′s early-year inflows were the highest in recent history.”
Asset allocation or portfolio ETFs have been another popular category of investments during RRSP season for several years, Mr. Straus says. About $1.6-billion flowed into those ETFs in January and February.
“This is almost certainly thanks to RRSP contributions,” he says. “As the deadline approaches, we notice that most regular people want to act fast, and a simple multi-asset ETF is a natural and logical resting point for this kind of money.”
That includes Vanguard Growth ETF Portfolio VGRO-T, which invests in equities and fixed income securities, and iShares Core Equity ETF Portfolio XEQT-T, which invests in a broadly diversified array of equities.
On the mutual fund side, RRSP season came after two years of net redemptions. While traditional balanced funds continued to see outflows, mutual funds overall saw $2.7-billion in net sales in the first two months of the year, according to the Investment Funds Institute of Canada, with bond funds leading the way.
A more positive outlook
In comparison to last year, conversations with clients this RRSP season “were generally very positive,” says Kathryn Del Greco, senior investment advisor with TD Wealth Private Investment Advice in Toronto. “Clients were quite relieved to see the recovery in the market and in their portfolios.”
Big topics included hot technology stocks, along with fixed income and GICs that continue to have attractive rates of 5 per cent or more, Ms. Del Greco says. “If you can get 5.5 per cent with a conservative, zero-risk investment, that’s a meaningful contribution,” she says, particularly in a tax-deferred vehicle such as an RRSP.
She also spoke with clients about ensuring their portfolios were diversified geographically, particularly with the U.S. economy being stronger than the lagging Canadian economy. “Canada just does not have those same types of mega-cap technology names,” she says.
While equities were a focus, fixed income still played a strong role, she says, including actively managed fixed income funds. “The balanced growth portfolio has come back into [favour] because of where fixed income rates are right now,” she adds.
In late 2023 and into 2024, Ida Khajadourian, portfolio manager and investment advisor with Richardson Wealth Ltd. in Toronto, started advising clients to move funds from cash or fixed income back into equities.
“We moved all that cash into a lot of small caps and into the U.S., and then select Canadian dividend and growth stocks. So, we’re very selective where we’re adding,” she says.
She’s also been looking at tech stocks, particularly companies likely to benefit from using artificial intelligence in their businesses, and adding select corporate bonds for certain clients. “We started to look at that area again, where we can generate great returns with lower risk.”
However, this RRSP season, there were lots of discussions about interest rates, inflation, the high cost of living and high taxation, Ms. Khajadourian says. Clients were also looking at how they could help their kids get ahead in this expensive housing market, and how they could ensure they had enough income throughout their retirement.
“Clients came in unsure and more cautiously optimistic,” she says. “I’d say clients are pretty concerned and focused on inflation, on income needs and on taxation. So, all of those issues are bigger issues than potentially market direction.”
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