The Top Canadian Index Funds to Buy For December 2022

Posted on December 8, 2022 by Mathieu Litalien

If you are just learning how to buy stocks in Canada and don’t have the time to do proper due diligence, or if you simply want a passive investment strategy, there is perhaps nothing better than index investing.

What is Index investing, and why should we be buying Canadian index funds?

Simply put, index investing is a passive strategy that attempts to replicate the returns of a particular index.

This is done through the purchase of Canadian exchange-traded funds (ETFs), or mutual funds that are built to closely track the underlying index. It is also one of the most effective ways to diversify your holdings, and they're available on practically every trading platform and brokerage.

For this particular article, we will be speaking on index ETFs only, as we believe they are more beneficial than mutual funds.

Index investing is one of the simplest investing strategies and one that is recommended by financial gurus.

Here is what some of the most well-respected gurus have had to say when it comes to index funds:

"By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals. Paradoxically, when 'dumb' money acknowledges its limitations, it ceases to be dumb." – Warren Buffet

"The word passive does a disservice to investors considering their options. Indexing provides an effective means of owning the market and allows investors to participate in the returns of a basket of stocks. The basket of stocks changes over time as stocks are added or removed based on its rules." - Charles R. Schwab

Canadian index funds can remove emotions from investing

Research has shown that retail investors consistently underperform the markets. In fact, most hedge funds do as well. At the heart of the issue for retail investors – is emotions.

Index funds are a passive investing approach, and can take emotion right out of the equation, as investors don’t get emotionally attached to any particular stock or company. As values change in terms of prices on individual stocks, it can cause stress and emotional panic selling. With an index fund, because you own a basket of hundreds, sometimes thousands of companies, your concentration risk is reduced significantly.

With this in mind, let’s take a look at the top Canadian ETF Index funds that provide a low-cost and passive investment solution for investors. We'll try to include a wide variety of index funds on this list so that readers with different investment objectives will find something they like.

What are the top Canadian index funds to buy right now?

  • BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN) 
  • iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC)
  • iShares S&P/TSX 60 Index ETF (TSX:XIU)
  • S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)
  • iShares S&P/TSX Capped Info Tech ETF (TSX:XIT)
  • iShares Core S&P U.S. Total Market Index ETF (TSX:XUU)

BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN) & iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC)

Let’s start with the ETFs that cover the broadest collection of Canadian stocks, the S&P/TSX Capped Composite Index.

I’ve listed two - the BMO and iShares versions. In essence, both are pretty much identical and have very similar compositions.

Both track the performance of the S&P/TSX Composite Index which covers approximately 95% of the Canadian equities market and has been the primary benchmark index for Canadian-based, Toronto Stock Exchange-listed companies since 1977.

The ETFs have identical MER fees (0.06%) and have similar holdings. The iShares fund is larger with $8.47 billion in assets as compared to the $6.76 billion held by the BMO fund.

Since this is a capped index intended to represent the broader TSX, the sector weightings are largely in line with the broader market.

As such, financials, energy, industrials, and basic materials dominate the portfolio holdings. A 2021 surge in tech had Shopify sitting as the top holding of this fund. But unfortunately, it has witnessed a significant drawdown and has dropped all the way to the high-teens in terms of largest positions.

The Top 10 of each ETF accounts for approximately 38% of the assets and features several of the big banks including...

  • Royal Bank of Canada (TSX:RY)
  • Toronto-Dominion Bank (TSX:TD)
  • Bank of Nova Scotia (TSX:BNS)
  • Bank of Montreal (TSX:BMO)

Other notable names include...

  • Enbridge (TSX:ENB)
  • Brookfield Asset Management
  • Canadian National Railway (TSX:CNR)

If you are looking to closely track the TSX Index, these two ETFs are your best options. However, if you're looking for an ETF that is laser-focused on the banks, check out our post on Canadian banking ETFs.

iShares S&P/TSX 60 Index ETF (TSX:XIU)

The iShares S&P/TSX 60 Index ETF tracks the 60 biggest stocks on the TSX Index.

These are defined as the biggest in terms of market cap and are considered the most liquid stocks on the index. This is why you see the emergence of Brookfield Asset Management and Shopify in this index fund, as they've become some of the biggest companies in the country.

This ETF is one of the largest in the country with net assets of $10.14 billion and pays out a quarterly distribution that currently yields 2.96%. XIU has a moderate risk profile and a low MER of 0.18%.

The iShares Index ETF has done particularly well over the past number of years. It has outperformed the Canadian Equity fund category over the past one, three, five, and ten-year periods.

In other words, it has consistently outperformed the broader TSX Index. This makes sense, as even though the fund has cyclical exposure, it only has exposure to the largest, most reliable companies in those sectors.

The top 10 stocks account for approximately 45% of the portfolio and the industry weightings closely match that of the index weightings as financials and energy dominate the portfolio.

In 2021, both the material and tech sectors had emerged as some of the largest sectors in this index fund. This is primarily due to the demand for tech and the rising price of gold back in the pandemic. However, those allocations have since fallen as both industries have taken a step back.

In terms of top holdings, if you look closely, they are identical to that of the two previous ETFs which tracked the S&P/TSX Capped Composite Index. The difference is the top 10 accounts for a bigger percentage of assets as there is a smaller number of stocks.

Simply put, XIU is the best blue-chip ETF on the market.

