So you’ve read about exchange-traded funds (ETFs) and have decided that you want to buy them. What are your options?
If you are planning to buy an ETF and you are worried that learning how to buy ETFs in Canada is going to be a complicated or grueling process, don’t be!
It’s deceptively easy to buy ETFs in Canada. I prepared this guide to inform you about the tools involved and the overall process.
If you follow the steps, you’ll have no trouble buying your first ETF or even creating your first ETF portfolio.
What Is An ETF?
An Exchange Traded Fund or ETF is simply a fund made up of several individual securities, i.e., stocks, bonds, commodities, etc. It’s quite similar to mutual funds in its composition since mutual funds are made up of baskets of securities as well.
But it’s also similar to stocks because it can be bought and sold on an exchange, and you can open a position in an ETF, i.e., buy it or close a position (sell it), at any time (if there is enough demand in the market). ETFs offer the diversification, ease of trading, and lower management fees/expenses and are assets worth considering.
What You’ll Need To Follow This Tutorial
In order to buy an ETF, there are essentially three things you will need:
Adequate funds – Like stocks, you can buy “fractional shares” of an ETF, which essentially means that you don’t have to buy the whole share of an ETF. For example, if an ETF trades at $100, you can opt for buying one-tenth of it for $10 instead of buying the whole thing. This means you can virtually start investing with as little as $1, but that’s not practical. You need to have a decent enough amount that different fees and expenses associated with ETFs (there are very few) don’t cancel out your profits.
Brokerage Account or Robo-advisor– Whether you direct your ETF trades (using a trading platform/discount brokerage) or automate the ETF buying process (robo-advisor), you’ll need a brokerage account. A brokerage account is where you keep the money to buy ETFs.
A Registered or Non-Registered Account – You’ll need to keep the ETFs you buy in a registered or non-registered account. Both the TFSA and RRSP allow you to keep ETFs and offer tax advantages. You should only keep your ETF in a non-registered account when you’ve maxed out your registered ones.
You need several other things, like a basic knowledge of what ETFs are and how they work, whether they are the right asset class for you (based on their strengths and weaknesses), and how to choose the right ETFs. We will get to these later in this article, but for simply buying an ETF in Canada, you’ll need the three things stated above.
How To Buy ETFs In Canada: The Three Methods
You can buy ETFs in Canada through a trading platform or a robo-advisor. With a trading platform, you’ll have to choose the ETF(s) you want to buy yourself. But if you use a robo-advisor, it will buy ETFs for you, basing its choice on your investment goals and risk tolerance. There is a third way as well, i.e., buying ETFs through a financial advisor, but it’s rare and not often very productive.
Each method has its own pros and cons, which mostly boil down to how much control you have over your ETF buying process (and portfolio) and the cost.
How To Buy ETFs In Canada Using A Trading Platform (Wealthsimple Trade)
If you want to have complete control over your ETF portfolio, i.e., you want to buy and sell the ETFs yourself and manage the portfolio “manually,” the trading platform approach is for you.
Best Trading Platforms / Online Brokers in Canada
The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:
|Wealthsimple Trade||Get $50 Signup Bonus|
|Questrade||Get $50 Free Stock Trades|
To learn more, check out my full breakdown of the best trading platforms in Canada here.
Step-1: Open An Online Brokerage Account
There are plenty of online trading platforms that allow you to buy and sell ETFs. The choice primarily depends upon the associated fees and how easy to use the platform actually is.
Questrade is a common choice, but if your sole focus is Canadian ETFs, Wealthsimple Trade might be a better choice because it doesn’t charge you anything when you buy or sell an ETF. The process is simple. You need to:
- Download and sign in to the Wealthsimple Trade app (there is a web browser-based trading platform as well, but the app might offer better functionality)
- Go to Profile > Accounts.
- Choose from RRSP, TFSA, and Personal Account (you can only choose one)
And you are done.
Step-2: Fund Your Account
You can link your bank account to your brokerage account and transfer funds. Additionally, you can set up automatic withdrawals, so a set amount of money falls into your brokerage account at a pre-decided frequency (for example, $500 every month in your TFSA-linked account).
