As usual when it comes to investing advice on this website, I should admit right up front that I have no letters behind my name that are related to financial fields of study, so feel free to verify any advice that you read on specific recommendations.
There is no way to determine what specific ETFs are best for your portfolio without knowing a whole lot about you and your circumstances (hence the whole idea of going to a financial planner). What I’m looking for when I recommend an ETF is broad diversification and really low fees (MERs), with some consideration for what stock exchange they are on and what currency you purchase them in. That’s about it.
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In recommending these seven ETFs I’m basically just using my own situation as the target group. So essentially someone who is young, has a long investment horizon, a fair degree of risk tolerance, and plenty of room in their RRSP to stick US equities.
Editor’s Note: This became such a popular post on our site that we decided to update it in order to reflect the changing landscape of passive index ETF investing (aka “Couch Potato Investing”) in August of 2016. You can check out the original ETF picks at the bottom of this article in order to see a few other options that are available, and to understand the evolution of ETF options in Canada. I also cut down on the quantity of recommendations for simplicity’s sake, but feel free to do some research and recommend that I take a look at a new offering in the comments! Finally, I’d be remiss if I didn’t mention that if you’re interested in a basic ETF portfolio, you should likely consider one of Canada’s robo advisors such as Wealthsimple and BMO SmartFolio. These relatively new Fintech darlings are changing the way the financial management game is being played in Canada.
This ETF is a fantastic creation for Canadians by Vanguard: King of the passive investing world. For an MER of .27% investors get great exposure to companies from an incredibly broad array of geographical regions, sectors, and overall sizes (small, medium, and large caps). It tracks the FTSE Global All-Cap index, except that it takes out the Canadian portion. What this means is that if you want the simplest of simple solutions, you can basically have a very diversified portfolio created for Canadian investors by allocating a certain percentage of your equity investments here, a certain percentage with VCN (the #2 ETF discussed below), and then a certain percentage in a vanilla bond ETF (see #3). There is no need to re-balance a US ETF against an Emerging Market ETF and a European ETF in order to get your world-wide exposure.
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VXC was created in June of 2014 and quickly replaced my former #1 and #2 favourite ETFs, which you can look back at near the end of this article. The reason for this switch was that Vanguard produced an option that allowed Canadians to get broad market exposure at a relatively low MER in Canadian dollars. US-market ETFs such as VXUS are still slightly cheaper in terms of MER, but there are several advantages to keeping your money in CAD with this TSX-listed ETF. You can still slice a few hundredths of a percent off of this ETF if you break it down into its component parts and re-balance it yourself (i.e. a specific percentage for Asian stocks, US stocks, Euro stocks, etc). It just isn’t worth my time to go through all that, and for most people the trading costs and time management considerations will strongly recommend this ETF as a cornerstone of their portfolio. (XAW) is a very similar product with a slightly lower MER (.22%), but it does not include a certain exposure to China that I like to have. Also, I enjoy supporting Vanguard since they are the original player in index investing. If you’re interested in the nitty-gritty details, check out the ETF’s fact sheet here.
You wanted Canada, Vanguard gave you Canada. This ETF replaces my former choice (XIC) from iShares because it is cheap (now only .06% MER) and gives me slightly broader exposure. While there is at least one ETF that gives Canadian TSX 60 exposure at a slightly cheaper MER (.03%), VCN is my choice because it allows me to easily invest in smaller Canadian companies as well. I like the balance that it gives my overall portfolio since the top 60 stocks in Canada tend to be clustered around a few industries. Overall, there is not a huge difference between (VCN) and (XIU), so don’t panic and go out and sell all of your (XIU) units. If you want to buy (VCN) from here on out that’s a great choice, if you want to stick with XIU, that is a pretty good deal too. Here is VCN’s fact sheet.
You get the impression that I dig Vanguard yet? Look, the name of the company’s founder is John Bogle, and he’s pretty much the Godfather of this whole ETF/passive investing thing – so I’m cool placing my trust in that company. (VAB) replaces (XBB) on this list because when it comes to bonds, MER points matter even more, and (VAB) just can’t be beat here at .14% MER.
This ETF gives you exposure to many different lengths of municipal, federal and provincial government bonds, as well as a healthy dose of investment-grade bonds from corporations in various sectors. This makes it a perfect fit for the conservative part of your investing portfolio. If you want more information on just what is in this ETF, here is the fact sheet.
Note: Most Canadian investors will be just fine with this three ETFs. If they adjust them over time in order to keep their preferred balance, they will be quite far ahead (likely hundreds of thousands of dollars) of the majority of Canadians that are saving and investing for retirement through traditional options such as mutual funds.
The Old School ETF Picks from 2011
Note: Below you can read the original post that reflects how I built my ETF passive investing portfolio back in 2011. As more Canadians have jumped on the couch potato investing bandwagon, better options have become available to us – and at much cheaper prices! This ate away at the advantages the ETFs below enjoyed. Also, if you read our free ETF eBook you might have noticed that I liked US-listed ETFs at the time because of the great exchange rate that CAD enjoyed with the USD. Obviously that reality has changed (and in the exact manner I predicted it would by the way).
