Canada is known for its innovation when it comes to poutine, insulin, and ice hockey. One of the lesser-known pioneering efforts from our country was the work it did for the creation of modern-day Exchange-Traded Funds (ETFs) during the 90s.
ETFs allow Canadians to invest at a fraction of the cost of traditional mutual fund portfolios at investment firms or big banks. Since the pioneering efforts to introduce what we now know as the modern-day ETFs, there are over 700 ETFs available today.
With all that you might have heard about them, you might also want to understand that finding the best ETFs in Canada to invest in can be a challenging feat.
I’ve created this article to make that task a lot easier for you. From going over the basics about ETFs to a categorized list of the best ETFs in Canada, this article is the comprehensive guide to help you prepare a worthwhile ETF portfolio.
The prolific ETF market in Canada saw assets grow by a remarkable 28.7% year over year in January 2020 to $211.1 billion.
What is an ETF?
An Exchange-Traded Fund (ETF) is a fund that can be traded on an exchange in the same way as a stock. The fund provider owns a basket of assets and sells shares in that fund to investors. A shareholder for an ETF owns a portion of the ETF without owning the underlying assets owned by the ETF.
ETFs essentially provide you with a way to buy and sell a bulk of assets like stocks, futures contracts, and bonds, without having to select them individually. ETFs are designed to track the performance of the underlying assets they own – like gold or a portfolio of stocks like the S&P 500. However, they trade at prices that typically differ from that of the underlying assets.
The long-term returns from ETFs can also vary from its underlying asset due to expenses and other factors. Investors can trade ETFs on an exchange like the Toronto Stock Exchange, much like stocks.
Pros of ETF Investing
Investing in ETFs offers shareholders several potential benefits that include but are not limited to:
- Tax Benefits: Investors typically incur taxes when they sell their ETFs. Selling other assets like mutual funds can incur taxes several times throughout holding the asset.
- Transparency: When it comes to the price activity for particular ETFs on an exchange, anybody can search for it on the internet. ETFs also disclose their holdings to shareholders daily. On the other hand, the holdings of mutual funds are disclosed on a monthly or quarterly basis.
- Diversification: ETFs offer investors diversification in terms of broad market verticals like bonds, stocks, or specific commodities. They offer further diversity to shareholders across market horizontals like various industries. Individually buying all of the commodities and assets in an ETF would require a great deal more effort and money. Purchasing an ETF provides investors with all the benefits of each asset at the click of a button.
Cons of ETF Investing
ETF investing has its advantages, but it does come with drawbacks you should know before you consider getting into investing in them, including:
- Risk of ETF closing: There is a risk that an ETF you have bought shares of can close. The main reason it can happen is that the fund did not purchase sufficient assets to cover its administrative expenses. The inconvenience of a fund closing is that investors must sell their shares earlier than they might have wanted to – sometimes even at a loss. Reinvesting that capital into other asset classes can incur tax burdens that investors might not have planned for.
- Finding buyers: ETFs are like other securities you purchase at an exchange – the prices on the market determine when it is time to sell. However, it can be challenging to sell ETFs since they are not traded as frequently on the exchange compared to assets like stocks.
- Trading expenses: The cost of ETFs does not necessarily end with the expense ratio. Since ETFs are exchange-traded funds, investors can incur commission fees from online brokers who facilitate the sales. While many brokers have dropped their ETF commissions to zero, it should not come as a surprise if you have to incur commission fees when you are trading ETFs.
Like securities, there are several types of ETFs that you can trade. The first type I will discuss the best ETFs for is all-in-one ETFs. These ETFs, like others, are a bundle of diversified ETFs, but they differ from regular ETFs because they offer substantially higher diversity. It is the most popular type of ETF investors choose due to likely lower fees and automatic rebalancing.
An all-in-one ETF typically contains a wide array of Canadian and international bonds, stocks, and other investments. These ETFs can be designed for specific investment objectives like conservative, growth, balanced, and income.
