When researching the best ETFs in Canada, investors should consider a mix of broad market exposure, stability from large-cap stocks, and international diversification. The following five ETFs offer a comprehensive approach to building a diversified and well-rounded Canadian portfolio.
Each ETF brings unique benefits, making them suitable for various investment strategies and goals, in addition to working well together within a comprehensive portfolio.
| ETF | MER | Dividend Yield | 1-Year Return | 3-Year Return (annualized) | 5-Year Return (annualized) |
| VCN | 0.05% | 2.5% | 10% | 8% | 7% |
| XIC | 0.06% | 2.9% | 9% | 7.5% | 6.8% |
| ZCN | 0.06% | 3.0% | 8.5% | 7% | 6.5% |
| HXT | 0.04% | N/A | 11% | 9% | 8% |
| EWC | 0.51% | 2.0% | 10.5% | 8.2% | 7.5% |
Vanguard FTSE Canada All Cap ETF (VCN) offers broad market coverage by including large, mid, and small-cap Canadian stocks. Known for its low management expense ratio (MER) of 0.05%, it is cost-effective for long-term investors. The ETF”s diversification across various sectors reduces sector-specific risks.
Historically, VCN has provided stable and consistent returns, reflecting the overall performance of the Canadian economy. It offers a dividend reinvestment plan (DRIP), allowing dividends to be reinvested into the fund.
Top Holdings:
- Royal Bank of Canada
- Toronto-Dominion Bank
- Enbridge Inc.
- Canadian National Railway Company
- Bank of Nova Scotia
VCN is ideal for long-term growth investors seeking broad market exposure at a low cost and those looking to diversify their Canadian holdings across all cap sizes. It complements more focused ETFs by providing wide market exposure.
Pros and Cons
- Broad market exposure and growth potential
- Subject to overall market volatility.
iShares Core S&P/TSX Capped Composite ETF (XIC) tracks the S&P/TSX Capped Composite Index, representing about 95% of the Canadian equity market. With a low MER of 0.06%, it is an affordable option for investors. High liquidity makes it easy to buy and sell without significant price changes.
Its performance mirrors the overall Canadian market, offering consistent returns in line with the broader economy.
Top Holdings:
- Shopify Inc.
- Royal Bank of Canada
- Toronto-Dominion Bank
- Canadian National Railway Company
- Enbridge Inc.
XIC provides broad market coverage, complementing other ETFs that might focus on specific sectors or cap sizes. XIC is suitable for investors wanting exposure to a wide range of Canadian companies and serves well as a core holding in a diversified portfolio.
Pros and Cons
- Diversified with growth potential
- High liquidity reduces transaction costs
- Market fluctuations impact performance.
BMO S&P/TSX Capped Composite ETF (ZCN) aims to replicate the S&P/TSX Capped Composite Index, covering a significant portion of the Canadian market. It has a competitive MER of 0.06%, enhancing net returns, along with a steady dividend yield of approximately 3.0%, making it appealing to income-focused investors.
Top Holdings:
- Shopify Inc.
- Royal Bank of Canada
- Toronto-Dominion Bank
- Canadian National Railway Company
- Enbridge Inc.
ZCN provides returns that closely follow the performance of the Canadian market and adds broad, diversified exposure, making it a good complement to sector-specific or international ETFs. This ETF suits investors looking to cover the entire Canadian market and cost-conscious investors seeking low-fee options.
Pros and Cons
- Broad exposure mitigates sector risk but follows market trends.
Horizons S&P/TSX 60 Index ETF (HXT) focuses on the 60 largest companies in Canada, providing exposure to the most stable and established firms. It uses a total return swap structure, enhancing tax efficiency by minimizing taxable distributions. Historically, HXT has boasted strong performance due to its focus on the largest and most successful Canadian companies and offers the option to reinvest dividends. The expense ratio is a very low 0.04%.
Top Holdings:
- Royal Bank of Canada
- Toronto-Dominion Bank
- Enbridge Inc.
- Canadian National Railway Company
- Bank of Nova Scotia
This ETF complements broader ETFs with its focus on large-cap, stable companies and is suitable for investors seeking stability and growth from large, well-established companies and those looking for tax-efficient investment options.
Pros and Cons
- Stability and tax efficiency
- Potential tax and regulatory risks from the swap structure.
iShares MSCI Canada Index ETF (EWC) provides exposure to large and mid-sized Canadian companies for both domestic and international investors. It includes various sectors, offering diversified exposure, and works well alongside domestic-focused ETFs in a portfolio by attracting international investors and offering a different perspective on the Canadian market.
Over time, it has provided solid returns reflecting the performance of large and mid-cap Canadian companies. High trading volume ensures easy buy/sell transactions. The expense ratio is higher at 0.51%, but it offers international diversification benefits.
Top Holdings:
- Shopify Inc.
- Royal Bank of Canada
- Toronto-Dominion Bank
- Canadian National Railway Company
- Enbridge Inc.
EWC is suitable for investors seeking a diversified Canadian portfolio with sector exposure and those looking to invest in Canada with a global perspective.
Pros and Cons
- International diversification
- International diversification benefits
- Higher expense ratio compared to domestic ETFs
Final Thoughts and Considerations
When looking at ETFs in Canada, those listed above complement each other by providing a mix of broad market exposure (VCN, XIC, ZCN), focused large-cap stability (HXT), and international diversification (EWC). This mix allows investors to build a well-rounded Canadian portfolio that benefits from the stability of large-cap stocks, the growth potential of small and mid-cap stocks, and sector diversification.
Before purchasing, investors should consider their investment goals, costs (such as MER), tax implications, and current market conditions. These considerations will help investors make informed decisions and build a portfolio tailored to their individual needs and goals.