1) The FTSE Global All Cap ex US Index (VXUS)
This is my current favorite ETF because it is the cheapest way to get exposure to thousands of stocks outside of North America (getting North American exposure is relatively easy). With a low MER of .16% you get to buy into companies of all sizes across the known world. You hit all the buzzwords like “emerging markets”, “BRICS”, and “N11”. I’m pretty sure that since Vanguard is set on being such a leader in the field, this will be a mainstay of my RRSP contributions for years to come.
2) Vanguard Total Stock Market ETF (VTI)
My Top Seven ETFsVTI makes the perfect complement to VXUS since it tracks the entire USA stock market. I really like the exposure you get to small cap stocks (as opposed to basic, vanilla S&P 500 ETFs). Some people would argue for an overweighting of small-cap stocks in both the global and North American markets since that sector has traditionally seen higher rates of return as a group than more mature, higher-cap stocks have. For me, the higher MERs associated with smaller-cap only ETFs, and the slightly more headaches involved with balancing that sort of equity, are not worth my time at this stage of my net worth. VTI keeps things simple, gives great exposure, and all for the extremely low “price” of a .05% MER!
3) FTSE Canada All Cap Index ETF (VCN)
This is the cheapest “all-stock” ETF that tracks the Canadian market. Alternatively, you can shave off a few MER points and only track the large-cap companies in Canada, and essentially you’ll probably end up pretty close to the same place. Either way you’re basically putting your money into the whole Canadian market. With a MER of .12%, I believe this ETF will slowly start to steal market share from the #4 option on this list.
4) iShares S&P/TSX 60 Index Fund (XIU)
The granddaddy of index ETFs in Canada. The big reason this ETF is on the list as the main competitor to VCN (see above) is that it is simply much more liquid. With many times more units on the market and a long track record, some people will just be more comfortable with this ETF. The biggest reasons I prefer Vanguard’s offering to this iShares “classic” (to be considered a classic in the Canadian ETF market you don’t exactly need to be ancient) is the slightly lower MER (.12% vs .18%) and the fact that XIU only tracks the 60 largest companies in Canada as opposed to the bigger market. That being said, those 60 companies are pretty closely correlated with the entire market (because they are such a large part of it) so you really can’t go too wrong either way. Either VCN or XIU are great choices to put in your TFSA account.
5) The iShares DEX Universe Bond Index Fund (XBB)
Bonds aren’t really my thing as a young person with a defined benefit pension plan. I’ve got a post in the pipeline queue (pipelines and Canada aren’t exactly a great mix at the moment) about why this is. That being said, if you’re looking for bond exposure in Canada people smarter than myself really like this route. Rather than sinking your cash into one or two government-only options, this ETF gives you exposure to many different lengths of municipal, federal and provincial government bonds, as well as a healthy dose of investment-grade bonds from corporations in various sectors. Maybe not the best bet right now (the ETF won’t do great in a rising interest rate environment) but certainly a great option for the more conservative part of your asset allocation.
6) Vanguard U.S. Total Market Index ETF (VUN)
Why in the world do I want another U.S. total market ETF in my portfolio when I’ve already recommended one with an ultra-low MER above? The reason this one makes the list because some investors are hesitant to purchase stocks on the New York Stock Exchange because of the currency risk. I’d argue that it would be very difficult for the Canadian Dollar to get much higher than it has been the last couple of years, but that currency market is notoriously difficult to predict. If you want to keep your money in CAD, and want to stick with the Toronto Stock Exchange, this ETF offers a Canadian-hedged product that will protect you a little from crazy forex swings. It’s also a cheap way to get exposure to the world’s markets (many of those huge US companies are themselves diversified all over the planet – just think of Wal-Mart as one example).
7) Vanguard FTSE Canadian Capped REIT Index ETF (VRE)
“Land is the only thing God isn’t making more of,” my grandfather used to say. Regardless of if this is factually true or not, the idea that a healthy portfolio should have some exposure to real estate is popular in many circles. I think that most people will get enough indirect exposure to Canadian real estate through purchasing the ETFs listed above, but if you want to allocate a small part of your portfolio to owning real estate investment trusts (REITs) I won’t argue with you.
VRE appears to me to be the best option in this case. As one of Vanguard’s relatively new Canadian products it doesn’t have a ton of net assets yet, but it’s MER of .40% is the lowest amongst its closest competitors. The 25% cap keeps any one trust from dominating the market share. I think an argument could be made for simply looking at the holdings of this ETF and simply directly investing in the top 5-10 and avoiding MER fees altogether, but this is a very simply, couch potato solution to getting REIT exposure in your portfolio without thinking about it too much.
If you’re thinking about heading down the DIY investing path, make sure and check out our Questrade Review as it is our preferred discount brokerage (mainly because it allows you to buy ALL ETFs – including the ones listed here for free).
What mix of these do you currently have in your portfolio? Are there superior options I might have missed somewhere?
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