These are long-term ETFs that offers you the benefits of mutual funds in the form of an ETF. They eliminate the need to hold several funds while taking the burden of rebalancing.
Here are my picks for the top four all-in-one ETFs in Canada.
1. Vanguard Growth ETF Portfolio
- Ticker: TSX:VGRO
- Equity/Fixed Income Split: 80% equity and 20% bonds
- Fees: 0.25% MER
- Dividend Yield: 1.91%
- Market Capitalization: $1.24 billion (May 5, 2020)
VGRO is a growth-centric all-in-one ETF portfolio that started trading on the Toronto Stock Exchange in January 2018. It is an ideal ETF portfolio for investors who don’t want to deal with the hassle of many discrete holdings. It has a wide array of securities across different sectors of the economy. Read a full VGRO review here.
2.iShares Core Balanced ETF Portfolio
- Ticker: TSX:XBAL
- Equity/Fixed Income Split: 60% equity, 40% bonds
- Fees: 0.18% MER
- Dividend Yield: –
- Market Capitalization: $3.05 million (May 5, 2020)
XBAL is an ETF portfolio that seeks long-term capital growth and income by investing in one or more exchange-traded funds that BlackRock Canada or its affiliates manage. It achieves that by replicating the performance of the Sabrient Global Balanced Income Index. It provides investors exposure to fixed income securities, real estate allocations, and equity with a bias towards income.
3.BMO Conservative ETF Portfolio
- Ticker: TSX:ZCON
- Equity/Fixed Income Split: 60% fixed income, 40% equity
- Fees: 0.20% MER
- Dividend Yield: –
- Market Capitalization: $18.8 million (May 5, 2020)
ZCON is a conservative ETF portfolio that seeks to provide income and moderate long-term capital gains through investments in fixed income ETFs and global equity. The ETF rebalances quarterly to strategic index asset allocation weights. It invests in broad-indexed equity and fixed income ETFs. It is essentially an ETF of funds.
4.Horizons Balanced Tri ETF Portfolio
- Ticker: TSX:HBAL
- Equity/Fixed Income Split: 70% equity, 30% fixed income
- Fees: 0.20% MER
- Dividend Yield: 0.20%
- Market Capitalization: $24.89 million (May 5, 2020)
HBAL is a balanced ETF portfolio that seeks long-term capital growth through a balanced portfolio of ETFs. It primarily invests in Horizons’ Total Return Index ETFs. It rebalances semi-annually to reflect a consistent level of balanced risk. It is subject to fees based on its underlying ETFs to remain within the 0.16 to 0.18% range and reach 0.20% inclusive of expense ratios.
This is an article about the best Canadian ETFs, but do not let the title mislead you. It does not mean that it is exclusively geared towards assets within the Canadian economy. Most ETFs in Canada seek to harness the growth of both our economy and that of the US in the south.
Canadian equity ETFs, however, are the funds that invest in the Canadian stock market. Here are the top ETFs that invest in Canadian companies.
5.Vanguard FTSE Canada All Cap ETF
- Ticker: TSX:VCN
- Fees: 0.06% MER
- Dividend Yield: 3.05%
- AUM: $ 2.2 billion (May 5, 2020)
VCN is an ETF portfolio that seeks to track the performance of a broad Canadian equity index to the reasonable extent possible, before fees and expenses. It measures the return on investment of large, mid, and small market capitalization Canadian companies publicly trading on the Canadian market. Currently, the ETF seeks to track the FTSE All Cap Index, investing in large, mid, and small market capitalization stocks on the TSX.
6.Horizons S&P/TSX 60 Index ETF
- Ticker: TSX:HXT
- Fees: 0.03% MER
- Dividend Yield: –
- AUM: $1.86 billion (May 5, 2020)
The Horizons HXT ETF Portfolio seeks to replicate the performance of the S&P/TSX 60 Index (total return) net of expenses. The ETF portfolio is designed to measure the performance of large market capitalization companies publicly traded on the Toronto Stock Exchange.
