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ETFs can be much more flexible for active investors. Read our expert's top trading strategies to get better returns on your ETF portolio.

Many investors use exchange-traded funds (ETFs) as a buy-and-hold investment solution, patiently putting their retirement savings in these passive investment vehicles.

But ETFs can be much more flexible for more active investors, with many using them rather than individual stocks.

These profitable ETF trading strategies can be quite lucrative, provided you know what you’re doing.

To start ETF trading, we recommend using Questrade and Wealthsimple Invest.

Let’s take a closer look at five different strategies that you can use for your own portfolio, moves that should help the average investor get better returns.

1. Put Proper Investments In Proper Accounts

We’ll start with the basics: make sure you think about which type of investment goes in each type of account.

Let’s start with bonds. Bonds pay interest, which is fully taxable at your marginal tax rate. This can be especially harmful to your returns if you are in a higher tax bracket.

You’ll want to stick your bonds into either your TFSA or RRSP to lessen the impact of taxes.

Canadian stocks can be safely held in any account. These companies pay dividends, which are taxed at a much better rate than interest, thanks to the Dividend Tax Credit.

You can avoid paying any dividend or capital gains taxes by putting domestic stocks in your TFSA or RRSP. Many investors can easily do this, but some have maxed out both accounts.

Finally, the thing to remember when it comes to U.S. or other foreign stocks is you’ll be stuck paying a foreign withholding tax if you have these securities in either a taxable or TFSA account.

Once again, this can be avoided if you stick your U.S. or foreign stock ETFs into your RRSP.

Many investors won’t have a taxable account. They don’t even max out their RRSP or TFSA space simply because they run out of capital. If that’s you, then just make sure your international stocks end up in an RRSP and use your TFSA for Canadian stocks.

It doesn’t matter if you’re a short-term ETF trader or a long-term investor, minimizing taxes is an easy way to ensure more dollars end up in your pocket, exactly where they belong.

2. Take Advantage of Short-Term Bets

ETF trading is an easy way to bet on certain trends over the short-term. Using these diverse investments is much easier than picking one or two stocks — and it’s usually safer too.

For example, you could research hundreds of oil producers currently trading on North American stock exchanges and invest in a few of the better operators.

But that carries a certain amount of risk. What happens if a company runs into an unforeseen problem?

Using individual stocks versus an ETF adds another layer of complexity to the trade. First, you must get the overall thesis right. Then, you must use your knowledge to pick the right stock.

It’s tough enough to get the first part of that equation right. The last thing you want to do is get the thesis right and then pick the wrong stock.

This is where buying an ETF really makes sense. If oil marches higher, an energy ETF like iShares S&P TSX Capped Energy Index Fund (TSX:XEG) will also go up.

Some of the individual companies that make up the ETF will be left behind, but they won’t matter. If oil cooperates, the ETF will be a good investment.

Making bets on a sector using ETFs will also save you on commission costs. Remember, it’s free to buy ETFs if you use Questrade as your online broker.

You’ll only have to pay a fee when you sell, and even then, it’s one of the lowest among all the online brokers.

As a bonus, you’ll get 50 free trades when you start investing with Questrade.

If you don’t want to pay any commissions at all, try Wealthsimple Trade — a mobile-only app that allows you to buy and sell stocks and ETFs for free. Plus, you can take advantage of our exclusive promo offer: open a new Wealthsimple Trade account, and get a $10 cash bonus + $0 commission trades. All you have to do is deposit $100 and buy $100 worth of stock within the first 45 days.

Start investing with Questrade and get $50 in free trades!

3. Use Dollar-Cost Averaging

Slowly putting savings to work in various assets isn’t a strategy that will impress a lot of people at a dinner party, but it’s effective, simple, and anyone can do.

Let’s face it. Many short-term trading techniques, complicated trading systems, and various other ways investors use to eke out extra returns are only as good as the person using the strategy.

Sure, many folks use these methods effectively, but many more struggle with them. Some even end up losing money.

Dollar-cost averaging, meanwhile, is a worthwhile pursuit because it’s simple. All you need to do is put aside a certain amount from your paycheque, invest it in your desired asset allocation, and watch the dollars pile up over the years.

The simplicity of dollar-cost averaging is one of its biggest downfalls, although that’s not the strategy’s fault. Investors will often tinker with a perfectly good portfolio simply because they’re impatient or because they feel the need to do something.

