So many RRSP choices. What to do? ETFs may be an investor's best ticker

Ah, the what-to-buy conundrum of RRSP season.

More than 3,000 mutual fund choices, and thousands more individual stocks, bonds, guaranteed investment certificates, principal-protected notes, closed-end funds and wrap products await you. Or, you can just buy some exchange-traded funds and be done with it.

ETFs are one-stop shopping for all the components you need in a registered retirement savings plan. If you want Canadian stocks, just choose between the blue-chip iUnits S&P/TSX 60 Index Fund or the broader iUnits Composite Canadian Equity Index Fund. If you want bonds, there are three ETFs to choose from. For income trusts, there is a pair of ETFs. There are dozens of ETFs for U.S. and global markets, but only a handful will be of interest to most RRSP investors.

ETFs are beyond simple to use, but they're also a durable, sensible building block for RRSPs. Their ongoing ownership costs are a small fraction of what comparable mutual funds charge, and they deliver the returns of the indexes they track, minus fees. If you compare the returns of mutual funds to those indexes, you'll find that many underperform in the short or long term, and sometimes both.

You can only buy ETFs through an on-line or full-service broker, but even this seeming inconvenience can work to your advantage. While funds can only be bought at end-of-day prices, ETFs can be traded at any moment during the trading day.

There are now just over 235 ETFs listed on the Toronto, New York and American stock exchanges, all of them available to Canadian investors. You can get a list of what's available using the "Filter" function on Globeinvestor.com, or by checking exchange websites -- tsx.com, nyse.com and amex.com.

Now for some examples of how ETFs can be used in RRSP portfolio building. Don't take these as blueprints to be followed exactly in your own account, but rather as models that get you thinking about your own needs.

The 'be your own pension fund' portfolio

Who it's for: Investors who aren't close to retirement and want a portfolio they can buy, hold and ignore, other than to rebalance the weightings in the various asset classes once a year.

Benefits: The consulting firm Watson Wyatt Worldwide says that if you averaged out the holdings of Canadian pension funds, this is the mix you would end up with.

Notes: Watson says the average pension fund has 3 per cent of its holdings in cash, but this has been lumped in with the fixed-income holdings. Pension funds commonly hold alternative investments, which can encompass real estate, investments in private companies and hedge funds. Here, we'll go with a small holding in an ETF that holds real estate investment trusts listed on the TSX.

Fixed income: 40 per cent.

20 per cent iUnits Short Bond Index Fund (XSB-TSX). Offers exposure to short-term bonds, which are more stable than longer-term bonds. Based on the Scotia Capital Short Term Bond Index.

20 per cent iUnits Canadian Bond Broad Market Index Fund (XBB-TSX). Should be a bit more volatile than the short-term bond ETF, but with modestly higher returns. Based on the widely used Scotia Capital Universe Bond Index.

Equities: 57 per cent.

32 per cent iUnits Composite Canadian Equity Index Fund (XIC-TSX). You're buying the benchmark Canadian stock index here.

13 per cent iUnits International Equity C$ Index Fund (XIN-TSX). Tracks the Morgan Stanley Capital International Europe Australasia Far East Index, which is basically everywhere but North America. This fund is hedged so that the impact of a rising or falling Canadian dollar does not affect returns.

12 per cent iUnits S&P 500 C$ Index Fund (XSP-TSX). The S&P 500 is the target index here. Again, currency hedging is used so that only the underlying index determines what your return will be.

Alternative Investments: 3 per cent.

iUnits S&P/TSX Capped REIT Index Fund (XRE-TSX). Holds REITs, which are a lower-yielding but stable type of income trust.

The 'racy but not crazy' portfolio

Who it's for: Investors who find the pension fund mix to be too conservative, or who are young enough to be able to take a riskier stance with their portfolios.

Benefits: More equities and fewer bonds mean the potential for higher returns, but also deeper losses.

Notes: A gold ETF is used here to provide some speculative oomph to the portfolio, but there are dozens of alternative sector ETFs. For example, you could focus on energy stocks, technology or individual countries.

Fixed income: 25 per cent.

20 per cent iUnits Canadian Bond Broad Market Index. Good for a core bond holding that adds portfolio stability.

