Best ETFs in Canada for 2023
Using Exchange Traded Funds (ETFs) is a great way for investors to build a low-cost, broadly diversified portfolio and save on the crazy fees charged by most Canadian mutual funds. We’ve compiled the best ETFs in Canada so that no matter where you are with your investing, you can best embark on your ETF journey.
In This Article:
What Are ETFs in Simple Terms?
An ETF is a basket of securities that are traded on a stock exchange. While stocks are one type of ETF, other types of investments are also included, such as bonds, commodities, currencies, and real estate funds. Regardless of the type of ETF one chooses to invest in, it is still a marketable security that has a price assigned to it at any given time. This allows it to be easily bought and sold in a similar way to a stock on the stock market—which is why this basket of securities is called Exchange Traded Funds.
The prices of ETFs fluctuate throughout the day as shares are bought and sold. That’s unlike a mutual fund, which is only traded once per day and after the market has come to a close (typically at 4 p.m. EST). While mutual funds are also a type of financial vehicle made up of several different investment sources, ETFs are more cost-effective and easier to trade, making achieving your investment objective more attainable.
Top 10 ETFs for Canadians
As there are more than 800 ETFs on the market today, many with very different mandates, it can be helpful for individual investors to distill the list of funds into something more useful to help build their own portfolio. There’s even a new Canadian Bitcoin ETF and a few Ethereum ETFs, throwing in cryptocurrency options for those who want to invest in the mix.
The most popular ETFs in Canada represent different asset classes and geographical areas, including a mix of Canadian, U.S., and international equity index ETFs, plus some fixed income or bond ETFs. Three ETF providers dominate the market: iShares, BMO, and Vanguard.
CETFA shares its top 20 largest ETFs by assets under management each month. I don’t know about you, but I don’t want to blindly follow the herd and invest in what’s most popular. I’ve studied the ETF market extensively and have come up with my own top 10 ETFs list:
|ETF Name||Ticker||MER %||# of Holdings||Asset class|
|BMO Aggregate Bond Index ETF||ZAG||0.09||1,368||Fixed income|
|Vanguard FTSE Canada All Cap Index ETF||VCN||0.05||180||Canadian equity|
|iShares Core S&P US Total Market Index ETF||XUU||0.07||3,657||U.S. equity|
|Vanguard FTSE Developed All Cap ex North America Index ETF||VIU||0.22||3,834||International equity|
|Vanguard FTSE Emerging Markets All Cap Index ETF||VEE||0.24||5,193||International equity|
|iShares Core MSCI All Country World ex Canada Index ETF||XAW||0.22||9,212||Global equity|
|Vanguard Conservative ETF Portfolio||VCNS||0.25||28,407||Asset allocation|
|Vanguard Balanced ETF Portfolio||VBAL||0.25||28,455||Asset allocation|
|Vanguard Growth ETF Portfolio||VGRO||0.25||28,315||Asset allocation|
|3Vanguard All-Equity ETF Portfolio||VEQT||0.25||12,859||Asset allocation|
Top 10 Explained
BMO Aggregate Bond Index ETF – Best Canadian Bonds ETF
BMO Aggregate Bond Index ETF (ZAG) is one of the top bond ETFs on the market and my choice for best bond holding, based on its broad diversification of investment-grade corporate and government bonds and slightly lower cost than a similar bond ETF, Vanguard’s VAB.
Vanguard FTSE Canada All Cap Index ETF (VCN) – Best Canadian Equity ETF
Vanguard FTSE Canada All Cap Index ETF (VCN) holds small, medium, and large-cap companies in Canada for the ultra-low fee of just 0.05% MER. This pick is based on my fondness for Vanguard, but a nearly identical ETF in terms of Canadian holdings and MER is iShares’ XIC. You can’t go wrong with either choice.
iShares Core S&P US Total Market Index ETF (XUU) tracks the CRSP US Total Market Index representing stocks of all sizes in the U.S. It’s also the cheapest U.S. ETF, coming in with an MER of just 0.07%. I chose this ETF over other strong U.S. ETF competitors, such as Vanguard’s VFV and BMO’s ZSP, both of which track the 500 companies in the S&P 500 and come with slightly higher fees.
Vanguard FTSE Developed All Cap ex North America Index ETF (VIU) – Best International Equity ETF
Vanguard FTSE Developed All Cap ex North America Index ETF (VIU) is more diversified across developed markets than its iShares counterpart, XEF (2,673 holdings) while maintaining similar tax efficiency and the same MER of 0.22%.
Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) – Best Emerging Markets ETF
Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) holds twice as many emerging market stocks as its closest competitor, iShares’ XEC, which gives investors access to countries like China, India, Brazil, and Russia. VEE also comes with a lower MER than XEC, at just 0.24%.
A Canadian investor can avoid holding individual ETFs for the U.S., international, and emerging markets by choosing an All World ex Canada ETF.
The best one on the market is iShares Core MSCI All Country World ex Canada Index ETF (XAW), which holds an incredible 9,212 individual stocks around the world (except for Canada). It comes with an MER of just 0.22% and is more tax-efficient than its Vanguard’s counterpart (VXC), which comes with an MER of 0.26%.