There’s nothing wrong with trying to maximize returns. Just remember to do so effectively. Stick to useful trading strategies proven to work.

4. Hedge Your Portfolio

Using an ETF to guard against big declines is an easy way to protect your portfolio from market crashes. I bet many investors wished they would have done this before COVID-19 crushed their portfolios.

Sophisticated investors will usually use options to hedge against potential declines.

But options are risky for average Joe investors. You need a certain amount of expertise to properly use them. Many investors don’t even bother delving into this complex part of the market, and I don’t blame them. It’s just not worth the risk.

Besides, it’s easy to use ETFs to hedge your portfolio. Say you have a big percentage of your investable assets in an ETF that tracks the TSX Composite Index.

You can then take a smaller part of your portfolio and use it to short the same index. This limits your upside when the market keeps going up but nicely protects your assets if stocks fall.

Another way to use ETFs to hedge against market declines is to buy an inverse ETF. These ETFs go up when the underlying index goes down, acting as a perfect hedge without going to all the trouble of physically shorting.

They’re a better solution for less sophisticated investors because you buy them just like a regular ETF. You get the hedge without having to worry about the stresses of shorting.

5. Get Smarter ETFs 

Instead of using a simple portfolio of ETFs, investors may be able to get extra returns by using some savvy strategies.

Generally, these more complex ETFs are grouped into something called smart beta strategies.

These are passive investment vehicles that use certain strategies to try and get higher returns than an underlying index or similar returns without as much risk. Investors can either actively trade these ETFs or hold them passively over the long term.

For instance, there’s evidence an equal-weighted index fund outperforms a market cap-weighted one, especially when we look at S&P 500 stocks.

The difference in returns over the last decade is approximately 1% per year, and that’s even after investors pay a higher fee for an equal-weighted S&P 500 index fund. That really adds up over time.

Many smart investors are convinced momentum trading strategies work as well, something investors can easily use with ETFs.

There are a million different momentum strategies, but they all follow the same basic framework. Investors buy ETFs that are going up and continue to hold until the underlying momentum starts to fizzle out.

They then sell and move onto the next strong ETF. If nothing meets the qualifications, then these investors just wait on the sidelines for the market to improve again.

There are many other smart beta strategies out there, with hundreds of ETFs dedicated to them.

One way investors can try to use them to get extra returns is to buy in when a strategy isn’t working. If an equal-weight ETF outperforms a market cap-weighted one, then there should be additional upside potential if you buy when the equal weight ETF is out of favour.

Another simple trading strategy investors can use to help maximize ETF returns is to use tax-loss harvesting. When tax loss harvesting, investors simply replace an ETF that’s gone down in value with a similar ETF that doesn’t track the same index, locking in a tax loss.

Those losses can then be used to offset gains at tax time, which helps keep more of your cash away from government taxation.

One of the big advantages of using a robo advisor like Wealthsimple is that it takes care of tax-loss harvesting for you.

It’s the perfect solution for a lazy investor who wants to use certain ETF trading tips but also doesn’t want to put in the work required.

Now is a great time to sign up because Wealthsimple is offering Young and Thrifty readers an exclusive deal: get a $75 cash bonus when you open and fund a new Wealthsimple Invest account with $1000 within 45 days.

Last Words

Many investors simply buy and hold ETFs over the long-term, choosing to use simple strategies like putting bonds in their RRSPs and Canadian dividend stocks in their taxable account.

That’s likely a sound long-term move. But I believe smart investors who use some ETF trading techniques can do a little better.

These strategies don’t have to be super complex, either. Sure, you can actively trade ETFs, or you can just use various smart beta strategies to try and maximize your portfolio.

Most people end up tinkering with simple ETF strategies anyway. If that’s you, then it’s best to make sure you’re doing so intelligently.

Also, don’t forget to check out The Best ETFs in Canada when building your own portfolio. It might even make you richer come retirement time.

Disclaimer: Young & Thrifty has entered into a referral and advertising arrangement with Wealthsimple US, LTD and receives compensation when you open an account or for certain qualifying activity which may include clicking links. You will not be charged a fee for this referral and Wealthsimple and Young and Thrifty are not related entities. It is a requirement to disclose that we earn these fees and also provide you with the latest Wealthsimple ADV brochure so you can learn more about them before opening an account.

