The LWAS strategy for your tax-free savings account is mighty tempting as we head into a new year.
That’s let’s wait and see. So much is up in the air right now – why not take a pause before taking advantage of a fresh $7,000 in contribution room for TFSAs in 2025? There are two good answers to this question, the first of them being the potential that stocks can keep generating decent returns. The other reason is that even nervous investors have options for earning a decent return in the near term.
Here are five TFSA ideas for investors with various levels of optimism for the year ahead:
You’re optimistic stock markets can keep it up:
Two back-to-back fantastic years for stocks increase the risk of a sharp pullback, and there’s plenty of uncertainty ahead for the all-important U.S. economy as president-elect Donald Trump returns to the White House. On the plus side, we have so far avoided recession and there are signs of somewhat strong economic growth next year. Maybe stocks will deliver again. If you agree, consider getting your fair share with an all-equity asset allocation exchange-traded fund.
These ETFs give you exposure to stock markets in Canada, the United States and internationally, so you’re covered if other markets take over from the S&P 500 as global leaders.
You want to be in stocks, but worry about sharp declines
Low- or minimum-volatility ETFs have kept up well in recent years with conventional equity funds, but past experience suggests they could experience a modestly less severe decline in a market pullback. Example: The iShares MSCI Min Vol Canada Index ETF (XMV-T) lost 1.3 per cent in 2022, while the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T) lost 5.9 per cent.
You need a year to see how things shake out in financial markets
Change and disruption seem more constant than ever in the financial world, so it’s unlikely we’ll find ourselves in a moment of greater clarity one year from now. But let’s say you want to see how a Trump administration conducts itself while keeping your money safe. A one-year guaranteed investment certificate is a reasonable option if you can get a rate of 3.5 per cent or more.
At 3 to 4 per cent, you’ve got a comfortable cushion above the recent inflation rate of 1.9 per cent. Cashable GICs are a better bet if you think you may want to bail before maturity, but you give up yield for that convenience. Royal Bank of Canada had a late December special one-year cashable GIC rate of 3 per cent.
You want dividend income, but dislike stock-market drama
Utility stocks were pounded when interest rates were high, but they’ve come back into vogue. Rising share prices mean declining dividend yields, but you could still get a yield of 4.1 per cent from the BMO Equal Weight Utilities Index ETF (ZUT-T) as of late December.
Utility stocks are a classic defensive asset, which means they should lose less than the broader market in a pullback. Rising rates are the big threat to utilities, but it’s hard to see a sustained increase in rates in today’s economic climate.
You want to stockpile U.S. dollars
The Canadian dollar hit multiyear lows in 2024 against the U.S. buck and there’s little happening right now to raise optimism about a sustained rebound. If you have a need for U.S. dollars for travel, for business or because you believe in them as an essential asset, then consider a U.S.-dollar investing product for holding cash.
One of the hottest selling ETFs in November was the Purpose U.S. Cash Fund (PSU.U-T), which holds its assets in cash accounts at major banks. The after-fee yield on this fund was 4.4 per cent in late December. There are also U.S.-dollar versions of the popular investment savings account, which is basically a savings-like account you buy and sell like a mutual fund. Example: The Equitable U.S. High Interest Savings Account (EQB1100) had a recent rate of 3.65 per cent. That compares to 2.9 per cent for the Canadian-dollar version of this product.