The Best Canadian ETFs for 2021
Each year, Canadians seem to have an increasing number of options when it comes to ETF investing. In addition to the traditional stock index ETFs, investors can opt for an all-in-one asset allocation ETF, or add thematic ETFs as a complement to their portfolio. The problem with all of these choices, however, is that it makes choosing the right ETF for your portfolio, downright confusing.
To help, I’ve put together this list of the best Canadian ETFs for 2020. To make the list easy to navigate, I’ve broken them down into 5 main categories: Canadian, US, International, Bond, and Asset Allocation (All-In-One).
Best Canadian Index ETFs
A Canadian Index ETF is a fund that invests largely in Canadian equities by tracking a major Canadian stock index. While there are an abundance of great ETFs available that fit the bill, here are my top 5 picks for 2020:
Vanguard FTSE Canada All Cap Index ETF
# of Holdings: 202
What We Like: With an MER of only .06%, VCN offers an ultra low-cost ETF that’s also highly diversified, due to it’s all-cap exposure to small, medium, and large Canadian corporations.
iShares Core S&P/TSX Capped Composite Index ETF
# of Holdings: 230
What We Like: Another fund with an ultra-low MER that invests in the largest and most liquid Canadian corporations listed on the TSX. Index holdings are capped at a maximum of 10%, to prevent an overweighting of any one company.
BMO S&P/TSX Capped Composite IDX ETF
# of Holdings: 230
What We Like: Tracking the same index as XIC, ZCN is a perfect alternative to the iShares offering above. Fewer assets under management, but still a popular ETF with a rock-bottom MER.
iShares S&P/TSX 60 Index ETF
# of Holdings: 60
What We Like: If you’re looking to track the biggest stocks on the Canadian market, without the limitations of a capped index, then XIU might be the perfect ETF for you. With a massive $8B AUM, this has been a go-to ETF for Canadian investors for years, although the .18% MER seems rather pedestrian when compared with the other ETFs on this list.
Horizons S&P/TSX 60 INDEX ETF
# of Holdings: 60
What We Like: This is a much smaller ETF than XIU ($2B vs. $8B in assets), but it tracks the same index, and it does so at a much lower cost, with a miniscule MER of only .03%. What’s not to like about that?
Best US Index ETFs for Canadians
If your ETF portfolio is only holding Canadian companies, you’re missing out. While some home-country bias is understandable, the problem with investing only in Canada is that our country represents less than 5% of the global market.
Without exposure to the US and other international markets, you are not only missing out on key opportunities, but your investments are not globally diversified. This can increase the risk level of your overall portfolio. The following US Index ETFs can be purchased in Canadian dollars, and are a welcome addition to any ETF portfolio.
iShares Core S&P U.S. Total Market Index ETF
# of Holdings: 3549
What We Like: Core long-term holding is the simplest and most affordable way to invest in the totality of the US market. Fund covers large, medium, and small cap companies (over 3500 in total), and features a very low MER of only .07%.
Vanguard S&P 500 Index ETF
# of Holdings: 507
What We Like: If you only want to hold the largest companies in the US, Vanguard’s S&P 500 Index is a good bet. With an MER of only .08%, this fund offers large-cap, unhedged exposure to the US market.
Vanguard S&P 500 Index ETF (CAD-hedged)
# of Holdings: 507
What We Like: Similar to VFV, however, this fund uses derivative instruments to provide currency hedged exposure to the S&P 500. Our top pick for those who want less exposure to currency risk. At .08%, MER is the same as VFV.
BMO S&P 500 Index ETF (CAD)
# of Holdings: 505
What We Like: Another large-cap ETF, ZSP tracks the same index as VFV, at a slightly higher MER. This is a much larger fund, however, with almost $9B in assets.
International Index ETFs
When buying an international ETF, you’ll have the option of picking a single fund that covers all global markets, or choosing 2 or 3 more targeted international ETFs with the goal of achieving full coverage. For example, the first fund on our list, XAW, is a true global fund that invests in developed and emerging world markets, as well as the US. VEE, on the other hand, focuses almost exclusively on emerging markets. This fund should be held alongside a developed market alternative, such as iShares Core MSCI EAFE IMI Index ETF.
iShares Core MSCI All Country World ex Canada Index ETF
# of Holdings: 8781
What We Like: A true global ETF, XAW receives top marks for its exposure to US and international markets, including developed and emerging markets. The .22% MER is higher than a Canadian or US index ETF, but it’s still a fraction of the cost of an international equity mutual fund.
Vanguard FTSE Global All Cap ex Canada Index ETF
# of Holdings: 10,363
What We Like: A nice alternative to XAW, albeit at a slightly higher cost, VXC provides exposure to all global markets, excluding Canada.
