When deciding which investment tool makes the most sense for you, it’s important to understand all of the available options. But, there is a lot to know. Learning the difference between a mutual fund and an ETF, for example, means you can choose the best option for you today, and into the future. It’s also important to understand the best Canadian ETFs for 2019-2020.
If you decide to invest in an ETF, it’s time to decipher which one is best for you. ETFs are not all the same. The best dividend ETF is not necessarily the option for you, and may not necessarily be the best ETF in Canada, generally speaking.
Where to invest your money changes in any given year. And amid precarious markets, it can change on a dime. That being said, there are some fairly reliable places that you can invest your money that should give you returns and security. An ETF (Exchange Traded Fund) is one of the more reliable investment tools to invest in.
What is an Exchange Traded Fund (ETF)?
ETFs are similar to a stock. However, instead of investing in a particular company, an ETF is a collection of securities that trade together on the stock market. Therefore, an ETF contains different types of investments, including bonds and commodities.
ETFs are made up of established companies spread out across market sections, which is a key benefit. This diversification insulates you from market fluctuations. The nature of ETFs makes it a good tool for investors who want to get into the market. And while they are similar to mutual funds, you can buy them at a fraction of the cost. This is appealing to newer or more humble investors.
There are over 700 ETF funds available to Canadian investors. It is challenging to wade through all of them, and to know where to invest your hard-earned money. That’s why research, and talking to a professional, can help guide you towards what ETF that makes the most sense for you.
What Are The Best Canadian ETFs?
Canada offers a wide variety of ETFs. While diversification in a portfolio is important, so too is reliable, long-term quality gains. The following three ETFs represent some of the best opportunities for investing in ETFs in Canada.
Vanguard FTSE Canada All Cap Index ETF – (VCN)
This fund offers diversification across small-, medium- and large-sized stocks. We like it because of its very low Market Expense Ratio (MER – the combined cost of fees, taxes and expenses charged to the account). Its MER is just .06% and yields of 7.16%. It has 213 holdings. By including small- and medium-sized stocks, this fund is a good option for Canadians who don’t want all of their eggs in the energy and financial basket. While energy and finance are reliable investments, this fund helps investors buffer the risk of a hit to their entire investment portfolio during a significant market downturn.
Hares S&P/TSX 60 index ETF (XIU)
This fund encompasses all of the top companies on the TSX. And it does so at a low fee. Its MER is just .18% and yields 2.9%. Its benefit is that it includes high-quality, reliable companies. However, the fund is less diversified. It doesn’t include sectors that aren’t as lucrative. But it is a reliable investment due to its focus on the top performers on the S&P and TSX 60 index.
iShares Canadian select dividend index ETF (XDV)
iShares tracks 30 of the highest-yielding stocks on the Canadian stock market. Its MER is .55% and yields 4.5%, making it a solid investment. It differs from indexes that highlight significant market share and heavy trading. Instead, iShares looks at dividend yields and prospective growth and long-term stability.
What Is The S&P 500?
Standard & Poor’s is an index of the 500 biggest companies in the United States. The benefit of investing in the S&P 500 is it provides diversification of investment. The S&P 500 is less tech-centric than the other exchanges, such as the NASDAQ. Therefore, it is less reliant on a single sector. That being said, because it is a more diversified index, it yields lower returns than a technology-based exchange.
Which S&P 500 ETF Is Best?
There aren’t many ETFs focusing exclusively on the S&P 500 as a guide. But many ETFs use it to heavily influence the composition of the portfolio. ETFs that focus on the S&P 500 is often considered to be more reliable investments because of their high placement on the index. Big, high-earning companies may feel more trustworthy for investors looking for high-quality returns.
iShares Core S&P 500 ETF (IVV)
We like this ETF because it is well-rounded, and closely follows the S&P 500 with only slight tweaks and adjustments. Given its reliability and diversity, it’s a long-term investment portfolio. The MER is just .04% with a yield of 5.59%. The structure yields quality dividends with low tax implications.
What Is A Bank ETF?
A bank ETF is a group of stocks that focus specifically on the banking and financial sector. Banking is one of the primary economic drivers in Canada. Given the profitability of this industry, it is a wise investment. Bank ETFs tend to provide significant yields and dividend payouts, making them attractive to investors.
Best Canadian Bank ETF
There are several bank ETFs to choose from in Canada. But our favourite is the BMO Covered Call Canadian Banks (ZWB), provided by BMO Asset Management. This ETF divides its funds equally among Canada’s top banks. It yields 5.7% with an MER of .65%. Because banks are such a large part of the Canadian economy, this fund gives investors the benefit of the high-quality performance of Canada’s top banks.
The ‘covered call’ option means that a buyer can purchase the shares from the ETF in which it is currently invested. This provides an additional opportunity for investors to benefit from the ETF.
Canadian ETF Screener
The best way to decide which ETF is a good investment, and to get an overall view of performance, is with an ETF screener. Using a screener helps you compare and review the current and average performance of different ETFs. You can filter and narrow down your ETF options based on the criteria of interest.
