Millions of Canadian investors have ditched their mutual funds for exchange-traded funds (ETFs). In this article, we're going to go over some of the best ETFs to buy in Canada today.
Let's take a closer look at some of the best Canadian ETFs, solid choices for almost any investor to use to achieve their long-term goals. Investors can then package a few together to build a truly diverse equity ETF portfolio, paying far lower fees for a diverse portfolio than offered by mutual funds.
For in-depth research and commentary, simply click the ETF you're interested in inside the table.
What are some of the best ETFs to buy in Canada today?
ETF Price 1 Yr Return iShares S&P/TSX 60 Index ETF (TSE:XIU)
The Horizons Capped TSX Composite ETF (TSX:HXCN)
Vanguard FTSE Canada ETF (TSX:VCN)
iShares S&P/TSX Dividend Aristocrats ETF (TSX:CDZ)
Vanguard S&P 500 Index ETF (TSX:VFV)
iShares Core S&P 500 ETF (TSE:XSP)
Vanguard All Cap Ex North America ETF (TSX:VIU)
BMO Aggregate Bond Index ETF (TSX:ZAG)
Our Top Pick For 2024 (Click Here)
iShares TSX 60 ETF (TSX:XIU)
The iShares TSX 60 ETF (TSX:XIU) is one of Canada's oldest ETFs, tracing its history back to 1990. It has traded under its current form on the TSX since 1999, and it has also grown to be Canada's largest ETF, with more than $11 billion in assets under management.
This market index ETF follows the S&P/TSX 60 Index, simply the 60 largest companies trading on the Toronto Stock Exchange. This index is stuffed with names most Canadians know well -- like Royal Bank, Enbridge, Canadian National Railway, and Alimentation Couche Tard, the convenience store giant behind the Circle K brand.
This is a market cap-weighted fund, meaning the largest positions will make up a significant portion of total assets. As it stands today, the largest holding is the Royal Bank of Canada, with over 7% of fund assets invested in just that one stock. Nearly 45% of assets are invested in the fund's top 10 holdings. This may not be enough diversification for some, but it hasn't hampered the fund's long-term returns. Since 1999, this ETF has returned just over 7% per year.
One negative of this fund is the allocation to financial stocks. Our six largest banks dominate Canada's stock market. Add in other big financial firms owned by this ETF; nearly 35% of assets are invested in the financial sector. On the one hand, Canada's banks are among the world's best. They're regarded to be great businesses. But on the other hand, those assets will likely underperform during an economic downturn. That's the nature of banking. So it's a tradeoff many investors might not want to make. Fortunately, we'll feature some ETFs with better diversification below.
This fund has a reasonable 0.18% management expense ratio (MER). However, as you'll see as we go on, there are certainly cheaper options. This ETF is also stuffed with dividend payers, meaning it pays a quarterly dividend back to unitholders. The current yield is approximately 3%.
Horizons Capped TSX Composite ETF (TSX:HXCN)
Some investors might not be comfortable holding the top 60 TSX stocks since that is a relatively concentrated portfolio. After all, some ETFs hold thousands of stocks. The Horizons Capped TSX Composite ETF (TSX:HXCN) is a good choice for those who want exposure to the Canadian equity market but with a little more diversification than a TSX 60 ETF. Rather than holding 60 underlying stocks, this ETF has more than 200 different positions.
This greater diversification should help reduce risk over time. Yes, this ETF still has a strong financial weighting, with 30% of assets invested in the sector. But, unlike the TSX 60 ETF, the financial exposure is more spread out. Instead of owning approximately a dozen financial stocks, this ETF has almost 30 underlying financial sector holdings. It also gives exposure to other sectors a TSX 60 ETF will ignore, like real estate investment trusts (REITs).
There are many different TSX Composite ETFs out there. What makes this one the best? The main thing is this fund's ultra-low-cost fees. It charges just 0.05% as a management fee, translating into just $5 worth of fees for every $10,000 invested. A low MER fund like this translates into better investment returns, ultimately meaning more dollars in investors' pockets.