7.BMO S&P/TSX Capped Composite Index ETF
- Ticker: TSX:ZCN
- Fees: 0.06% MER
- Dividend Yield: 3.82%
- AUM: $3.53 billion (May 5, 2020)
ZCN is a Capped Composite Index ETF incorporated in Canada. The fund is designed to replicate the performance of the S&P/TSX Capped Composite Index net of expenses. The fund seeks to invest in and hold the Constituent Securities of the S&P/TSX Capped Composite Index.
8.iShares S&P/TSX 60 Index ETF
- Ticker: TSX:XIU
- Fees: 0.18% MER
- Dividend Yield: 3.44%
- AUM: $7.83 billion (May 5, 2020)
XIU is an iShares S&P/TSX 60 Index ETF incorporated in Canada. The fund seeks to provide its shareholders with long-term capital growth. The fund invests in the Index Shares underlying the S&P/TSX 60 Index. It invests in the shares based on their proportion in that index.
9.iShares Core S&P/TSX Capped Composite Index ETF
- Ticker: TSX:XIC
- Fees: 0.06% MER
- Dividend Yield: 3.71%
- AUM: $5.78 billion (May 5, 2020)
The XIC is an S&P/TSX Capped Composite Index ET that is established in Canada. The fund seeks to provide investors with long-term capital growth. It invests in the shares of the companies that the S&P/TSX Capped Composite Index comprises of, in the same proportion as they are reflected in the Index.
Here are my top five picks for Canadian ETFs that invest in companies based in the US.
10.Vanguard S&P 500 Index ETF Portfolio
- Ticker: TSX:VFV
- Fees: 0.09% MER
- Dividend Yield: 1.35%
- AUM: $2.69 billion (May 5, 2020)
VFV is an S&P 500 Index ETF that seeks to track the performance of a broad US equity index that measures the investment return from large market capitalization US stocks. It uses efficient and cost-effective index management techniques to provide exposure to large US companies, fully replicating the S&P 500 Index to the extent that it is reasonably possible.
11.BMO S&P 500 Index ETF
- Ticker: TSX:ZSP
- Fees: 0.09% MER
- Dividend Yield: 1.68%
- AUM: $7.53 billion (May 5, 2020)
The BMO S&P 500 Index ETF is a fund designed to replicate the performance of the S&P 500 Index, net of expenses, to the extent possible. The ETF invests in and holds the Constituent Securities of the Index based on the proportion they are reflected in the Index. The ETF trades in US dollars on the TSX.
12.Vanguard US Total Market Index ETF
- Ticker: TSX:VUN
- Fees: 0.16% MER
- Dividend Yield: 1.33%
- AUM: $2.1 billion (May 5, 2020)
VUN is a US Total Market Index ETF that seeks to track, to the extent possible before expenses and fees, the performance of a broad US equity index that measures the return on investment of primarily large market capitalization US stocks. Currently, the fund seeks to track the CRSP US Total Market Index, investing primarily in the stock of US companies.
13.iShares Core S&P US Total Market Index ETF
- Ticker: TSX:XUU
- Fees: 0.07% MER
- Dividend Yield: 1.60%
- AUM: $1.06 billion (May 5, 2020)
XUU is an ETF established in Canada that seeks to provide long-term capital growth by replicating the performance of the S&P Total Market Index, net of expenses. The ETF holds a broad base of stocks of US companies. It invests in all of the stocks the Index comprises. The ETF weights its holdings in the stocks based on market capitalizations.
14.Vanguard S&P 500 Index ETF (CAD-hedged)
- Ticker: TSX:VSP
- Fees: 0.09% MER
- Dividend Yield: (If they have one)
- AUM: $X million (April 25, 2020)
VSP seeks to track, to the extent reasonably possible before expenses and fees, the performance of a broad US equity index that measures the return on investment of large market capitalization US stocks. The Index is hedged to the Canadian dollar. Currently, the ETF seeks to track the S&P 500 Index (CAD Hedged). It invests directly or indirectly in the stock of US companies. It also uses derivative instruments to seek to hedge the US dollar exposure of the securities included in the S&P 500 Index back to the Canadian dollar.