Step-3: Buy The ETF
Once your account is funded (it might take some time) and you have money in your Wealthsimple account to buy the ETF, all you need to know is what to buy. So:
- Find out/decide which ETF you want to buy
- Type in the symbol or name of the ETF in Wealthsimple trade search (it’s mixed between ETFs and individual stocks)
- Click on the ETF =>Click Buy
- Enter how many shares/units you want to buy (if you know the amount you want to invest but not how many shares you want to buy, simply divide the dollar amount with ETF price)
- Choose market buy (it’s the simplest option. Learn about other options for more advanced trading/investing)
- You’ll be notified once your purchase is completed.
And that’s it. That’s how you buy ETFs in Canada (using Wealthsimple). If you have a Questrade account or want to give it a try, this video can offer you relevant information.
How To Buy ETFs In Canada Using A Robo-Advisor
If you want to learn how to buy ETFs in Canada using a robo-advisor, the first thing you should understand is that when you invest with a robo-investor, you don’t buy the ETF; the “advisor” does.
Which Robo-Advisor to Choose
I’ve done an in-depth review of robo-advisors in Canada, and here are my top picks:
- Lowest Fees by a Wide Margin
- Actively Managed Portfolios
- Online Live Chat Support
- Tax-Loss Harvesting
- Reputable Questrade Brand
How to Get Started with Robo-Advisors
The process of buying ETFs with robo-advisor is relatively simple, and they follow the following steps. The order of the steps might not be the same for every investor, so I am listing them below as simple bullet points instead of numbered steps.
- Create an account. You’ll need to provide and verify your personal and financial details.
- Connect your robo-advisor brokerage account with your TFSA, RRSP, or any other registered or non-registered account.
- Answer the questions the robo-advisor has about your risk tolerance and your investment goals. It will create a portfolio for you that will fall into one of the portfolio categories (growth, conservative, etc.). Usually, conservative portfolios have a different “equity” to “fixed income” ETF split compared to growth portfolios. Growth portfolios have more equity ETFs, and conservative portfolios have more fixed-income ETFs.
- The robo-advisor will propose a portfolio to you (made up of ETFs) with expected growth projections (based on the timeline relevant to your investment goals).
It’s important to note that when you are working with a robo-advisor, you don’t have control over which ETFs you are going to buy, nor their quantity. You also can’t change their allocation in your portfolio. Most robo-advisors work with a select basket of ETFs and might not expose you to the full range of ETFs you can buy on your own.
Similarly, compared to buying ETFs on your own using a trading platform, buying them through a robo-advisor actually costs you money. If it charges 0.5% of the portfolio value, you will pay $250 a year for a $50,000 TFSA portfolio.
Why then would robo-advisors be a good route to ETF investment? Because it doesn’t require you to research individual ETFs and develop the necessary investment acumen on your own. The robo-advisor offers completely hands-off investing.
You’ll still have to research which robo-advisor to go with because just one factor, i.e., the fee, can make up a lot of difference in the overall growth of your portfolio. Other factors like portfolio rebalancing should also influence your choice.
How To Buy ETFs In Canada With Financial Advisors?
The financial advisor is a pretty broad umbrella term, especially now when financial advice is steadily moving away from brick-and-mortar office (and sharp suits) to online platforms, AI, and tech-heavy analyses.
But for the sake of simplicity, let’s assume that a financial advisor is an individual that charges you a fee to create and manage your investment (ETF) portfolio.
Why NOT to Choose a Financial Advisor to Buy ETFs
You’ll have to be the one to open a brokerage account in your name and hand over the reins to your advisor. They will then try to buy and sell ETFs for reaching your investment goals.
But they are also expected to charge a fee that will likely be significantly higher than what you might pay with robo-advisors.
And if you are not going by reference or recommendation alone and want to research financial advisors on your own (to find the best one), I would suggest spending the time researching ETFs instead.
If you understand how that particular asset works and know how to analyze different ETFs, you will probably be better off creating and managing your own portfolio.