ETFs are a great option for investors who can’t or don’t want to, invest in mutual funds. They provide diversification in your investment portfolio. And without the expense of a mutual fund. For a well-rounded portfolio, an ETF offers a great solution to invest in products like a Tax-Free Savings Account (TFSA). It is a lower risk, and a more reliable, option for the more fiscally cautious investor.
Are Canadian ETFs Legalized As Corporations?
ETFs in Canada are typically structured as a trust or a corporation. Because of this, they operate separately from the management company that runs them. ETF investors, therefore, get shares or units of the fund.
Are Canadian ETFs PFIC?
A Passive Foreign Investment Company (PFIC) is a foreign-based corporation with gross income that is largely based on passive income, such as interest. In addition, half of the assets of a PFIC are investments that produce income based on earned interest, dividends or capital gains. In Canada, all mutual fund trusts, including ETFs, are PFICs.
Can Any Canadian Mutual Funds Beat An ETF Fund?
In the United States, ETFs are already a popular investment product. In Canada, however, they are a newer option, and not chosen as frequently. And while there is a growing shift towards ETF investment in Canada, the reality here remains that investors still commonly choose mutual funds. That being said, the rate of investment in ETFs is growing in Canada. In fact, in 2018, investment in ETFs surpassed that of mutual funds for the first time. There is still far more money going into mutual funds across Canada. But we are seeing a trend towards ETF investment in Canada catching up, and keeping pace, with the U.S.
Best ETFs In Canada In 2019
When investing in an ETF, you can select market segments. For this reason, many people focus their investments on specific commodities or fund groups. The following list highlights some of the most popular ETF groups and the best places to consider investing your money in 2020.
Best Canadian Gold ETF
Who doesn’t want to say they own gold? Seriously though, buying gold is a popular choice for people who invest in ETFs. In 2019, iShares Gold Bullion ETF proved to be a solid investment. With an MER of just 0.56%, this ETF isn’t actively managed and instead invests in long-term holdings.
Best Canadian Bond ETF
When it comes to bond ETFs, Vanguard Total Bond Market ETF (BND) is, and continues to be, one of our favourite overall bond ETFs. This fund mostly invests in U.S. fixed-income securities, with the rest diversified across a number of countries. Over two million funds trade daily in the Vanguard fund. This gives it lots of depth and liquidity.
Best Canadian Bank ETF
You can choose to invest your ETF into a group of stocks that track the Canadian banks. There are a few options to choose from. We like the BMO Equal Weight Canadian Banks ETF (ZEB). That’s because it is consistently reliable and is a good choice for people who want a guaranteed, comfortable return on their investment.
Best Canadian Oil And Gas ETF
Oil and gas are one of Canada’s biggest industries. Although the market fluctuates, this is a pillar of Canada’s economy. And this makes it a worthy investment to consider. If you want to invest in an oil and gas ETF, we like the Horizons NYMEX Crude Oil ETF (HUC). This is an actively managed ETF, so it has a higher MER than passively managed funds. But at .87% it is still a reasonable rate considering the potential returns. This fund hedges on both December returns and on the Canadian dollar against the greenback, as it trades in US funds but pays in Canadian.
Best Canadian ETF To Buy 2020
If you’re looking for the best ETF investment option in 2020, consider the Vanguard S&P ETF 500 (VOO). This ETF invests in the top 500 stocks on the S&P. And because it tracks the 500 highest stocks traded on the S&P, there is a high potential for growth with this ETF.
How To Buy a Canadian ETF
Ready to invest in ETFs? Great! Now it’s time to pick your fund and start investing. And there are a few options. For one, go right to the source. For large ETF providers, like Vanguard, you buy into ETF directly from Vanguard at no additional cost. Alternatively, use an online trading platform. Or, if this is the early days of your investment journey, we recommend consulting a professional investment advisor to help guide you with their expertise and experience.
What Does It Mean When An ETF Is Canadian Hedged?
An ETF that is Canadian hedged means it protects against market fluctuations. For example, say you invest in the S&P, and the market drops by 5%. That means your investment also drops. But that drop is not as significant because it’s hedged in Canadian dollars, not U.S. currency. And the Canadian dollar is worthless. In a nutshell, the exchange rate differential over time does not impact a Canadian-hedged ETF in the same way an unhedged fund would.
Are Canadian ETF’s iShare Distributions Dividends Or Interest?
Both! And more. In full, the types of distribution that an iShares ETF may distribute are: interest and other income, foreign non-business income, Canadian dividends (eligible or ineligible), capital gains and/or return of capital. It all depends on the type of investment.
Can Canadians Buy A US ETF?
You can but at a cost. Canadian investors pay a withholding tax of 15% on U.S. ETF dividends. You pay this to the American government before seeing the remainder. So invest, but unless it is a high yielding investment, it might not be worth the hit you take before you ever see a penny.