Bond ETFs are similar to regular ETFs in many ways. The main difference is that this type of ETF invests exclusively in bonds. They make benchmark bond indices more accessible to regular investors, and they offer more liquidity as opposed to individual bonds or mutual funds.
Here are the top four picks for bond ETFs you can consider.
15.iShares Core Canadian Short-Term Bond Index ETF (XSB)
- Market Symbol: XSB
- Average Duration: 2.7 years
- Yield to Maturity: 2.7%
- Assets Under Management: $2.26 billion (May 5, 2020)
XSB is a short-term bond index ETF that seeks to provide its investors with income by replicating the performance of the FTSE Canada Short-Term Overall Bond Index, net of expenses.
16.iShares iBoxx $ High Yield Corporate Bond ETF
- Market Symbol: HYG
- Average Duration: 2.81 years
- Yield to Maturity: 5.58%
- Assets Under Management: $19.53 billion (May 5, 2020)
HYG is an ETF fund incorporated in the IS. The ETF seeks to track the investment results of an index composed of US dollar-denominated high-yield corporate bonds.
17.Invesco Senior Loan ETF
- Market Symbol: BKLN
- Average Duration: 5.15 years
- Yield to Maturity: 5.99%
- Assets Under Management: $4.00 billion (May 5, 2020)
BKLN is an ETF incorporated in the US. The fund tracks the market capitalization-weighted S&P/LSTA US Leveraged Loan 100 Index that represents the 100 most substantial loan facilities in the leveraged loan market. Each week the index is reviewed to reflect early principal repayment and to ensure that no loan exceeds 2% of the index.
18.Vanguard Short-Term Corporate Bond ETF
- Market Symbol: VCSH
- Average Duration: 2.64 years
- Yield to Maturity: 2.20%
- Assets Under Management: $24.20 billion (May 5, 2020)
VCSH is a short-term corporate bond that matures within 1-5 years. It seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg Barclays US 1-5 Year Corporate Bond Index.
Dividend ETFs track indexes composed of dividend-paying stocks. Canadian Dividend ETFs are a type of ETF that tracks an index consisting exclusively of Canadian dividend-paying stocks.
Different ETFs have a varying approach to dividend strategies for the portfolio they offer to investors. For instance, some funds select stocks based on dividend yields, while others choose to select them based on locations or the market capitalizations of the underlying companies.
Here are the top three Canadian dividend ETFs.
19.Horizons Active Canadian Dividend ETF
- Ticker: TSX:HAL
- Fees: 0.67% MER
- Dividend Yield: 3.45%
- AUM: $49 million (May 5, 2020)
HAL is a Canadian Dividend ETF that seeks long-term total returns. The fund consists of regular dividend income and modest, long-term capital growth assets. The ETF primarily invests in equity securities of major North American companies that have above-average dividend yields.
20.BMO Canadian Dividend ETF
- Ticker: TSX:ZDV
- Fees: 0.38 MER
- Dividend Yield: 5.64%
- AUM: $390 million (May 5, 2020)
ZDV is a Canadian Dividend ETF that seeks to provide exposure to the performance of a yield-weighted portfolio. It targets the stock of companies with the potential for long-term capital gains.
21.iShares S&P/TSX Canadian Dividend Aristocrats Index ETF
- Ticker: TSX:CDZ
- Fees: 0.66% MER
- Dividend Yield: 5.11%
- AUM: $706 million (May 5, 2020)
CDZ is a Canadian Dividend Aristocrats ETF that seeks to replicate the S&P/TSX Canadian Dividend Aristocrats Index before expenses and fees. It offers investors exposure to a portfolio of high-quality Canadian dividend-paying stocks. Its underlying index screens for large market capitalization Canadian companies that increased ordinary cash dividends each year for at least five consecutive years.