ETFs vs. Other Investment Assets In Canada
Before you learn how to invest in ETFs, you need to know why you are investing in this particular asset instead of others. You can invest in mutual funds, individual stocks, cryptocurrencies, and even real estate (if you have enough capital), so why invest in ETFs?
The closest match to an ETF is mutual funds. They have one major advantage of ETFs, and it’s that they are actively managed, i.e., financial experts are constantly changing the underlying securities in the mutual funds for optimal returns.
ETFs, on the other hand, usually stick with the same “composition.” But they also cost significantly less. The management fee for mutual funds can easily be 20 times that of ETFs, and it tends to eat into your profits. Mutual funds are also less liquid compared to ETFs.
Speaking of liquidity, individual stocks are even easier to trade and significantly more liquid, even compared to ETFs. They don’t carry any management fee, and their capital appreciation and dividends are not diffused with others and offer full exposure to you, i.e., the investor.
This is a stark comparison to ETFs, where returns are “averaged out.” But ETFs also offer inherent diversification and a significantly better chance of capital preservation.
Cryptocurrencies can be a wild card investment and very difficult to understand and research for an average investor. ETFs are stable, easier to understand, diversified, and offer predictable long-term returns without requiring your active participation. There are crypto ETFs as well, but for performance and returns, they are more akin to cryptocurrencies than ETFs in general.
When it comes to real estate, ETFs have the same advantage as individual stocks and crypto, i.e., cost-barrier to entry.
How To Choose The Right ETF in Canada?
Even before you learn how to buy ETFs in Canada, it’s important to learn which ETFs to buy in the first place. Your choice will be influenced by several different factors. Some of them would be personal, i.e., specific to you, like your risk tolerance, affinity to certain markets or sectors, an understanding of the stock market in general, and your investment goals.
Other factors are relatively more external and speak to the core merit of this particular investment.
Underlying assets: That’s the first thing you should look into. Some of the best ETFs in Canada have a decent equity/fixed-income split; others track specific indexes. Some dividend ETFs can offer quite enticing yields, whereas sector-oriented ETFs allow you to narrow your exposure, which is quite helpful.
For example, if the US legalizes marijuana, an ETF that focuses on cannabis stocks might offer amazing returns. So before you invest in an ETF, make sure you understand what it’s made up of. Most heavily traded ETFs are usually broad-market indexes (especially S&P 500) because they are heavily diversified, and the risk is spread out over several securities.
Costs, Size, And Liquidity: It’s important to understand all the costs associated with holding an ETF, usually as a percentage of your stake (management expense ratio). Larger ETFs, unless the bulk of the shares are owned by a limited number of entities or individuals, usually inspire more confidence than smaller ETFs.
Liquidity indicates how easy an ETF is to get rid of. ETFs with higher trading activity (in general) tend to be more liquid in nature. It shows that there are always investors willing to buy and sell the particular ETF. Higher liquidity also results in relatively tighter bid/ask spreads (better for investors).
Tracking difference: The tracking difference is the practical “disparity” between the performance of the underlying assets and ETFs performance/returns. In an ideal world, there shouldn’t be a difference, but we don’t live in an ideal world.
There are several factors that influence the returns compared to the underlying assets/indexes. Still, the easiest thing for you to understand is that the smaller the tracking difference, the better.
Avoid overlap: Buying two or more ETFs with significant exposure to similar securities, sectors, or indexes can be a mistake. You will have to deal with different liquidity levels and expenses at the cost of no-diversification and similar returns.
When comparing an ETF to another ETF or a different asset class, it’s important to take more than just return potential into account.
ETFs have been a game-changing investment asset class right from the beginning. They are set on a path to replace mutual funds, are the core asset class for robo-advisors, and are preferred over individual stocks by many investors (thanks mostly because of their diversification and ease of use).
But to get the best out of ETFs and to make an ideal portfolio for your investment goals (and risk tolerance), it’s important that you learn more than just how to buy ETFs in Canada. You should learn about different ETF providers, different ETFs and develop your own ETF selection criteria.