If you have read our article on asset location and deciding between a TFSA and RRSP you will be aware of a few conclusions that we came to. If you did not get a chance to read it, you should give it a look before you dive into this one. 

Some of the conclusions follow:

• The decisions between TFSA and an RRSP comes down to tax rates.
• TFSA's are likely the superior account once you get down to the more qualitative aspects such as flexibility and behavioural factors. 
• At 5i Research we prefer growth names in a TFSA, US dividend payers in an RRSP and Canadian dividend payers in an unregistered account.

The Importance of Sectors

What about companies in different sectors? Should an investor focus on putting certain industry exposure into different accounts? By default, if an investor is tilting a portfolio to things like dividend payers or growth companies, there will be an overrepresentation of certain sectors in the different accounts. Let's take a look at what sectors would align with the types of securities we think fit best in an RRSP and TFSA.

It is important to remember that there is no single correct answer here. This guide should offer an investor a starting point for how to attack their tax-advantaged accounts and allow one to adjust as they deem fit. It is also important to remember we are taking the point of view of a Canadian investor here.

The above table follows a few key themes:

1. Growth sectors in a TFSA - Technology, Healthcare
2. Canadian dividend payers in a non-registered account to take advantage of the dividend tax credit.
3. Canadian sectors that have no depth should focus on US names and in turn an RRSP - Industrials, Consumer staples, Consumer discretionary and Healthcare.
4. Slow growth dividend payers in a non-registered account - Financials, Utilities, Telco.
5. If a US dividend payer, default should generally be an RRSP.
6. Don't speculate within tax-advantaged accounts (or at all). 

Special Consideration: Energy and Materials Sector

Point number five deserves a bit more attention as it relates to the energy and materials sectors. While these sectors can be higher growth and make sense for a TFSA, they can also be volatile and unpredictable.

We often find that investors try to speculate within these two specific sectors, for better or worse. One of the worst things an investor can do in a tax-advantaged account is to speculate within them. Losing contribution room and long-term compounding potential can be harmful to one's retirement.

This is why we would focus on quality companies no matter the sector. This does not mean one cannot own high growth or even volatile stocks, it just means to do not waste good room on bad or speculative companies. If one is investing in quality companies in the Materials and Energy sectors, a TFSA can be fine. However, if they are pre-revenue companies or exploration names, it probably makes more sense to own these names in an unregistered company for tax loss purposes since the future results can be so uncertain.

At least this way, if they do not work out, they can be applied to taxable gains opposed to reducing contribution room.

Other items to consider

While we think it makes sense to tilt different accounts to different sectors, and that this will happen by default to some degree, we would caution against having any account 100% in a single sector.

This goes back to the benefits of diversification. As an example, let's say one has 100% of the TFSA invested in technology companies. Technology won't always have a good year. Some years the whole sector will go down or stay flat just due to sentiment or macroeconomic events out of anyone's control. This goes for any sector. In times like this, an investor will appreciate having a bit of diversification across accounts, to help smooth out the ebbs and flows of markets.

This should also mean that an investor has diversification in the non-registered account so when an area unfortunately goes down, it can be utilized for tax-loss selling purposes.

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