Article comments

19 comments
Mike says:

I have a TFSA and RRSP. I will put bonds in RRSP, but for the All ex Can ETF and VCN, if I have more cash in one account…. does it make sense to hold both ETFs in each account. So all Ex Can & VCN in TFSA and same two in RRSP?

Kyle says:

It won’t actually make a difference Mike – you’re going to get hit with both layers of tax on the Ex-Can ETF no matter what.

Saud says:

Great articke kyle… Can u confirm that will a low income person be taxed on VXC gains as well? And what will be the withholding tax treatment for him if he invest in ETFs?? Will it matter if he keeps funds in TFSA account or regular account? I heard that low income person will get the rebate/refund of any taxes he paid on Etf gains and dividends.. is it true??

Kyle says:

You’ll have to show me exactly what you’re referring to Saud. Everything I know about VXC has led me to believe that there is definitely no income-tested benefits. I think what you might be referring to is the dividend tax credit – which exists if you invest outside of registered accounts.

Ben Morrison says:

a .09% tax drag has got to be considered inconsequential unless we are talking about a 7 figure portfolio here…

keep in mind a .27% drag on 1/3 of his portfolio is .09

Kyle says:

Well… Not completely inconsequential Ben – did you check out the example near the end of the article? I do agree with you in principle though.

Alex Babalos says:

Thanks for the Reply Kyle, much appreciated. One more question: I just got my Questrade account approved for my wife and I (transferred funds for investors group over). I’ve decided that the lazy mans formula is for me (VCN, VXC), however am wondering what asset location you would recommend. Between my wife and I we each have our TFSA, she has an RRSP and I contribute to a spousal RRSP in her name as I will make more in retirement. I know there are a lot of factors in deciding asset location, so basically my question would be is having each account a microcosm of my overall asset allocation a poor strategy or not? Are there simpler, more efficient ways to organize my (and wife’s) portfolio (saving for retirement for the two of us).

Kyle says:

I should probably stay away from making specific recommendations on equities since I do not have the necessary professional certifications to do so Alex. On a macro level, having both a TFSA and an RRSP with the same asset allocation won’t make any difference from a witholding tax perspective if you use VXC and VCN (it never matters with VCN – no foreign dividends to worry about – and VXC hits you with the taxes no matter where it is kept).

Kate says:

Great article! Just so I’m clear, any capital gains and dividends from owning a US stock in an RRSP will not result in any withholding taxes. You mention US ETF but I don’t see a straight US stock mentioned (?).

But when you take those funds out (presumably at retirement), they are taxed at your marginal tax rate. Thanks Kyle!

Kyle says:

That is correct Kate!

Alex Babalos says:

Thanks so much for the article, this makes things quite clear. Question: is there anything wrong with starting with the lazy man formula (VCN, VXC) and eventually switching to the more involved (Norbert’s Gambit, eliminate withholding tax) strategy as one’s portfolio grows and the cost becomes more significant? What would that process look like?

Kyle says:

There is nothing at all wrong with that Alex. It could be switched at any time with 4-5 basic transactions (sell VXC, and purchase what you want in terms of international/US exposure).

Putera says:

Thanks for the informative post! Given the information above… I probably will allocate following for my portfolio:

TFSA: XIC, VAB, XEC, XEF, CGR
RRSP: VUN

All are Canadian listed ETFs.

Does that sound about right? Hopefully you can advise, still relatively new to this!

I’m in the mid-late 20s, so looking at a 40 year timeline. TFSA still has a lot of contribution left.

Kyle says:

Sounds about right Putera, why put VUN in an RRSP just out of curiousity? I’d just make sure you’re TFSA vs RRSP decision is sound.

Davie562 says:

Beautifully done – clear concise and visually appealing. One critique: you say a basis point is one-tenth of a percent, but it’s one-hundredth. Big difference, especially if you hear about bps from other sources that got it right!

Kyle says:

Sorry for the typo Davie – you’re quite right!

Harry says:

Great post

Bryan says:

So well written! This is such an easy layout for newbies and oldies. Great stuff. Thanks for compiling this information with input from other great Canadian financial gurus too. I love the simplicity of VXC but also good to think of the cumulative cost over the 20-30 years of potential investing.

Kyle says:

Thanks Bryan, appreciate the feedback!