This ETF is also capped, meaning one stock cannot be more than 10% of its assets. Sometimes, a single stock can make up a huge portion of the TSX Composite Index, as Nortel did in 2000. This ETF ensures investors won't end up with a huge position in a single stock by accident.
iShares and BMO offer comparable TSX Composite ETFs. Both are larger and more liquid than the Horizons offering but have slightly higher management fees. The BMO version has the ticker symbol TSX:ZCN, while the iShares version trades under the ticker TSX:XIC.
The Vanguard FTSE Canada ETF (TSX:VCN) is much like the two TSX ETFs mentioned above, but just different enough that investors should know about it.
Rather than just holding the largest Canadian stocks, the Vanguard FTSE All Cap ETF holds everything from the largest Canadian stocks to various small caps. It only has 176 different stocks in it -- compared to approximately 230 for a TSX Composite ETF -- with a real emphasis on dividend-paying stocks. 29 of 30 top holdings pay a quarterly dividend. As of this writing, the dividend yield was higher than 3%.
The focus on dividends isn't at the detriment of total returns. This fund has delivered some solid capital gains, rising 110% from the fund's inception (September 2013) through July 2023. That's enough to turn a $10,000 initial investment into something worth more than $20,000, assuming those dividends were reinvested.
iShares S&P/TSX Dividend Aristocrats ETF (TSX:CDZ)
Many retirees have turned to dividend-paying ETFs, using them as a passive way to generate the income they need for day-to-day expenses. One of the best Canadian dividend ETFs is the iShares S&P/TSX Dividend Aristocrats ETF (TSX:CDZ).
This ETF owns large, established Canadian companies with a demonstrated history of paying consistent dividends and increasing that payout over time. This results in a steadily growing income stream that is perfect for an investor who wants an inflation-protected passive income stream.
This ETF has 90 holdings, emphasizing the financial, energy, and telecom sectors. Naturally, all holdings pay a dividend. It has performed relatively well over the last decade, approximately doubling an investor's money, assuming all dividends were reinvested. Someone spending their dividends would have a lower return.
There's only one problem with this ETF: the management fee. You'll pay a 0.66% MER to own this fund, making it much more expensive than many other choices on this list.
Vanguard S&P 500 Index ETF (TSX:VFV)
Up next is another entry from Vanguard, the Vanguard S&P 500 Index ETF (TSX:VFV). This market cap-weighted ETF holds all 500 stocks that make up the S&P 500 index, the most influential index tracking American large-cap stocks.
Many Canadian investors might not see the logic in holding American stocks. They live in Canada, work in Canada, and plan to retire here. What's the point in diversifying outside of the Great White North?
It turns out there are plenty of reasons. Firstly, this ETF has performed better than most Canadian ETFs. Since this fund's inception -- which was in 2012 -- the ETF has performed quite well, returning more than 16% per year. That absolutely trounces the performance of most ETFs that track TSX stocks as their benchmark index.
An investment in this fund is an investment in the best companies in the world. Top holdings include Apple, Amazon, Alphabet, Netflix, Exxon Mobil, and Pepsico, among 493 others. And all this costs is a mere 0.09% per year in management fees, which translates into just $9 for every $10,000 invested.
The only real downfall of this fund is all the investments are in U.S. Dollars, while the fund is in Canadian Dollars and trades on the Toronto Stock Exchange. This means it has a certain amount of currency risk. If the Canadian Dollar strengthens compared to its American counterpart, that will hurt returns. You can read a comparison of VFV vs VOO to decide which fund may be right for you.
Each of the major ETF providers offers a very similar S&P 500 ETF. For instance, the BMO S&P 500 ETF has the same 0.09% management fee and invests in the same companies. It trades under the ticker symbol ZSP on the Toronto Stock Exchange.
iShares Core S&P 500 ETF (TSE:XSP)
On the surface, the iShares Core S&P 500 ETF (TSE:XSP) is the same as the Vanguard version we just looked at. It invests in the 500 largest companies that trade on major American stock exchanges with the same weight as these stocks are represented in the underlying index.