S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)

There is only one ETF that currently tracks Canada’s Dividend Aristocrats. In comparison, there are almost a dozen funds south of the border that track U.S. dividend growth companies.

Aristocrats are stocks that have raised their dividends for at least five consecutive years.

The index fund seeks to replicate the investment of the S&P/TSX Canadian Dividend Aristocrats Index. To be included in the Index, stocks must have a market cap of at least $300 million.

There are currently 97 stocks in the portfolio. It is one of the simplest ways to implement a dividend growth strategy.

The fund has MER fees of 0.66% and pays out a monthly dividend that currently yield’s 3.83%. From 2014 to 2019, the company raised eligible dividends from $0.76101 to $1.11098 per share. This is equal to an average of 9.2% annually. In comparison, the Canadian Dividend Aristocrats have collectively raised dividends by approximately 11.8% over the same time frame.

However, considering many companies cut the dividend during the 2020 pandemic, its growth has slowed as of late. But, it should be able to continue that pace of growth moving forward.

Over the course of the last ten years, this index fund has kept reasonable pace with the TSX Index. However, in a post-pandemic environment, it has lagged significantly, primarily due to the large increases in energy and material stocks that this ETF just doesn't have large exposure to.

The Aristocrat index fund is a well-balanced ETF with most sectors accounting for no more than 20% of holdings. The lone exception is the financial sector which is the top sector weighting at 29%.

The top 10 holdings are quite interesting and outside of the norm. They account for only 24.3% of holdings and no stock accounts for more than 2.91% of holdings. At the time of writing, 2 of the top 5 holdings contain Slate Grocery REIT and Fiera Capital Corp, two relatively unknown companies that are not witnessed in even the top 10 or 15 holdings of the other index funds on this list.

iShares S&P/TSX Capped Info Tech ETF (TSX:XIT)

Over the past decade, the TSX Index has underperformed the U.S. markets in a fairly significant fashion. The main reason? Exposure to technology. Information technology accounts for only 10.3% of the TSX Index.

Although this is up significantly from years past, it pales in comparison to the exposure south of the border. Information technology is the top-weighted sector accounting for 23.4% of the S&P 500.

As mentioned, Canada is starting to form an impressive collection of IT companies. XIT, to put it lightly, soared due to the COVID-19 market crash and the pandemic overall. It has since had a large drawdown due to the popularity of tech companies falling over the short term. However, this is still a great index fund for Canadians who are comfortable with a little more risk.

With management fees of 0.61%, it's fairly expensive to own this index fund. However, the returns, despite the large drawdown in 2022, have been well worth the fees.

Despite a large, 40%+ drawdown in 2022, the fund is still outperforming the TSX Index by a whopping 11% annualized rate over the last half-decade. It becomes even larger over a 10-year timeframe, outperforming it by 14% annually. To give you an idea of how drastic this is, just $10,000 invested in XIT over the last decade would have you sitting on total returns of $55,000. The TSX? Just $15,000.

Obviously, past performance is not indicative of future results. However, if you are bullish on the markets, expect XIT to consistently outperform.

Interestingly, the top four holdings account for 82.27% of the portfolio. These include

  • Constellation Software (TSX:CSU)
  • CGI Group (TSX:GIB.A)
  • Shopify (TSX:SHOP)
  • Open Text (TSX:OTEX)

Combined, the top 10 account for over 95% of assets.

Although this ETF does contain other tech companies, a purchase of XIT is a big bet on the top four holdings that we list above. So, why so heavily weighted?

This lack of diversification is a reflection of a young industry. As mentioned, tech hasn’t had a big presence on the TSX and it has only recently begun to expand.

This is a highly concentrated ETF appropriate for those with a higher risk appetite, and for investors looking to capture the best of the best, TSX-listed technology companies.

iShares Core S&P U.S. Total Market Index ETF (TSX:XUU)

One of the biggest mistakes made by Canadian investors is a lack of exposure to markets outside of the country. The TSX Index is heavily weighted toward financials and is highly dependent on resources.

Considering this, investors should add exposure to equities south of the border.

The iShares Core S&P U.S. Total Market Index ETF is the best and most diversified way to accomplish this. It trades in Canadian dollars and aims to track the performance of the S&P.

It is a relatively young ETF having only been introduced in 2015.

Outside of significantly increasing diversification, it has ultra-low MER fees of 0.07%. It is worth noting however, that this is slightly misleading (more on that later).

The Top 10 securities account for only 23.82% of assets, and there are 3,600 stocks in the portfolio, a testament to its diversification. Not surprisingly tech dominates the top 10 with Microsoft, Apple and Amazon leading the way. Berkshire Hathaway and Johnson & Johnson also crack the top 10.

There is no better way to increase your exposure to the stock markets south of the border. Keep in mind though, that it achieves this diversification through holding underlying ETFs.

And as a result, the ETF is subject to withholding taxes. Since the XUU holds underlying ETFs, it faces a withholding tax of 0.32% regardless if it is held in an RRSP. It is also important investors consider income taxes inside of this fund, as the US dividends will be subject to withholding taxes.

This has the net effect of bumping its MER to 0.39%. Still cheap, but not as eye-catching expenses of 0.07%

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed in this article. Stocktrades Ltd may also be compensated via affiliate links in this post.

Mathieu Litalien

About the author

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha and Stocktrades. Mathieu also focuses primarily on stock research and content production for Premium and the Stocktrades blog.