Last updated on April 1st, 2020 at 11:45 pm
Today, probably hundreds of Canadian ETFs trade on the TSX stock market every single day. At the end of the day, what really matters is the kind of returns you make. Investments can again be for the shorter or the long haul (which is usually recommended and better for the matured and compounded returns over time). Never mind, I’ve something for everyone here. If you are looking to invest your money in some of the best Canadian ETFs, I’ve pretty much covered you here with almost 17 high quality and excellent ETFs. Yeah, not only 7 but more than 20 in fact, that’s the added bonus 🙂
Whatever be your investment mindset and goals, at the end of the day, what really matters is the kind of returns we are generating from the investments or from the money we have pooled into the investment.
In this article, I’ve covered the 7 Best Performing Canadian ETFs you should own in 2020. Before we get to the actual list, let’s first look at the ETF scenario in Canada, what the parameters are when choosing a good ETF and how do we decide on which ETFs are the best for our investment portfolios.
BONUS: At the end of this post I’ve also included a comprehensive list of the Top 10 all-time best Canadian ETFs, so make sure you check that out! That’s in addition to the Top 7 List of course 😉
According to the recent report from the Bank of Montreal, sales in the exchange-traded assets are set to double this year. Canadian ETFs are the most preferred investment type amongst the new entrees into the stock market.
This report also predicts further growth in ETF sales, and it is clear that investors have their eyes set on ETFs in 2020. Now without wasting any more time, let’s jump into the topic and get started.
Quick Peek At The Top 7 Canadian ETFs
1. Vanguard S&P 500 ETF
2. SPDR S&P 500 ETF
3. Fidelity Zero Total Market Index Fund
4. iShares Russel 2000 ETF
5. Vanguard FTSE Developed Markets
6. Invesco PowerShares QQQ
7. Schwab US Dividend Equity ETF
What Is An ETF?
An ETF (Exchange-Traded Fund) is an investment fund that represents a basket of stocks, bonds or other investments. Unlike conventional mutual funds, an ETF is traded on a stock exchange and often tracks a market index or may have a specific investment strategy.
An exchange-traded fund (ETF) is a collection of securities – stocks, commodities, and bonds, that you can purchase and auction through a broker. ETFs are offered in most investment categories varying from traditional investments to alternative investments like stocks or currencies. If you looking for a new investment option to diversify your portfolio, you can consider ETFs.
Canadian ETFs are an attractive investment as they are a low-cost option to build a well-diversified portfolio.
How Do ETFs Work?
When stock exchanges are open, ETFs are purchased and traded like company stock during the day. And like the stock, an ETF has its own symbol with information on intraday price which is readily available during the trading day.
However, contrary to company stock, the volume of outstanding shares of an ETF changes daily. This is due to the constant creation of new shares and the redemption of existing shares. The constant creation and redemption of shares allow the market price of ETFs to stay in line with their underlying securities.
While the primary focus of ETFs is on individual investors, institutional investors also play a major role. Maintenance of liquidity and tracing of the integrity of the ETF through the trading of creation is done by the institutional investors. However, when the price of the ETF doesn’t correspond to the underlying asset value, the institutional investors bring an arbitrage mechanism into play. This mechanism is permitted by the creation units to pull the ETF price back in line with the fundamental asset value.
How To Invest In Canadian ETFs?
There are two main parameters to consider before investing in the Canadian ETFs and they are:
1. Management Expense Ratio Or MER
Every ETF that you’ll invest in will have an MER fee associated.
So What Is the Management Expense Ratio?
The Management Expense Ratio (MER) is the combined total of the management fee, operating expenses and taxes charged to a fund during a given year expressed as a percentage of a fund’s average net assets for that year.
All mutual funds and Canadian ETFs have an MER.
What Is A Good MER?
A good low expense MER ratio is generally considered to be around 0.5% to 0.75% for an actively managed portfolio, while an expense ratio greater than 1.5% is considered to be high. Mutual fund expense ratios are typically higher than expense ratios for ETFs.
For passive index funds, the typical overall ratio across the industry is approximately 0.2%.
2. Underlying Index
This makes perfect sense, as the reason for investing is to gain a specific type of exposure and for Canadian ETFs, this will be determined by the index it tracks.
Looking under the bonnet of Canadian ETFs to examine the underlying index composition and its potential sector and/or stock biases is key to understanding the fundamental drivers of the fund’s performance.
What Are The Types Of ETFs?
