# Picking the right ETF for my TFSA



## Compounding1 (May 13, 2012)

Hello all,

I can't quite seem to pull the trigger on which ETF(s) I would like to hold in my TFSA. My RRSP currently consists of ETF's now from Vanguard. I trade with Questrade so purchasing ETF's is free which makes it ideal for me as my combined account size isn't large (30k) and I contribute regularly.

I am looking at either a dividend ETF such as CDZ, ZDV, VDY, etc. Vanguards new ETF seems like it has lower yield for a dividend etf compared to the rest at first glance and also has 55% of its holdings in the financial sector which seems high. 

I was also thinking of going for an ETF such as XIU or VCE but I already hold VCE in my RRSP so this seems redundant but since its a non-taxable account I don't really need the dividend accumulation so an ETF along these lines might not be so bad. 

The other option is continuing to build on dividend stocks(I already own a few including a REIT). I would prefer ETF's though as the commission is free and it frees up quite a bit of time for me and works well with my smaller account. 

I should add that I'm still in my early 20's and would be contributing monthly to my TFSA account.

So am I thinking this through too much and can I go wrong here by picking one of these products?


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## jcgd (Oct 30, 2011)

I can't help you with ETFs as I'm not knowledgeable in that area, but if you are looking for some individual stocks for your TFSA search for Argonaut's TFSA Five Pack. There's a US and a Canadian version and he updates them when he believes a different stock looks more attractive. Some good info in the whole thread that would be good for you to read even if you decide to go with ETFs. 

Also, consider all your accounts together when you work out your allocations and what ETFs/stocks you hold where to try and maximize the benefits of each account. I'm not sure if you are aware, but RRSPs have specific qualities that make them better choices for, say, US dividend payers, while TFSA can be better for Canadian dividend payers. Just one example of the many differences. It's nice to have a plan worked out before you spend money on commissions just to find out you want to move holdings to other accounts. Not an issue for you with ETFs but it could be with stocks.


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## andrewf (Mar 1, 2010)

It might be worthwhile talking about your asset allocation plan, then look for ETFs, etc. that will help you implement that plan.


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## Compounding1 (May 13, 2012)

andrewf said:


> It might be worthwhile talking about your asset allocation plan, then look for ETFs, etc. that will help you implement that plan.


My current asset allocation in my RRSP is:
10% Emerging
15% International Equity
30% Canadian equity
25% American equity
20% Cdn Bonds

Right now for my TFSA I'm thinking of putting in some Small caps (Haven't looked into which ETF for this yet) and REIT (Vanguards likely) ETF's along with some short term bonds (Vanguard again). And then around 60% of allocation in a mixture of ZDV and XDV.

Does this seem like a good plan/good mixture of ETFs to use?


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## andrewf (Mar 1, 2010)

You should dig into the holdings of dividend funds, as some of them are very concentrated in a few sectors, like financials. While others are fans of dividend focused ETFs, I'm skeptical (vs broad market ETFs). I'm not sure about the benefit of holding two different dividend funds. It seems likely to me that they would largely hold the same companies.

Best to keep the foreign equity ETFs in RRSP and the Canadian equity and bond component in your TFSA (though it's fine to hold these in your RRSP as well).


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## Compounding1 (May 13, 2012)

At first I was thinking the same thing but XDV is around 50% in financials and just looking at its top 10 holdings you see a lot of the big banks on there. ZDV is a bit different. It still has 30% in financials but I don't remember seeing any of the top banks in it's top 10 holdings and I think 2 overall. It seems like it has some more volatile stocks in it though.

I was thinking of a broad index instead aswell but I didn't think I should have that much in Canadian equity in both my RRSP and TFSA, unless I lower my allocation in my RRSP in canadian and put it in american or bonds (given american indexs are pretty high atm). And yes the small caps and REIT I plan on putting in my TFSA would be canadian too.


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## My Own Advisor (Sep 24, 2012)

My personal strategy is to own a bunch of individual CDN dividend paying stocks in my TFSA over time, and a few REITS for tax-free income. No ETFs. 

That said, I don't think you can really go wrong with some broad-market ETFs like XIU, XIC or VCE that focus on capital appreciation. If you want some more income vs. appreciation, then look at XDV, ZDV, VDY or CDZ.


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## andrewf (Mar 1, 2010)

Capital appreciation and income are two side of the same coin. Investing for income with XIU/relatively lower dividend paying funds means selling a small part regularly to generate cash. Investing for capital appreciation with XDV/relatively higher dividend paying funds means reinvesting your dividends. Don't fall into the mental accounting traps of equating income with distributions. Income comes from after tax total returns.


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## My Own Advisor (Sep 24, 2012)

Andrewf, you prefer broad-market ETFs right?


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## andrewf (Mar 1, 2010)

It seems like you get more diversification with broad market ETFs rather than dividend focused ETFs. Many dividend funds are highly exposed to Canadian banks, which may or may not outperform the broader market over the next ~10 years. It's a concentrated bet, though.


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## My Own Advisor (Sep 24, 2012)

Bet indeed and I agree with your diversification point. I do feel however, most CDN blue-chip stocks will continue to provide dividends and appreciation over time.

Going the ETF route definitely gives you some immediate diversification for the TFSA.


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