The major difference is this ETF is hedged to Canadian Dollars. Meaning if the Canadian Dollar gains against the U.S. Greenback, this ETF will perform much better than one that simply invests in those same U.S. stocks. However, the inverse is also true. This ETF will perform worse if the currency doesn't cooperate.
Surprisingly, this ETF offers an even lower management fee than most pure-play S&P 500 ETFs, meaning you get the currency hedging effectively for free. This fund has a 0.08% management fee.
Vanguard FTSE Developed All Cap Ex North America ETF (TSX:VIU)
Canadian investors shouldn't just have diversification into American markets. There are also a bunch of benefits to diversifying to other markets as well. The Vanguard FTSE Developed All Cap Ex North America ETF (TSX:VIU) allows investors to easily buy a basket of stocks trading in developed markets worldwide.
This ETF is massively diversified, with underlying exposure to almost 4,000 different stocks in various markets. The fund owns stocks in nations like Great Britain, Germany, France, Japan, South Korea, Australia, New Zealand, and about a dozen more countries. It is also much less exposed to financials than your average Canadian ETF, with just 16% of assets invested in that sector. It also has nice-sized investments in the healthcare and technology sectors, two areas where Canada's stock market is a little weak.
The management fee for this product is a very reasonable 0.23%, a small price to pay for exposure to these markets. In fact, many of the markets this fund invests in have underperformed as of late, suggesting there may be additional upside potential as investors rediscover those undervalued markets.
Vanguard also has several worldwide equity ETFs, easy one-fund solutions for investors looking to get access to all corners of the globe. One of the best solutions is the Vanguard All-Equity ETF Portfolio (TSX:VEQT), which owns more than 10,000 different stocks trading in North America, Europe, Asia, and various developing markets.
BMO Aggregate Bond Index ETF (TSX:ZAG)
There are dozens of bond ETFs, yet only one clear winner exists in the space. The BMO Aggregate Bond Index ETF (TSX:ZAG) is the go-to name for Canadian investors who want a quick and easy way to add bond exposure to their portfolios.
This ETF is massive, holding nearly 1,500 bonds. It has exposure to almost every kind of debt, ranging from the most secure creditors to ones with a bit of extra risk. Most of the fund's assets -- about 75% of the total -- are in ultra-safe government bonds, with corporate bonds making up the rest. And even in the corporate bond portion of the portfolio, most assets are invested in corporations with good credit history.
Many investors stick with a 100% equity portfolio; content in the knowledge stocks tend to outperform bonds over time. But bonds play an important role during periods of market weakness. They tend to act as a ballast, protecting capital as the portfolio's equity portion gets hammered. In 2008, for example, bonds eked out a positive return while equity portions of portfolios fell as much as 40%.
Finally, this ETF is also dirt-cheap, with an MER of just 0.09%.
Why switch to ETFs?
The most important reason is fees, of course. A mutual fund can easily charge a 2% management fee, with expenses even higher for some specialty funds. Most ETFs, meanwhile, charge fees about one-tenth that much, or 0.2%. Some specialty ETFs charge more, but most of the big ones charge less, with many charging fees under 0.1% of assets under management.
Lower fees automatically translate into higher returns, at least when you compare an ETF to a similar mutual fund. Remember, your net return on an investment is essentially the gross return minus the fees.
There are only two variables. If one of those variables goes down, that's a good thing. The math doesn't lie; more mutual funds would beat the market if they charged comparable fees to ETFs.
The rise of ETFs has also made investing simpler. The average investor can put their capital into an index ETF with just a few clicks of a mouse. Or, depending on the service they use, an investor can even set automatic withdrawals from their bank account to be immediately invested in ETFs, ensuring they're putting precious capital to work every paycheque or every month.
The finance industry knows ETFs are the future, so it has responded accordingly. Thousands of different ETFs have popped up, ranging from simple products that track broad indexes to ETFs that try to mimic complex investing strategies, or ETFs that assist in avoiding taxable events such as tax-efficient ETFs. It's enough to overwhelm even an experienced investor.
