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Exchange-traded funds (ETFs) have made it possible for Canadians to invest at a fraction of the cost of a traditional mutual fund portfolio that you’d find at a big bank or investment firm. No doubt ETFs have been a huge boon for investors, but with more than 700 ETFs now available, finding the best ETF in Canada can be a challenge.
Thankfully, there are a lot of good ETF options in the marketplace. Low-cost indexing pioneers, such as Vanguard, as well as other ETF industry titans such as iShares, have driven down costs so that Canadians can easily build a globally diversified portfolio for around 25 basis points. To put that into perspective, a similar portfolio of mutual funds might cost 2.5%. In dollar terms, assuming a portfolio of $25,000, investors would pay $62.50 per year for an ETF portfolio, while mutual fund investors would pay $625. A massive difference!
Finding the Best ETF in Canada
The ETF landscape in Canada seems to improve every year. The most recent addition to the space is a new trend of all-in-one “asset allocation” ETFs. Finally, we have a balanced mutual fund available in ETF form. These one-ticket ETF solutions eliminate the need to hold multiple funds and takes the burden of rebalancing off of investors’ plates.
The beauty of ETFs is that while you can get broad exposure to the entire world with just one fund, you can also drill down into specific sectors such as REITs, or even into specific industries like cryptocurrency and marijuana. For the purpose of this article, we’ll stick with core “set-it-and-forget-it” ETFs rather than trying to guess which hot new sector or industry will outperform.
Our Pick of the Best Canadian ETFs 2019
How do you put together a list of the best Canadian ETFs? We started with ranking the top ETFs for the Canadian market, the U.S. market, the International market, and the bond market (Canadian and global). Finally, we looked at the all-in-one ETFs as an efficient way to bring everything together under one fund and then ranked the best.
|ETF||Ticker||MER %||# of Holdings||Description|
|Vanguard FTSE Canada All Cap Index ETF||VCN||0.06||213||Provides broad exposure to predominantly Canadian large-, mid- and small-capitalization companies|
|iShares Core S&P U.S. Total Market Index ETF||XUU||0.07||3,548||Offers broad exposure to U.S. large, mid, small, and micro capitalized companies through the S&P Total Market Index|
|iShares Core MSCI All Country World ex Canada Index ETF||XAW||0.22||8,490||Captures large, mid and small cap representation across 22 developed markets countries (excluding Canada) and 23 emerging markets countries.|
|BMO Aggregate Bond Index ETF||ZAG||0.09||952||A broad measure of the Canadian investment-grade fixed income market consisting of Federal, Provincial and Corporate bonds.|
|Vanguard Balanced ETF Portfolio||VBAL||0.25||12,291||Maintains a long-term strategic asset allocation of global equity (approximately 60%) and fixed income (approximately 40%) securities.|
Top Canadian ETF – Vanguard’s VCN
The biggest ETF in Canada (by far) is iShares’ XIU, which tracks the S&P/TSX 60 Index (the largest 60 companies in Canada). But in this case, bigger isn’t necessarily better.
Instead, we like Vanguard’s VCN as the top Canadian ETF due to its exposure to small, medium, and large-cap stocks (213 in total) at a rock-bottom fee of 0.06% MER (compared to 0.18% for XIU).
VCN tracks the FTSE Canada All Cap Index and the fund has delivered a solid annual return of 7.16% since inception in August 2013.
Canada is a small market dominated by the financial and energy sectors. By diversifying our holdings to 213 we reduce the risk of concentrating our investments in those two sectors and get exposure to small and medium-sized companies that may be poised to break out.
Top U.S. ETF – iShares’ XUU
The U.S. stock market is the largest in the world and so it stands to reason that you’d want to own the entire market to get exposure to American ingenuity at its finest.
iShares got the diversification right with its Core S&P US Total Market Index ETF (Ticker: XUU). With an ultra-low MER of 0.07%, XUU holds an incredible 3,548 stocks with all the familiar faces such as Microsoft, Apple, Amazon, Alphabet, and Facebook, plus hundreds of small-cap firms you’ve never heard of before.
XUU is a fund of funds, meaning its underlying holdings actually consist of four other iShares’ ETFs.
- IVV iShares Core S&P ETF
- ITOT iShares Core S&P Total U.S. Stock
- IJH iShares Core S&P Mid-Cap ETF
- IJR iShares Core S&P Small-Cap ETF
Two of its top three sector holdings are technology and healthcare, which you’ll barely find in the Canadian market. That reason alone should be enough for Canadian investors to add U.S. exposure to their portfolios.