Vanguard FTSE Emerging Markets All Cap Index ETF
# of Holdings: 5200
What We Like: A solid choice if you prefer a dedicated emerging markets ETF. Fund is all-cap, with about 65% of holdings in large-cap companies.
iShares Core MSCI EAFE IMI Index ETF
# of Holdings: 2628
What We Like: For those wanting to target their international exposure, XEF includes developed nations in Europe and Asia, as well as Australia. Recommended as a long-term holding for your portfolio.
Bond Index ETFs
Many Canadian investors are under-weighted in the income component of their portfolio. This means that they may be exposed to levels of volatility that exceed their risk tolerance and are not suitable given their investment objective. The following bond index ETFs make it easy to achieve the right asset mix in your portfolio.
BMO Aggregate Bond Index ETF
# of Holdings: 1259
What We Like: A low cost, broad based bond index fund that tracks the FTSE Canada UniverseXM Bond Index, and holds federal, provincial, and corporate bonds. This fund will reduce portfolio volatility and generate income over the medium to long term.
Vanguard Canadian Aggregate Bond Index ETF
# of Holdings: 1000+
What We Like: An alternative to ZAG, VAB holds over 1000 high quality government and corporate bonds, but tracks the Bloomberg Barclays Global Aggregate Canadian Float Adjusted Bond Index. Very low cost with an MER of only .09%
iShares Core Canadian Short Term Bond Index ETF
# of Holdings: 507
What We Like: Simple, low cost way to get broad exposure to high quality short term bonds. Fund tracks the FTSE Canada Short Term Overall Bond Index.
BMO Laddered Preferred Share Index ETF
# of Holdings: 191
What We Like: While not an actual bond ETF, ZPR makes it easy to diversify the fixed income component of your portfolio by adding a broad selection of rate reset preferred shares.
Asset Allocation ETFs (All-In-One)
Over the past couple of years, we’ve witnessed the emergence of asset allocation ETFs, or all-in-ones. Consider them an ETF of ETFs, as each one holds a number of ETFs within it. The overall holdings cover both income and growth asset classes. Because of their added complexity, the MERs of an all-in-one are higher than a typical Candian stock index ETF, but not when compared to a balanced mutual fund MER of over 2%.
Asset allocation ETFs are offered as a family of funds, making it difficult to come up with a top pick. For example, Vanguard has 5 different funds, and all of them hold the same underlying ETFs, with different weightings. The exception is the 100% stock fund (VEQT), which does not have a bond component. I’ve listed them below to better illustrate how these work:
- Vanguard Conservative Income ETF Portfolio – VCIP – 20% stock, 80% bonds
- Vanguard Conservative ETF Portfolio – VCNS – 40% stock, 60% bonds
- Vanguard Balanced ETF Portfolio – VBAL – 60% stock, 40% bonds
- Vanguard Growth ETF Portfolio – VGRO – 80% stock, 20% bonds
- Vanguard All-Equity ETF Portfolio – VEQT – 100% stock
What I like about the Vanguard asset allocation ETFs is that they cover the full asset allocation range. BMO has their own family of asset allocation ETFs, but they only offer 3 different funds.
Where Can I Buy ETFs?
The best way to add ETFs to your portfolio, is to purchase them through an online discount brokerage. There are at least a dozen online brokers in Canada, but our top pick, and the one I use personally, is Questrade.
Questrade is the perfect broker for buying ETFs, because they don’t charge any commissions on ETF purchases. Because ETFs trade like stocks, most brokers charge a trading fee of up to $9.95 every time you place a trade.
With low MERs and no commissions, there’s really no excuse to buy traditional mutual funds instead of ETFs. You can open a Questrade account online, and place your first trade as soon as the account is funded.
Best Canadian ETFs: How Do I Choose Which to Buy?
Although I’ve narrowed down the choices with my list of the best Canadian ETFs for 2020, you may still be wondering how to settle on two or three for your portfolio. If you prefer to keep things really simple, you can get away with buying one asset allocation ETF, and leave it at that. For example, the Vanguard Balanced ETF Portfolio (VBAL), will give you an asset mix of 60% stock and 40% bonds, along with global diversification, because it holds no fewer than 4 Vanguard international ETFs.
If you prefer to build your own ETF portfolio, a Canadian stock index ETF, like VCN or XIC, would make for a good core holding, a bond index for the income component, and one of the all country international index ETFs, such as XAW or VXC, for global exposure. Try not to overanalyze – the most important thing is not whether you buy Vanguard or iShares, but that you get started investing. And, as always, make sure you consult a qualified advisor to ensure you’re invested properly.