As February 2024 nears its end, it’s crucial to remember the Registered Retirement Savings Plan (RRSP) contribution deadline for the 2023 tax year, which allows for tax deductions on contributions made in the first 60 days.
But if you’ve already maximized your RRSP and have additional funds, consider focusing on your Tax-Free Savings Account (TFSA) next, given its significant tax benefits. Income earned in a TFSA is tax-free, making it an excellent choice for both saving and investing.
With a $7,000 TFSA contribution limit for 2024, an effective way to utilize this is by investing in a low-cost index exchange-traded fund (ETF). This approach offers market-wide exposure and growth potential while keeping investment costs low. Here’s a strategy for investing your $7,000 TFSA contribution effectively.
Going for aggressive growth
Before diving into the ETF pick, it’s crucial to assess your investment objectives, risk tolerance, and time horizon. If you’re a long-term investor aiming for growth and are comfortable with high volatility, this information is geared towards you.
However, if you prefer a more conservative approach, this particular ETF might not align with your investment strategy. The ETF in focus here is one that tracks the Nasdaq-100 Index. This index comprises the 100 largest non-financial companies listed on the Nasdaq stock exchange.
It’s worth noting that the index is heavily influenced by growth stocks, primarily from the technology, communications, and consumer discretionary sectors. This composition makes it a dynamic and potentially high-growth option but also introduces a higher level of volatility compared to more diversified indexes.
Historically, the Nasdaq-100 Index has been a strong performer, attracting investors looking to make a concentrated bet on U.S. stocks, especially within the tech and related sectors. Its performance in recent years has underscored its appeal to those seeking aggressive growth and willing to navigate the ups and downs associated with these market segments.
The ETFs to use
You can’t invest directly in the Nasdaq-100 Index, so you’ll need to use an ETF that tracks it. My top picks for this purpose are Invesco Nasdaq-100 Index ETF (TSX: QQC) and Invesco Nasdaq-100 Index ETF (CAD-Hedged) (TSX: QQC.F).
Both ETFs aim to replicate the performance of the Nasdaq-100 by investing in all the underlying stocks in the index, essentially wrapping their U.S.-listed ETF counterparts. This access comes with a low expense ratio of 0.20%, making them a cost-effective option for investors.
A key distinction between the two is their approach to currency fluctuation. QQC is not currency-hedged, meaning its performance can rise with the appreciation of the U.S. dollar against the Canadian dollar or fall if the Canadian dollar strengthens.
However, QQC.F employs currency hedging strategies to neutralize the impact of currency movements, offering a layer of protection against fluctuations in the USD-CAD exchange rate.