XUU has returned 11.17% since inception in February 2015.
Top International ETF – iShares’ XAW
One of the great ETF revelations occurred several years ago when Vanguard and iShares introduced their All-World ex Canada ETFs. What that means is that for the first time, Canadian investors could build exposure to every global market (minus Canada) with just one fund. Before the advent of these All-World funds, investors needed a minimum of four-five funds to construct a proper globally diversified portfolio containing Canadian, U.S., International, and Emerging Markets.
iShares’ XAW stands out ahead of Vanguard’s VXC due to its lower cost (0.22%) and more tax efficient structure. It’s complicated but, in a nutshell, Canadian investors are subject to foreign withholding tax on dividends, adding another 30 to 40 basis points to the cost of these ETFs. XAW is a “fund-of-funds”, with its underlying holdings made up of other U.S.-listed iShares ETFs. The one exception is that it gets its developed market exposure from XEF – a Canadian-listed ETF that holds its underlying stocks directly – making XAW slightly more tax efficient than its main competition VXC.
XAW comes with a MER of 0.22% and holds 8,490 large, mid, and small cap stocks across the U.S., International, and Emerging markets. The fund has returned 8.61% since inception in February 2015.
Top Bond ETF – BMO’s ZAG
Most investors need a dose of fixed income in their portfolios. Bonds help reduce volatility, making it easier for investors to ride out a market correction or crash without losing their nerve.
The largest bond ETF in Canada is BMO’s Aggregate Bond Index ETF (Ticker: ZAG). It’s designed to track the FTSE TMX Canada UniverseXM Bond Index, holding a mix of federal, provincial, and corporate bonds at both short- and long-term durations.
ZAG has been around since January 2010 and has delivered annual returns of 3.96%. It comes with a MER of just 0.09%.
An honourable mention goes to Vanguard’s Canadian Aggregate Bond Index (Ticker: VAB). It tracks the Bloomberg Barclays Global Aggregate Canadian Float Adjusted Bond Index.
VAB launched in November 2011 and has delivered annual returns of 3.27% since inception. The fund comes with a MER of 0.09%.
Top All-in-One ETF – Vanguard’s VBAL
These funds have been called one-stop ETFs, one-ticket solutions, asset-allocation ETFs, and balanced ETFs. For the purpose of this article we’ll call them “All-in-One ETFs”.
Investors have several choices when it comes to all-in-one ETFs. We’ll briefly highlight all of the different options before declaring a winner.
First up is Vanguard, who arguably changed the game for DIY investors (and put robo-advisors on notice) with the introduction of its line-up of all-in-one ETFs. They include:
- Vanguard Conservative Income ETF Portfolio (VCIP) – 20% equities / 80% bonds
- Vanguard Conservative ETF Portfolio (VCNS) – 40% equities / 60% bonds
- Vanguard Balanced ETF Portfolio (VBAL) – 60% equities / 40% bonds
- Vanguard Growth ETF Portfolio (VGRO) – 80% equities / 20% bonds
- Vanguard All-Equity ETF Portfolio (VEQT) – 100% equities
Each of the above ETFs comes with a low-cost MER of 0.25%
Next up is iShares’ asset allocation ETFs:
- iShares Core Balanced ETF Portfolio (XBAL) – 60% equities / 40% bonds
- iShares Core Growth ETF Portfolio (XGRO) – 80% equities / 20% bonds
The iShares funds are expected to have a MER of 0.21%.
BMO also launched three asset allocation ETFs:
- BMO Conservative ETF (ZCON): 40% equities / 60% bonds
- BMO Balanced ETF (ZBAL): 60% equities / 40% bonds
- BMO Growth ETF (ZGRO): 80% equities / 20% bonds
The three BMO all-in-one ETFs come with a MER of 0.20%.
We decided to crown Vanguard the winner of this category due to the breadth of its offerings for the ultra-conservative to ultra-aggressive investor, and everything in between.
I personally switched my previous two-ETF portfolio, consisting of VCN and VXC, to the new 100% equities all-in-one ETF VEQT.
Personal preferences aside, I stand by my statement that most investors should add bonds to their portfolio to smooth out the ride. For that reason, I’ll highlight the classic 60/40 balanced portfolio – VBAL – as the top all-in-one ETF in Canada.