We have 10 different types of Canadian ETFs and they are:
1. Market ETFs
Market ETFs basically track major market indexes like the NASDAQ or S&P 500. They are one of the most active ETFs on any exchange platform. However, some market ETFs do trace low-volume indexes. The purpose of a market ETF is to imitate an underlying index and not to exceed it. It is a great way to get started as a new investor in ETFs.
2. Bond ETFs
Bond ETFs are developed to give exposure to nearly all kinds of bonds available be it the corporate, international, U.S treasury, or municipal. Bonds generally trace low-liquidity investment products and are not active in secondary markets.
3. Sector and Industry ETFs
Industry ETFs principally trace a sector index portraying a certain industry. It was developed to give frontage to a specific industry, particularly oil, pharmaceuticals, or advanced technology. The sector and industry ETFs help investors earn exposure to specific markets. For example, the Invesco Dynamic Pharmaceuticals ETF (PJP)
4. Commodity ETFs
Commodity ETFs and industry ETFs are quite similar in that they target specific areas of the market. Nonetheless, when you buy a commodity ETF, like oil or gold, you don’t really buy the commodity. Instead, these ETF entails derivative contracts to mimic the price of the fundamental commodity.
5. Style ETFs
Style ETFs follow an investment procedure or market capitalization priority like the large-cap value or small-cap growth. Style ETFs are highly exchanged in the United States existing on growth and value indexes.
6. Foreign Market ETFs
Foreign market ETFs helps you to acquire exposure to foreign currencies without completing complex transactions. It was developed to follow foreign markets, like the Hang Seng index in Hong Kong or Japan’s Nikkei Index.
7. Inverse ETFs
Developed to benefit from a dip in the prevailing market. When the market falls, investors want to short their positions. Entering inverse ETF, create short positions when you buy them, helping you to short easily. Inverse ETFs are more suited to veteran investors.
8. Actively Managed ETF
Developed to beat a market, not following the trend of most ETFs, which are created to trail a market. It integrates the advantages of both mutual and exchange-traded funds into one asset.
9. Exchange-Traded Notes
These are debt securities backed by the credit power of the bank handing it out. These are developed to grant a pathway to asset markets with the added advantage of creating little or short-term capital profits taxes. If you are looking for a quick turnaround on your money, this is a great trading option for you.
10. Alternative Investment ETFs
They are systems that allow you to trade with volatility or gain knowledge in a specific investment technique.
Top 7 ETFs In Canada
Alright then, let’s jump straight to the list of Top 7 Canadian ETFs, first on the list is the “Vanguard S&P 500 ETF or VOO
1. Vanguard S&P 500 ETF (VOO)
Vanguard S&P 500 ETF seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks.
Why Vanguard S&P 500 ETF?
Invests in stocks in the S&P 500 Index, representing 500 of the largest U.S. companies (a majority of them are blue-chip companies)
The goal of this ETF is to closely track the S&P 500 index’s return, which is considered a gauge of overall U.S. stock returns
It offers high potential for investment growth, share value rises and falls more sharply than that of funds holding bonds
More appropriate for long-term goals where your money’s growth is essential
You can see the market summary and the financial screenshot of Vanguard S&P 500 ETF since mid of 2015 below. This will give you an overall idea of the kind of returns you can expect by investing in this fund.
From the above screenshot, you can clearly notice the kind of growth VOO ETF has generated over the past 5 years. The ETFs currently trading at $300 USD with a dividend yield of 1.32% annually.
52 week low is 241.27 USD and high is $305.92. So the ETFs currently trading near to the 52 weeks high so please be cautious and buy it in dips if you really want to. Let’s now continue looking at couple more facts and features of the Vanguard S&P 500 ETF (VOO)
VOO ETF Fund Facts
Domestic Stock – General
|Vanguard Equity Index Group|
10 Largest Holdings Of The Vanguard S&P 500 ETF (VOO)
As the name suggests S&P 500, the fund invests your money on the 500 largest US Market Cap companies. Look at the list below you have the Apple’s, Microsoft, Facebook, Google, Berkshire, and P&G just to name a few. These are all blue-chip companies as well, so the growth of your money is assured over time, but all you need is patience after investing your money. You just can’t invest today and expect rock-solid returns in 6 months.
The other thing is, Blue Chip companies have a history of excellent returns over long horizons of time with excellent dividends and fewer market fluctuations.
|6||Berkshire Hathaway Inc.|
|7||JPMorgan Chase & Co.|
|8||Johnson & Johnson|
|9||Procter & Gamble Co.|
Characteristics Of Vanguard S&P 500 ETF
Number of stocks
Fund total net assets
Net assets of 10 largest holdings
Vanguard S&P 500 ETFs Performance Over Time
2. SPDR S&P 500 ETF (SPY)
SPY is the best-recognized and oldest ETF and typically tops rankings for the largest AUM and greatest trading volume. The fund tracks the massively popular US index, the S&P 500. Few realize that S&P’s index committee chooses 500 securities to represent the US large-cap space – not necessarily the 500 largest by market cap, which can lead to some omissions of single names. Still, the index offers outstanding exposure to the US large-cap space.