Vanguard ETFs – Best All-in-One ETFs
Finally, rather than building, monitoring, and rebalancing a portfolio of two to five ETFs, investors can opt for a single asset allocation ETF that combines all your fixed income and global equity needs into one product.
These ETFs come in several flavours, from a conservative 40% equities and 60% bonds to an aggressive 100% equity version. Vanguard, iShares, and BMO all offer their own versions, but they’re all very similar. I’m partial to Vanguard and include four of their all-in-one ETFs in this top 10 list:
- 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 these four ETFs is automatically rebalanced daily and comes with an MER of just 0.25%.
Horizons ETFs – Worth a Mention
Horizons ETFs also offer a suite of asset allocation ETFs that are worth a look for high-income earners who invest in a non-registered (taxable) account. These ETFs use a strategy called a total return swap, which means they don’t hold the underlying securities directly. The advantage is that the investor won’t receive ongoing taxable distributions from dividends and interest. Instead, they’ll defer capital gains until the fund is sold.
The three Horizons “one-ticket” ETF solutions include:
- Horizons Conservative TRI ETF Portfolio (HCON): 50% equities / 50% bonds
- Horizons Balanced TRI ETF Portfolio (HBAL): 70% equities / 30% bonds
- Horizons Growth TRI ETF Portfolio (HGRO): 100% equities
It’s important to note that the Horizons TRI ETFs are less diversified than the asset allocation ETFs offered by Vanguard, iShares, or BMO. That’s because they primarily invest in large-cap stock indexes rather than total market indexes (which include mid-cap and small-cap stocks).
How We Chose the ETFs
How do you choose between different ETF providers that track the same or similar index? I used these three criteria to help me pare down the list of hundreds of ETFs into the best ETFs in Canada.
- Cost – Choose the ETF that has the lowest MER. Fees are the best predictor of future returns, so when comparing apples to apples (like comparing Canadian equity ETFs), go with the ETF that has the lowest fee.
- Holdings – Choose the ETF that tracks the broadest index or has the largest number of holdings. An example is the popular Canadian equity ETF called XIU. It tracks the performance of the S&P/TSX 60 – meaning it holds the 60 largest stocks in Canada. But a better, more broad representation of the Canadian stock market should also include mid-cap and small-cap companies. This is better represented by Vanguard’s VCN, which holds 180 Canadian stocks.
- Tracking error – Choose the ETF that most closely tracks its benchmark index (the sign of a well-managed passive fund). The goal of a passive index ETF is to mirror the returns of its benchmark index as closely as possible. Some ETF providers are better than others at closely tracking their index. If an ETF’s performance strays from its benchmark index, this is known as a tracking error. In the example below, the ETF’s total return very closely mirrored its benchmark return over a five-year period.
Low MER, broad diversification, and tight tracking error were the three main characteristics I looked at when choosing my top 10 ETFs for this article. It’s no surprise, then, to see low-cost total market ETFs that have a low (or acceptable) tracking error compared to their peers dominating this list.
Building Your Own ETF Portfolio
It has never been easier to build your own portfolio of low-cost ETFs. All you need to do is open a discount brokerage account, link your bank account to set up an automatic contribution plan, and purchase the ETF(s) of your choice by entering the ETF ticker symbol. (Check out our list of the best online brokers in Canada if you’re not sure where to start.)
Questrade has been the low-cost investing king for two decades and offers free ETF purchases and a robust trading platform and every account type you can think of, including LIRAs, joint accounts, and RESPs. And right now, GreedyRates readers get $50 in free trades when they open an account.
Wealthsimple Trade is relatively new on the scene and offers RRSPs, TFSAs, and non-registered (taxable) personal investment accounts. As Canada’s first and only commission-free stock and ETF trading platform, Wealthsimple Trade has been an instant hit for cost-conscious investors with basic investing needs. It’s also offering a promo: a $50 cash bonus to those who open an account and deposit and trade $150.
ETFs have exploded in popularity lately, and with more than 800 to choose from, it’s easy for investors to get overwhelmed. But you can’t go wrong investing broadly in a diversified portfolio of low-cost ETFs. Hopefully, this top 10 list made your investment decision easier.
FAQs About ETFs
What does it mean when an ETF is Canadian hedged?
A currency-hedged ETF removes possible currency fluctuations from your investment to protect it from the negative impact on its exposure to international securities. If your ETF is Canadian hedged, you will be protected against currency fluctuations from the US dollar (in exchange for increased fees on unit costs).
How are US ETF dividends taxed in Canada?
US ETFs are fully taxable to Canadian taxpayers — this means that Canadian ETF investors will typically be subject to a 15% tax rate for dividend ETF payments received from U.S. companies.
Canadian dividend ETF recipients may be eligible for Canada’s dividend tax credit, allowing dividend income to be taxed at a lower rate than the same amount of interest income.
What happens if an ETF provider goes bust?
If an ETF provider goes belly-up, the provider will send its investors notice so that they can either sell their shares or wait until they’re liquidated. This means that if an ETF provider goes bust, investors will not lose money invested in them. This differs greatly from just investing in a stock, which represents equity in that company. If the company goes bust, the investor can lose the value of their investment.