As “set-it-and-forget-it” as investing gets, VBAL offers instant global diversification with more than 12,000 holdings. A fund of funds, VBAL is made up of the following underlying ETFs:
- Vanguard US Total Market Index ETF – 23.8%
- Vanguard Canadian Aggregate Bond Index ETF – 23.6%
- Vanguard FTSE Canada All Cap Index ETF – 17.9%
- Vanguard FTSE Developed All Cap ex North America Index ETF – 13.8%
- Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged – 9.2%
- Vanguard US Aggregate Bond Index ETF CAD-hedged – 7.2%
- Vanguard FTSE Emerging Markets All Cap Index ETF – 4.5%
One area to highlight is the exposure to both U.S. and global bonds, which most investors can’t get in a typical ETF or mutual fund portfolio.
How to Invest in ETFs
Now you have a list of the best Canadian ETFs, but how do you go about investing in them? That depends on whether you want to be a do-it-yourself investor or want to take a more hands-off approach to investing. Either way, here’s a brief explanation of how to invest.
For DIY investors, you’ll want to open a discount brokerage account. The lowest cost option is at Questrade, where you can purchase ETFs for free and there are no annual fees no matter what your account size. Their other trading fees range from $4.95 to $9.95, and their account minimum is $1,000. If you transfer your RRSPs or TFSAs from another institution, Questrade will cover your transfer fees. See our full Questrade review for all the nitty-gritty details.
Once your discount brokerage account is set-up, you’ll need to fund the account with a contribution from your bank. You can do this with a one-time lump sum or with regular automatic contributions.
From there you’ll want to select your ETF, or portfolio of ETFs, by entering the ticker symbol(s) and purchasing the appropriate number of units. Unless you hold an all-in-one balanced ETF, you’ll need to do your own portfolio rebalancing. Decide on some rules. Let’s say your target allocation is 33% Canadian, 33% U.S., 33% International. You can either rebalance whenever you add new money by contributing to the fund that is lagging behind. Or you can rebalance once or twice a year by selling some of the top performing fund and buying more of the fund with the poorest returns. Buy low, sell high. That’s the name of the game.
For investors looking for some hand-holding through the process but who still want to save on fees, a robo-advisor is worth a look. Robo-advisors, or digital advisors, allow investors to build a portfolio of low-cost ETFs and will automatically rebalance your portfolio as you add new money or whenever your portfolio drifts away from its target allocation. Most robo advisors charge a management fee of around 0.40 – 0.50% to monitor your portfolio.
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 the leading Canada’s robo advisors, such as Wealthsimple (our top pick) and BMO SmartFolio. These relatively new Fintech darlings are changing the way the financial management game is being played in Canada.
ETFs vs. Mutual Funds
How do you know if ETFs are suitable for you as an investor? ETFs are like mutual funds in that they hold baskets of securities (like stocks or bonds) that can either be passively or actively managed. One key difference is that ETFs trade like stocks on an exchange, while mutual funds can only be bought and sold at the end of a trading day at the same price for all investors.
Mutual funds can be advantageous for new investors who make small, regular bi-weekly or monthly contributions. That’s because investors aren’t charged a commission for buying and selling mutual funds, making them a great choice for accumulating savings through dollar cost averaging.
ETFs, on the other hand, will likely cost around $10 to trade at many of the big bank discount brokerages. You can also try commission-free ETF purchases at Questrade.
The other massive difference between mutual funds and ETFs in Canada is the fees. The average mutual fund sold in Canada comes with a management expense ratio (MER) greater than 2%. Meanwhile, it’s possible to build a globally diversified portfolio of ETFs for around 0.25%.
Still, mutual fund sales vastly outnumber ETF sales in Canada. Mutual fund assets totalled $1.53 trillion at the end of March 2019, compared to ETF assets, which reached a high of $172.9 billion at the end of March 2019.
The Canadian ETF landscape continues to get better and offer investors more robust options from which to choose. In fact, it’s never been easier and cheaper to build your own portfolio using the best ETFs in Canada.
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). For investors leaning towards a robo advisor, it's worth your while to check out Wealthsimple. The combination of reasonable pricing, overall usability, and unique perks make it our top choice.
What mix of these do you currently have in your portfolio? Are there superior options I might have missed somewhere? Let us know!
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