Look at the above 5-year growth chart of SPY ETF, as you can clearly notice the growth of this ETF has been tremendous and today the stock is trading at $328 USD. Also, the dividend yield of this stock is 1.71% which is pretty decent. The expense ratio is 0.09%.
SPY Summary Data – Quick Peek
SPY Risk Statistics
I’ve outlined the Risk of SPY over 3, 5 and 10 years investment category average for your reference.
3. Fidelity Zero Total Market Index Fund (FZROX)
Let’s look at a couple of key benefits and features of the Fidelity Zero Total Market Index Fund (FZROX):
1. Seeks to provide investment results that correspond to the total return of a broad range of publicly-traded companies in the US.
2. There is a 0% expense ratio and no minimums to invest in FZROX.
3. Fund Facts:
Fund Category – Large Blend
Fund Inception – 8/2/2018
Expense Ratio (Gross) – 0.00% 8/2/2018
Expense Ratio (Net) – 0.00%8/2/2018
NAV – $11.2112/6/2019
Minimum to Invest – $0.00
Turnover Rate – 5%4/30/2019
Portfolio Net Assets ($M) – $4,491.6611/30/2019
12 Month Low-High – $8.24 – $11.23
FZROX Fund Objective
The fund seeks to provide investment results that correspond to the total return of a broad range of U.S. stocks.
FZROX Fund’s Investment Strategy
Normally investing at least 80% of its assets in common stocks included in the Fidelity U.S. Total Investable Market Index, which is a float-adjusted market capitalization-weighted index designed to reflect the performance of the U.S. equity market, including large, mid and small-capitalization stocks.
Using statistical sampling techniques based on such factors as capitalization, industry exposures, dividend yield, price/earnings (P/E) ratio, price/book (P/B) ratio, and earnings growth to attempt to replicate the returns of the Fidelity U.S. Total Investable Market Index using a smaller number of securities. Lending securities to earn income for the fund.
FZROX Fund’s Top 10 Stock Holdings
1. MICROSOFT CORP
2. APPLE INC
3. AMAZON.COM INC
4. FACEBOOK INC CL A
5. BERKSHIRE HATHAWAY INC CL B
6. JPMORGAN CHASE & CO
7. ALPHABET INC CL C
8. ALPHABET INC CL A
9. JOHNSON & JOHNSON
10. PROCTER & GAMBLE CO
4. iShares Russell 2000 ETF (IWM)
Fourth on this list of the Top 7 Best ETFs for Canadians is “iShares Russell 2000 ETF or IWM”
1. Exposure to small public U.S. companies
2. Access to 2000 small-cap domestic stocks in a single fund
3. Use to diversify a U.S. stock allocation and seek long-term growth in your portfolio
IWM FUND’S INVESTMENT OBJECTIVE
The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities.
IWM Fund Key Facts
USD 46,418.23 –
United States –
Russell 2000 Index –
With reference to the above ETF chart, you can clearly see the growth trajectory of the IWM ETF over the past 5 years. Also, the P/E ratio of this ETF stands at 21.38 which is good and not expensive. The dividend yield stands at 1.27% annually which is decent as well. Overall a well-diversified, balanced ETF for your investment portfolios.
|Acquired Fund Fees and Expenses||0.00|
|Foreign Taxes and Other Expenses||0.00|
|Gross Expense Ratio||0.19|
Acquired Fund Fees and Expenses
Foreign Taxes and Other Expenses
5. Vanguard FTSE Developed Markets (VEA)
Why Invest In VEA ETF?
1. Seeks to track the investment performance of the FTSE Developed All Cap ex US Index.
2. It provides a convenient way to match the performance of a diversified group of stocks of large-, mid-, and small-cap companies located in Canada and the major markets of Europe and the Pacific region.
3. Follows a passively managed full-replication approach.
As you can see from the above chart, VEA currently trades at $43.57 US per share. Also, this ETF yields a 2.40% annual dividend in returns for the investor which is really good.