5 per cent iUnits Real Return Bond Index Fund (XRB). Real return bonds offer protection against inflation.

Equities: 75 per cent.

35 per cent iUnits Composite Canadian Equity Index Fund. Given the 28-per-cent weighting in energy stocks these days, the benchmark Canadian stock index is racier than some might think.

10 per cent iUnits Income Trust Sector Index Fund (XTR-TSX). There are dozens of funds that offer diversified exposure to TSX-listed income trusts, but this ETF has a low MER of 0.55 per cent.

10 per cent iShares Russell 3000 Index Fund (IWV-American Stock Exchange). Gives you an index that includes big, medium and small companies. You're unprotected from Canadian dollar swings, though.

15 per cent iUnits International Equity C$ Index Fund. Cheap and easy global exposure.

5 per cent iShares Comex Gold Trust (IGT-TSX). Designed as a substitute for holding gold bullion, which has been hot lately and offers a hedge against global economic and political uncertainty. The fund trades at one-tenth the price of gold.

The

'income first' portfolio

Who it's for: People who are converting RRSPs into registered retirement income funds and want to generate income from their investments, while also growing their capital a bit.

Benefits: This mix of ETFs would generate a yield of 4.95 per cent, with each individual fund distributing cash quarterly. Given the blue-chip nature of the stocks in both dividend ETFs, it would be reasonable to expect solid capital appreciation over the years, with less volatility than ETFs tracking broader stock indexes.

Notes: You could wring more income out of this portfolio by increasing the weighting of income trusts, but that would also introduce more risk to the mix.

Fixed Income: 35 per cent.

5 per cent iUnits Canadian Short Bond Index. At today's interest rates, offers modest but very reliable income.

30 per cent iUnits Canadian Bond Broad Market Index. Ditto.

Equities: 65 per cent.

20 per cent iUnits Dividend Index Fund (XDV-TSX). This new ETF holds 30 high-yielding TSX stocks, including all the major banks. Think of it as a conservative dividend fund.

10 per cent iShares Dow Jones Select Dividend Index Fund (DVY-NYSE). Holds U.S. dividend stars such as Altria and Bank of America.

35 per cent iUnits Income Trust Sector Index Fund. This is where the real income in this portfolio is generated.

The 'speculator's dream' portfolio

Who it's for: Aggressive, hands-on investors who want to maximize potential returns by focusing in large part on volatile sectors that can deliver huge gains and losses.

Benefits: Exposure to a wide variety of speculative sectors with a proven ability to make outsize gains, and losses.

Notes: No fixed income to slow you down (or slow your descent). Remember to check the ETF rosters of the various exchanges for other speculative plays.

Equities: 100 per cent.

40 per cent iUnits Composite Canadian Equity Index Fund. Oils, gold, mining stocks -- what's not to like about this index if you're an aggressive investor?

15 per cent iShares S&P 500 Value Index Fund (IVE-Amex). Focuses on the value stocks in the S&P 500. You'd think an aggressive investor would prefer a similar growth-oriented ETF, but the value version has been a much better performer.

10 per cent iShares Russell 2000 (IWM-Amex). Offers exposure to the Russell 2000 index of U.S. small-capitalization stocks, which has far outperformed the S&P 500 in recent years.

10 per cent iShares MSCI Emerging Markets Index Fund (EEM-Amex). Alternatively, you could buy a few different individual country ETFs.

5 per cent iShares FTSE/Xinhua China 25 Index Fund (FXI-NYSE). Follows an index based on 25 of the largest, most liquid Chinese companies.

5 per cent Nasdaq-100 Index Tracking Stock (QQQQ-Nasdaq). This heavily traded ETF is the classic technology stock play. It tracks the largest, most liquid non-financials on the Nasdaq.

5 per cent PowerShares WilderHill Clean Energy Portfolio (PBW-Amex). Focuses on companies involved in clean energy and conservation. A bit gimmicky, but it seems to have some traction right now.

5 per cent iShares Comex Gold Trust (IGT-TSX). An obvious choice for today's speculative investor.

5 per cent iUnits S&P/TSX Materials Sector Index Fund (XMA-TSX). Metal producers, including some gold mining companies.

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