Banks ETFs are funds that specifically invest in the stock of companies operating in the banking sector. Canadian bank ETFs focus exclusively on Canadian banks. These ETFs present investors to get the benefit of owning banking stocks without worrying about choosing the right bank through diversification across Canada’s most significant banks.
Here are my top three picks for Canadian bank ETFs.
22.BMO Equal Weight Banks Index ETF
- Ticker: TSX:ZEB
- Fees: 0.61% MER
- Dividend Yield: 4.28%
- AUM: $997 million (May 5, 2020)
ZEB is an Equal Weight Banks Index ETF incorporated in Canada. The ETF seeks to replicate the performance of the Solactive Equal Weight Canada Banks Index, to the extent possible. The fund seeks to invest in and hold the Constituent Securities of the Index.
23.CI First Asset CanBanc Income Class ETF
- Ticker: TSX:CIC
- Fees: 0.80% MER
- Dividend Yield: 8.02%
- AUM: $135 million (May 5, 2020)
CIC is a Canadian Banking ETF that seeks to track the return on investment for Canada’s most significant financial institutions while generating more income through the sale of covered call options. The ETF does not contain any underlying funds. It aims to provide its investors with the opportunity of capital gains, the lower overall volatility of portfolio returns as opposed to owning a portfolio of common shares of its underlying assets individually, and it offers quarterly dividends.
24.BMO Covered Call Canadian Banks
- Ticker: TSX:ZWB
- Fees: 0.71% MER
- Dividend Yield: 6.78%
- AUM: $1.40 billion (May 5, 2020)
ZWB is a Canadian Bank ETF that seeks to provide its shareholders with exposure to the performance of Canadian banks to generate income and long-term capital gains while reducing downside risk through covered call options.
As the name suggests, gold exchange-traded funds are a commodity ETF that consists of gold as the principal asset. The fund itself holds gold derivative contracts backed by gold. Investing in shares of gold ETFs does not mean you own gold but can benefit from the changes in the price of the commodity.
Here are my top two picks for the best gold ETFs in Canada.
25.iShares Gold Bullion ETF
- Ticker: TSX:CGL
- Fees: 0.55% MER
- Dividend Yield: –
- AUM: $545.0 million (May 5, 2020)
CGL is a Gold ETF that seeks to replicate the performance of the price of gold bullion before expenses and fees. The fund offers investors targeted exposure to the price of gold that is hedged to the Canadian dollar. It offers a convenient and cost-effective exposure to gold bullion without having actually to own the metal.
26.Horizons Enhanced Income Gold Producers ETF
- Ticker: TSX:HEP
- Fees: 0.61% MER
- Dividend Yield: 3.79%
- AUM: $100.20 million (May 5, 2020)
HEP is a Gold ETF with a more balanced approach that also provides its investors with income. The fund aims to have an equal weighting of North American listed gold stocks and to provide an attractive monthly income through dividends. It is a lower-risk ETF that outperforms the price hikes in gold and underperforms drops in gold prices due to the income strategy.
Real estate is among the most sought after sectors for investors in the Canadian economy. However, the barrier to entry is too steep for many even to consider. Real Estate Investment Trusts (REITs) are companies that provide shareholders a slice of property ownership without the hassle that comes with it.
REIT ETFs provide you the ability to benefit from real estate without having to invest in property or individually selecting REITs trading on the stock exchange. REIT ETFs also offer you diversity in the range of properties with a low-cost investment.
Here are my top three picks for the best REIT ETFs in Canada.
27.Vanguard FTSE Canadian Capped REIT Index ETF
- Ticker: TSX:VRE
- Fees: 0.39% MER
- Dividend Yield: 4.59%
- AUM: $206.2 million (May 5, 2020)
The Vanguard FTSE Canadian Capped REIT Index ETF is a fund incorporated in Canada that seeks to track, to the extent possible, before fees and expenses, the performance of the FTSE Canada All Cap Real Estate Capped 25% Index. It has a low management fee among its peers.