VEA ETF Facts
Foreign Large Blend
as of 04/26/2019
Vanguard Equity Index Group
Top 10 Largest Holdings Of VEA
|2||Royal Dutch Shell plc|
|3||Samsung Electronics Co. Ltd.|
|4||Roche Holding AG|
|6||Toyota Motor Corp.|
|7||HSBC Holdings plc|
Fund total net assets
Number of stocks
Net assets of 10 largest holdings
|FTSE Developed Markets ETF||0.05%|
|The average expense ratio of similar funds|
If you had invested $8,000 in 2009, look at growth right now, it stands at almost double your money at more than $16,000 in terms of appreciation and fund growth. Now, that’s excellent returns over a decades time.
6. Invesco PowerShares QQQ
Invesco QQQ ETF is ranked in the top 1% tracking the NASDAQ-100 index. Since its formation in 1999, it has demonstrated a history of impressive performance.
Invesco QQQ is an exchange-traded fund based on the Nasdaq-100 Index. The Fund will, under most circumstances, consist of all of the stocks in the Index. The Index includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually.
As you can see from the above chart, PowerShares QQQ ETF is doing really good in terms of growth over the past 5 years. I’ve considered 5 years as it is a good placeholder to compare returns over time. The ETF also yields a dividend of 0.71% annually which is decent, but that all matters is the growth which is good.
Currently, this ETF trades at $221. 45 USD per share with a PE Ratio (TTM) of 56.85.
Overall Portfolio Composition is 100% in Stocks and 0% in Bonds which is good for the growth investor in mind.
7. Schwab US Dividend Equity ETF (SCHD)
Charles Schwab offers another significant lower cost ETF for the family investment. This is among the best American dividend ETFs to explore. If you are keen on turning your portfolio into cash flow, the fund on large companies brings a stable dividend. Retirees seek to earn income from a portfolio without selling often use dividend stock as the main issue.
This means the ETF is passively managed to track the Dow Jones U.S dividend 100 indexes. It charges a very competitive 0.07% expense ratio.
As you can see from the above chart, the growth of this ETF over the past 5 years has been excellent. The ETFs currently trading at $58.32 and yields a dividend of 2.01% which is good.
SCHD Fund Highlights
1. A straightforward, low-cost fund offering potential tax-efficiency
2. The Fund’s focused approach can complement a diversified portfolio
3. Tracks an index focused on the quality and sustainability of dividends
4. Invests in stocks selected for fundamental strength relative to their peers, based on financial ratios
SCHD Equity Fund pays out very good dividends as you can see from the screenshot below. Dividends have been increasing over time and that’s a very positive sign for any good ETF in the first place.
I’ve also included the screenshot for the dividend payments since 2017 so that it gives you a good idea of what to expect going forward.
The annual dividends so far have been $1.71 in the recent four quarters.
Top 10 All-Time Best Canadian ETFs
In addition to the above list of top 7 best Canadian ETFs, I’ve listed down 7 more all-time favourites ETFs preferred by Canadians over and over again. I’ve compiled the below list by going through numerous Reddit forums and discussions with active investors and Canadians overtime over preference and selections. Anyways here’s the list:
1. VCN or XIC – VCN is the Canadian Couch Potato’s currently recommended Canadian Equities ETF. When comparing VIC Vs. XIC, note the MER of 0.06, and close to $2B assets in XIC vs VCN’s of 0.11 and $330M, having a similar number of holdings, suggesting XIC beats VCN in almost all ways. Also, XIC’s dividend is a bit higher than VCN as well. So comparing Apples to Apples seems like a better position. XIC is more liquid than VCN. With that said, either one is a great pick for your portfolio!
2. XAW – XAW is an index fund that tracks the world stock market (excluding Canada). XAW is the Canadian Couch Potato Recommended world Equities ETF (excludes Canada which is why you need to include VCN as part of your portfolio)
3. ZAG – ZAG is from the BMOs bond component, and is the currently recommended bond index by Canadian Couch Potato.
4. VGRO – VGRO is an all-in-one fund with an 80/20 mix of equities and bonds. The underlying assets of VGRO are VCN, VUN, VEE, etc so no need to hold multiple ETFs and no efforts into rebalancing. Thus, VGRO replaces VCN, XAW, and ZAG using one ticker. You can read my complete review on VGRO by clicking here.
5. XEC – iShares Emerging Markets ETF. XEC has a 0.27 MER. Also, XEC should ideally be about 10 – 15% of your overall ETF or investment portfolio
6. VXC – VXC is an International ETF with a heavy US (50%+) weight. If you prefer more on the Canadian equities then VCN would be the right choice to make.
7. VAB – Legacy here. VAB was the CCP recommended fund years ago. If you looking to invest in VAB you can actually consider VXC as well. VAB is an excellent pick for your RRSPs.
