Investing for education

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When it comes to portfolio construction there are various types of investments you can use to fulfill your education savings asset allocation strategy. Consider the following investment options that can help you put your eggs in different baskets.

  • All-in-one exchange-traded funds (ETFs):These allow you to diversify your assets across global markets, while automatically rebalancing your portfolio to maintain a desired value split among different classes.
  • Life-cycle funds: A type of asset-allocation mutual fund that automatically rebalances your assets throughout the course of your investment time horizon. Adjustments start from a profile of higher risk then shift to a lower risk as you approach the date of funds withdrawal.
  • A High Interest Savings Account (HISA): As its name suggests, a HISA pays higher interest than standard savings accounts and constitutes a practical approach to security with some growth.
  • Money market exchange-traded funds (ETFs): These offer investment opportunities in in high-quality and very liquid short-term debt instruments such as U.S Treasury bonds.

Keep in mind that maintaining a well-diversified portfolio of investments— including equities and fixed income, spread across different sectors and geographies— is a highly regarded approach to achieving growth while mitigating the effects of market ups and downs. Your saving education portfolio isn’t limited to one particular asset class. Everything from cash and mutual funds to GICs, stocks, bonds and ETFs can be used to achieve your education savings goals.

Which ETFs are best choices for saving education plans?

1. Vanguard 500 Index Fund ETFThis fund provides a good starting point. The Vanguard S&P 500 Index Fund ETF (NYSEMKT:VOO) tracks 500 of the largest companies (by market capitalization) traded on U.S. exchanges, and it has proved to be a strong investment over any 15-year period in U.S. history. While there’s no guarantee the index will rise in any short- or medium-term period, investors in this ETF can be fairly confident that major benchmarks will rise over the decade or two that they will be saving for a child’s post-secondary education. Investing in a fund tracking the S&P 500 is a good starting point for any education savings plan.

2. Vanguard Small-Cap Value Index Fund ETF

If you are looking to diversify the holdings in your college savings plan, the Vanguard Small-Cap Value ETF (NYSEMKT:VBR) might warrant being part of an overall portfolio. The fund holds positions in companies with market capitalizations less than $1 billion, and it focuses on value stocks — those companies with stock trading at low prices relative to their earning. Small-cap value stocks have the potential to outperform the market on a long-term basis, and given that college funding is a long-term goal, it might make sense to include this inexpensive fund.

3. Vanguard FTSE All-World ex-US ETF 

This international ETF includes companies operating outside the United States, and it can act as a sensible complement to any existing U.S.-based fund. The Vanguard FTSE All-World ex-US ETF (NYSEMKT:VEU) is dominated by companies based in developed economies like Japan, the United Kingdom, and France — only about a quarter of its holdings are in emerging markets. A properly sized position in this fund will achieve much, if not all, of the international diversification needed in a portfolio. Pair it in equal proportion with a low-cost U.S. ETF and you will definitely increase the potential for long-term success in your education savings plan.

4. Schwab Emerging Markets Equity ETF

The widely available and tax-efficient Schwab Emerging Markets Equity ETF (NYSEMKT:SCHE) offers investors a low-cost option for getting exposure to emerging markets. This is another fund that you probably wouldn’t want to invest your child’s entire college fund in, but having a portion of your portfolio in this ETF is worth considering. It provides access to emerging economies like China, Taiwan, India, Brazil, and South Africa — but without the concentrated risk of investing in any single country. This ETF is best used as part of a diversified portfolio that also has exposure to U.S. and international developed markets.

5. Fidelity MSCI Information Technology Index ETF

If you’re bullish on tech, you can express that view through the Fidelity MSCI Information Technology Index ETF (NYSEMKT:FTEC). The benefit of investment here is that, for an extremely low annual fee, the fund provides a basket of tech companies weighted toward top-tier names like Apple and Microsoft. While this fund probably shouldn’t be a core holding, it would be a safe bet to allocate 5% to 10% of your educatin savings portfolio to it for a decade or two. The fund is also a prudent choice for those who are interested in tech but don’t want their funds to become ensnared in the hype of day trading or the lure of headline-grabbing stocks. 

Whichever investment vehicles you use make sure that as you approach the date of decumulation you may want to gradually shift to a more conservative strategy, particularly if your initial strategy was strongly growth oriented. If all goes well, then come the time when your child is on the cusp of starting university, you won’t be dreading a staggering tuition tab thanks to your saving education plan.

For help with a RESP or other savings plans, you may contact the author. Call 289-856-8397 or send an e-mail to support@moneylesson.org

This article is an expression of the author’s personal opinions. The Company will not be held liable in any way for the opinions expressed herein.  

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