Lululemon Athletica Inc.’s shares are among the top holdings in Dynamic Global Discovery Fund, which invests in companies with high, free cash-flow generation and strong balance sheets. (Andrej Ivanov/The Globe and Mail)Andrej Ivanov/The Globe and Mail
Picking winning stocks is never a slam dunk, but equity investment funds can be a less risky way for investors to grow their money within a tax-free savings account (TFSA).
A recent Royal Bank of Canada survey indicates that 42 per cent of holdings in a TFSA are in savings accounts or cash compared with 28 per cent in mutual funds and 7 per cent in exchange-traded funds (ETFs).
By not having some exposure to equities inside a TFSA, investors miss out on potential capital gains and Canadian dividends that can be withdrawn on a tax-free basis. That’s extra cash in the pocket. (Foreign dividends may be subject to a withholding tax, which is 15 per cent in the case of U.S. securities.)
We asked three fund experts to give their top equity mutual fund and ETF picks for a TFSA:
Corey Hurwitz, senior product analyst at Industrial Alliance Securities Inc.
The mutual fund pick: EdgePoint Canadian Portfolio
Management expense ratio (MER): 0.99 per cent for Series F; 2.14 per cent for Series A (front-end load)
This Canadian equity mutual fund’s track record and management team make it an appealing investment for a TFSA, Mr. Hurwitz says. The mutual fund’s Series F units have returned an annualized 9.50 per cent for the 10 years ended Oct. 31 versus 7.32 per cent for the S&P/TSX Composite Total Return Index. EdgePoint Investment Group Inc. partners Geoff MacDonald and Tye Boussada, who co-manage the fund, describe themselves as business people buying businesses. Specifically, they look for companies with barriers to entry and strong management, Mr. Hurwitz says. Top holdings include Element Fleet Management Corp. (EFN-T) and Restaurant Brands International Inc. (QSR-T), the latter of which owns Tim Hortons. A risk stems from the fund’s concentration in about 65 stocks, but they typically have a large margin of safety, he notes. The fund requires a minimum investment of $20,000.
The mutual fund pick: Dynamic Global Discovery Fund
MER: 1.20 per cent for Series F; 2.35 per cent for Series A (front-end load)
This global equity mutual fund is an attractive candidate for a TFSA because of its long-time portfolio manager – David Fingold, vice-president and senior portfolio manager at 1832 Asset Management LP – and track record, Mr. Hurwitz says. Mr. Fingold, who has run the fund since 2004, targets companies with high, free cash-flow generation and strong balance sheets, Mr. Hurwitz says. “He wants to own companies that are best in class with moats around their businesses.” The fund’s Series F units have returned an annualized 14.23 and 11.64 per cent, respectively, for the five and 10 years ended Oct. 31. That compares with gross returns of 11.56 and 12.30 per cent, respectively, for the MSCI World Index in Canadian dollars. A risk is the fund concentration in 20 to 25 names, he says. Top holdings include Elbit Systems Ltd. (ESLT-Q), Microsoft Corp. (MSFT-Q) and Lululemon Athletica Inc. (LULU-Q). The minimum investment is $500.
Daniel Straus, vice-president, ETFs and financial products research at National Bank Financial Inc.
The ETF pick: Vanguard All-Equity ETF Portfolio (VEQT-T)
MER: 0.22 per cent
This global equity ETF is suitable in a TFSA for risk-tolerant, younger investors – or for others as a complement to their bonds in a retirement savings plan, Mr. Straus says. The ETF, which was launched earlier this year and provides exposure to 12,600 stocks, holds four Vanguard ETFs that invest in the U.S., Canada, internationally and emerging markets. Vanguard All-Equity ETF Portfolio also has an overweight, 30-per-cent position in Canada versus the typical 4 to 5 per cent among its ETF peers, which also may not have emerging-markets exposure. The risk, he says, stems from market volatility triggered by events such as the uncertainty surrounding Brexit or falling energy prices, which would affect domestic stocks. The ETF’s fee is “very cheap,” he adds.
The ETF pick: CI First Asset Morningstar Canada Momentum ETF (WXM-T)
MER: 0.67 per cent
This Canadian equity ETF can be rewarding in a TFSA for aggressive investors, but it comes with higher risk, Mr. Straus says. “It is quite a bit more volatile than the broader index.” It tracks a Morningstar index targeting shares of companies with price and earnings momentum. Air Canada (AC-T), Canada Goose Holdings Inc. (GOOS-T) and CGI Inc. (GIB-A-T) are among the holdings. The ETF has returned an annualized 10.13 per cent since inception in 2012 to Oct. 31 versus 6.98 per cent for the S&P/TSX Composite Total Return Index. The ETF’s fee is on the high side, but it’s the only Canadian equity ETF with a momentum strategy that has some history, he notes. The risk stems from the ETF’s concentration in 30 equal-weighted stocks and small- to mid-cap bias, he adds. This ETF, he says, should be a satellite as opposed to a core holding.
Alex Bryan, director of passive strategies research for North America at Morningstar Inc.
The ETF pick: Vanguard U.S. Dividend Appreciation ETF (VGG-T)
MER: 0.30 per cent
This U.S. dividend ETF would appeal to risk-averse investors for their TFSAs because it has a defensive strategy, Mr. Bryan says. The ETF, which focuses on dividend growth, screens for companies that have raised their payouts for 10 consecutive years. These companies tend to have durable competitive advantages and shareholder-friendly management teams, he adds. “The ETF should hold up a bit better during market downturns, but it may not keep up during a market rally.” As the ETF is still an equity investment, investors should also have at least a 10-year time horizon to ride out any volatility, he notes. Microsoft, Visa Inc. (V-N) and McDonald’s Corp. (MCD-N) are among the ETF’s top holdings. Since inception in 2013, the ETF has returned an annualized 14.80 per cent as of Oct. 31. This ETF, he says, is one of the cheaper dividend options.
The ETF pick: iShares Core MSCI Global Quality Dividend ETF (XDG-T)
MER: 0.22 per cent
This global equity ETF would be attractive for investors seeking dividend income so it “would probably be better for someone who is closer to or in retirement,” Mr. Bryan says. “It is trying to deliver above-average yield, and I think it does that pretty well. …It is one of the cheaper dividend strategies available.” This ETF, which has a trailing 12-month yield of 3.20 per cent, also provides better diversification than a single-country fund, he adds. Top holdings include Procter & Gamble Co. (PG-N), Exxon Mobile Corp. (XOM-N) and AT&T Inc. (T-N). The ETF posted an annualized return of 6 per cent from inception in 2017 to Oct. 31. A source of risk for this ETF is its slight tilt toward value stocks that have been out of favour for the past decade – and that “can create a headwind for this type of strategy,” he says.