How to use All-in-One ETFs in your TFSA
- When you invest inside a TFSA, your assets can grow tax-free and you can withdraw your money at any time without penalty.
- All-in-One ETFs hold a diversified mix of securities in one fund. They also rebalance automatically, aiming to help keep your asset mix on track.
- For some investors, using an All-in-One ETF in a TFSA can provide a simpler portfolio structure, potentially helping you navigate market volatility.
- There are multiple Fidelity All-in-One ETFs to choose from based on your time horizon, risk tolerance and goals.
The Tax-Free Savings Account (TFSA) is one of the more popular savings vehicles in Canada, but account holders may feel uncertain about how to invest their money within it. This means that contributions may sit in cash or overly conservative investments, which could impact the account’s long term growth potential.
But you can hold a variety of investments inside your TFSA. One option that many Canadians consider is All-in-One exchange-traded funds (ETFs). These funds are designed to provide a simple, diversified investing solution in a single fund. A TFSA is a natural home for this kind of investment because both are generally straightforward, and the account can offer tax-free growth and withdrawals. Here’s what you need to know about using All-in-One ETFs and TFSAs together.
How do All-in-One ETFs and TFSAs work together?
A TFSA lets your investments grow without triggering tax on income or withdrawals. That makes it useful for both short-term goals, such as saving for a car or a wedding, and longer-term wealth-building and retirement goals. The tax-free nature supports more efficient compounding over time, since your returns aren’t subject to taxes as they grow. You can also withdraw funds at any time, giving you flexibility when accessing your savings.
All-in-One ETFs complement this flexibility by holding a broad mix of assets across sectors and geographies, which can help with diversification. These funds rebalance automatically at least once a year (more often if allocations drift too far from target), helping reduce the need for you to regularly monitor your portfolio or make frequent investment choices.
What are the benefits of holding an All-in-One ETF in your TFSA?
Combining an All-in-One ETF with your TFSA offers a simple approach to investing, reducing the need to choose individual stocks or handle rebalancing on your own. The fund’s diversified portfolio can also contribute to a more stable experience during periods of market uncertainty. ETFs typically come with lower fees compared to many other investment products, helping you keep overall investing costs manageable. Together, lower fees and fewer decisions can make it easier for you to keep your money invested with confidence.
One thing to keep in mind, though, is foreign dividends are an exception to the TFSA’s tax-free treatment. Payments from U.S. companies, for example, may still face withholding tax at the source, even inside a TFSA, and no foreign tax credit is available.
How do I start using an ETF inside my TFSA?
There are several All-in-One ETFs to choose from, ranging from more conservative to more growth-focused. Choosing the fund that best suits your TFSA will depend on several factors. Here’s what to consider first:
How your time horizon can shape your ETF choice
When you’ll need access to your money is one factor to consider when choosing an investment. For a short-term goal (e.g., a downpayment in approximately two years), you may look at conservative options to reduce sensitivity to short-term volatility. For longer-term goals (e.g., retirement in around 20 years), you might consider growth-focused options, because a longer horizon provides more time for potential compounding and market recovery.
How your risk tolerance can influence your ETF selection
While time horizon and withdrawal frequency are important, you also need to consider your tolerance for risk: if you’re uncomfortable when markets fall, you may prefer leaning toward a more conservative option. If you don’t get too bothered by market swings, then a more growth-oriented option may be worth considering.
What All-in-One ETFs are available from Fidelity?
Fidelity offers six All-in-One ETFs that you can choose from, ranging from primarily equity exposure to full fixed income. Here’s how they compare:
| Fund | Primary goal | General asset mix | Risk level | May be a fit if you are… |
|---|---|---|---|---|
| Fidelity All-in-One Equity ETF | Long-term investment growth | Mostly equity investments with some cryptocurrency exposure | Medium | Investing for the medium- to long-term and can handle market swings |
| Fidelity All-in-One Growth ETF | Long-term investment growth | Mostly equity with some fixed income and cryptocurrency exposure | Medium | Focused on growth with diversification to help manage volatility |
| Fidelity All-in-One Balanced ETF | Seeking some income and growth | A relatively balanced mix of equity and fixed income with some cryptocurrency exposure | Low to medium | Looking for a more balanced portfolio with more equity exposure |
| Fidelity All-in-One Conservative ETF | Seeking income generation and modest growth | A mix of equity, fixed income investments and more-limited cryptocurrency exposure | Low to medium | Looking for a more balanced portfolio with more fixed income exposure |
| Fidelity All-in-One Conservative Income ETF | Seeking income generation and conservative growth | Mostly fixed income investments with lower exposure to equity and cryptocurrency | Low | Seeking a diversified portfolio with an emphasis on Canadian fixed income |
| Fidelity All-in-One Fixed Income ETF | Seeking income generation | Fully invested in fixed income vehicles | Low | Focused on income generation with an emphasis on Canadian fixed income securities |
Source: Fidelity Investments Canada
What else should I consider when choosing ETFs for my TFSA?
ETFs with heavier equity and crypto exposure typically offer more growth potential, but they also come with more potential for volatility. Your asset mix should also reflect how comfortable you are with market volatility, in addition to your expectations of the market.
Your circumstances will also change as you move through life. A timeline that once felt distant might start to feel closer or a particular goal you once had in mind might no longer be in focus. An annual review of your TFSA strategy can help ensure your investment mix still matches your situation. A financial advisor can help with this process to make sure your TFSA aligns with your broader financial plan.
Should you use an All-in-One ETF in your TFSA?
A Fidelity All-in-One ETF paired with your TFSA can offer diversification, automatic rebalancing and the cost efficiencies associated with ETFs, all within a tax-advantaged account. Your income grows tax-free and you can withdraw without penalty whenever you need the money, giving you flexible access to your savings. The combination works best when your investment mix reflects your timeline and goals, helping you stay invested with confidence.
Frequently asked questions (FAQs)
Can one All-in-One ETF be enough for your TFSA?
An All-in-One ETF can be enough for many TFSA investors because it already provides diversification across asset classes and regions in a single fund. Some investors may choose multiple ETFs for a more customized portfolio, but that may add complexity.
What happens when you withdraw money from your TFSA?
You can make withdrawals from your TFSA at any time, tax-free. The amount you take out gets added back to your contribution room on January 1 of the following calendar year. Be careful not to recontribute in the same calendar year unless you have contribution room available, as overcontributions will face a tax penalty.
What if your investment goals or time horizon change?
If your time horizon or financial goals change, it’s important to revisit your TFSA strategy. You may want to switch to an All-in-One ETF with a different asset mix. A financial advisor can help you work through the decision.