28.CI First Asset Canadian REIT ETF
- Ticker: TSX:RIT
- Fees: 0.87% MER
- Dividend Yield: 5.54%
- AUM: $529 million (May 5, 2020)
RIT is a Canadian REIT ETF that seeks long-term total returns that consist of regular income through dividends and long-term capital gains through an actively managed portfolio. The portfolio comprises primarily of Canadian REIT stocks, REOCs and other entities involved in the real estate industry in Canada.
29.iShares S&P/TSX Capped REIT Index ETF
- Ticker: TSX:XRE
- Fees: 0.61% MER
- Dividend Yield: 5.64%
- AUM: $1.1 billion (May 5, 2020)
XRE is a Canadian REIT ETF established in Canada that seeks to provide investors with long-term capital growth through replicating the performance of the S&P/TSX Capped REIT Index, net of expenses. It has a significant portfolio of assets and a high dividend yield. It invests in Index Shares underlying the S&P/TSX Canadian REIT Index in the proportion they are reflected in that Index.
ETF vs. Mutual Funds
Like exchange-traded funds, mutual funds are also a popular investment with the concept of pooled fund investing. Both types of funds often stick to strategies aimed at tracking or replicating the benchmark indices of underlying securities. Both types also represent a common way for investors to diversify their holdings.
There are a few key differences in the way ETFs and mutual funds are managed. Understanding the differences might help you understand why ETF investing is becoming more popular as opposed to mutual funds.
One of the major differences between ETFs and mutual funds is the aspect of taxation that I mentioned earlier. ETFs offer investors an advantage in terms of taxation. Due to the way they are designed, ETFs only incur capital gains tax when you sell your shares. Mutual funds, on the other hand, incur the capital gains tax as the shares are traded throughout the time you hold the investment. Buying and holding ETFs long-term can reduce your tax bills compared to holding mutual funds for the same period.
When you purchase or sell an ETF, you can perform it as a single transaction at one price. ETF investing is less complicated since you can simply trade them one time to open or close a position. Buying or selling mutual funds is more complicated than making a single transaction.
While the process of opening an account or redeeming shares in a mutual fund is not too complex a process, it takes more effort than making a simple trade. You need to call the customer service, fill out paperwork, await the transaction to go through, and wait for the approval to change your position in mutual funds.
Another significant difference is cost-effectiveness. ETFs offer you better value for your money than mutual funds. ETFs are mostly passively managed. They are set up to track the returns of a specific benchmark. There is also no need for investors to go through the process of selecting individual assets.
Mutual funds, on the other hand, are mostly actively managed. There is a reasonable demand for a higher fee for mutual funds since you are employing fund managers for their time and expertise to manage the fund.
Flexibility of Investment
ETFs offer investors a vast assortment of specific trading strategies. There are new ETFs being released constantly that offer investors a terrific level of flexibility. Closely tracking the performance of a certain index or achieving a particular financial goal is more likely with ETFs as opposed to mutual funds. That being said, mutual funds do offer variety as well.
Investors can run into a slew of complications whenever they move a managed portfolio to another investment firm when it comes to mutual funds. Investors can even find themselves having to close fund positions before they can make a transfer, and that can cause significant inconvenience for investors. It can result in losses for them due to the untimely closing of trades.
ETFs, on the other hand, is considered a portable investment. ETFs make switching investment firms a more straightforward affair.
How to Buy ETFs For Free in Canada
I have been using the discount broker Questrade for all my stock and ETF trading for the past eight years. The platform is easy to use, and the support has been outstanding so far. You can buy ETFs for free on the platform, and sell it at a low fee.
You can get $50 in free trades by opening a free Questrade account here.
As you can see, there is a massive landscape of Canadian ETFs you can consider. It offers you a variety of solid options from which you can choose.
I think that with the right knowledge and a narrowed down list of the best ETFs in Canada, you can have an easier time creating a robust ETF portfolio.
Tell me what mixture of ETFs do you have in your portfolio? Do you think I should have included more options? Let me know in the comments below!