Let's take a closer look at Canadian ETFs, including a brief overview of the asset class, the various providers, and a closer look at a few of the best choices for Canadian investors.
What's an ETF?
Before we tackle the best ETFs, let's back up for a minute. What exactly is an ETF, and why are they solid investments?
An ETF is a pooled basket of securities to track an underlying index. Most ETFs only make changes when the index they follow makes changes, making them among the most passive investments. This lack of activity helps keep fees down. ETFs are bought and sold on stock exchanges, just like individual stocks.
ETFs are like mutual funds in many ways, but there are a few critical distinctions. Mutual funds are actively managed pools of stocks or fixed-income securities, with the manager's goal to beat the underlying index.
In theory, this is quite achievable; after all, you have many smart people working hard towards that goal. In reality, high fees ensure most mutual fund portfolio managers underperform their comparable index over time.
Finally, mutual funds tend to be purchased directly from a financial advisor, while ETFs are purchased directly on the stock exchange -- although there are more and more financial advisors who are abandoning mutual funds in exchange for ETFs. They are similar investments but have a different legal structure.
Since an ETF is a fixed portfolio of securities, computers can easily calculate its net asset value (NAV). This ensures all ETFs trade very close to what they're worth. If an ETF's market price ever deviated from the underlying net asset value in any notable way, active investors would step in and buy, knowing they could capture that spread and make money from it. This all adds up to an incredibly efficient market, a good thing for regular investors.
What about a robo-advisor?
Investors can easily purchase a basket of ETFs through a special financial advisor. These asset managers are called Robo-advisors, and they use software to help uncertain investors build a portfolio full of low-cost ETFs while maintaining a suitable asset allocation. Essentially, it's a financial advisor without spending time with a human. Wealthsimple has surged to the top of the robo-advisor world, winning over customers with low overall fees, good customer service, and many other financial products under one roof.
The industry has gone from a few dozen ETFs to thousands, with multiple ETFs tracking almost every conceivable index. Investors can use ETFs to get direct exposure to just about any country's stock market or use them to invest in specific types of stocks or various other strategies.
Some popular choices include dividend stocks, covered call strategies, or exposure to other countries in a currency-hedged fashion. Some ETFs even allow investors to make leveraged bets on various asset classes, like crude oil or NASDAQ stocks, for those who want to get interested.
There are more than a dozen companies in Canada that provide ETFs. Still, in reality, the sector is dominated by a handful of names.
The largest is BlackRock, which has quietly grown to be the top ETF provider in North America and one of the largest asset management companies worldwide. It had US$8.59 trillion in assets under management at the end of 2022, spread out over dozens of different countries. Its ETFs are marketed under the iShares brand name. Many of Canada's largest ETFs are managed by BlackRock.
Next is Vanguard, the non-profit passive investing giant started by John Bogle in 1974. Vanguard's funds are entirely owned by its customers, with this non-profit approach critical in keeping fees as low as possible.
It had approximately $8 trillion in worldwide assets under management at the end of 2022. Vanguard has only operated in Canada for a little longer than a decade but has grown to the point where it threatens BlackRock's leadership status.
Another big ETF provider in Canada is the Bank of Montreal (BMO), which expanded away from mutual funds and into ETFs in the early 2010s. BMO is the leader in more specialty funds, focusing on more niche areas of the market rather than going up against BlackRock and Vanguard directly.
If, for example, you're looking for an ETF that tracks junior gold companies, BMO likely has it -- and at a pretty reasonable fee, too. It also does a pretty good job of providing mainstream ETFs at costs comparable to its two larger competitors.
There are a number of other ETF providers in Canada. Still, they mostly focus on niche areas that the three main providers don't cover. Some of these ETFs are useful; we'll even profile one or two. But, for the most part, investors should stick with big ETFs provided by the leaders in the sector. Leave the specialty ones for those who want to use them as a substitute for active investing.