8. XGRO – It’s a great product that is well-diversified with an overall portfolio of 80% global equities and 20% bonds. XGROs MER is also low at around 0.2%. I prefer XGRO over VGRO because it has a little more on the US equities which is any day better than Canadian returns.
9. VDY – When you compare VDN with the likes of VCN, VCN has 0.06% MER while VDY is at 0.22% MER. However, it appears that VDY distributes dividends monthly, while VCN distributes quarterly which is a big plus to some of the value or dividend investors. Also, VDY generates a monthly dividend of 4%. VDY is also more stable but VCN should return more over time.
10. XEQT or VEQT – XEQT currently yields a dividend of 3.20% quarterly. XEQT has a 0.18 MER and VEQT has 0.22. Another thing is that XEQT has 25% into Canadian equities whereas VEQT has 30 here. Looking at these numbers alone, XEQT seems like a better choice. What gets really interesting here is the fact that VEQT could be slightly more tax-efficient (depending on the investment account that it’s held in) because it holds only Canadian ETF’s in its overall aggregate holdings. On the other hand, XEQT holds 2 US-listed ETFs in aggregate and that could represent more withholding taxes from its distributions unless you want it in your RRSP’s.
Canadian ETFs – Honourable Mentions
1. iShares Core S&P U.S. Total Market Index ETF/TSX Capped Composite Index ETF
2. BMO S&P TSX Capped Composite IDX ETF
Issuer: BMO Asset Asset Management
3. Horizons S&P/TSX 60 INDEX ETF
Issuer: Horizon Exchange Traded Funds
4. Vanguard FTSE Canada All Cap ETF
Issuer: Vanguard Investment Canada
Advantages Of The Canadian ETFs
ETFs do appeal to some investors for lots of advantages such as the way they offer mutual funds. Other advantages include;
1. Trading Flexibility
ETFs are traded during the day when the markets are open. During normal exchange hours, the pricing of ETF shares remains constant. However, due to the changing the intraday value of the underlying assets, prices of share vary throughout the day.
Furthermore, ETF makes it easy for you to transfer money between asset classes including stocks, commodities or bonds. You can efficiently get your allocation into the investments in an hour and then change your allocation in the next. However, that is not advised, but it can be done.
The flexibility of ETFs affords you the benefit of making prompt investment decisions. You get to place orders in different and numerous ways. Furthermore, all trade combinations of investing in common stocks are also available in ETFs, including the limit orders and stop-limit orders.
2. Portfolio Diversification and Risk Management
With ETFs covering a wide variety of sectors, you can easily move your interest into sectors that intrigue you. Furthermore, there could be instances where your investment in a certain sector is under significant threat that prevent you from diversifying due to taxes or other restrictions. In that case, you can short an industry-sector ETF or buy an ETF that shorts an industry for you.
3. Lower Costs
You can sustain your operating expenses with your managed funds irrespective of the structure. Nonetheless, ETF operation costs are cheaper compared to mutual funds. Expenses being passed on to the brokerage firms that hold the customer’s accounts lower the costs of client services. Other areas where ETFs helps to reduce cost include notifications, transfers and notification. On the other hand, open-end fund companies require that you send the shareholders regular reports and statements.
4. Tax Benefits
In comparison to mutual funds, ETFs have two primary tax advantages. Mutual funds tend to incur more capital gains taxes over ETFs due to their structural differences.
Tax on dividends is lesser on ETFs. The dividends issued by ETFs are of two types; qualified and unqualified. The tax on qualified dividends is between 5 and 15%, while the unqualified dividend is subject to the same tax rate as that of your income.
Disadvantages of Canadian ETFs
The ETFs might offer a lot of advantages, but it isn’t perfect. There are some drawbacks when it comes to ETFs. They include;
1. Trading Costs
Depending on where you trade, the cost of trading an ETF can be more than the savings from management fees. For investors using a brokerage firm, trading costs will be lower especially when compared with investors with no brokerage firm.
Also, when buying high and selling low, you should be away from the spread which increases cost in the long run. Furthermore, not all ETFs are a low-cost you should always check carefully at the expense ratio of the ETF you want to invest.
2. Tracking Error
ETF managers are tasked to keep their funds’ investment performance in line with the indexes they track. It is not as easy as it seems. There are different ways an ETF can get lost from its intended index. Tracking errors can cost investors to lose profit as ETFs can be hard to track.
3. Complexity and Settlement Dates
Lack of understanding of the operational mechanics of ETFs by individual investors is always a problem. It comes as no surprise that some investor gets confused when dealing with grantor trusts, exchange-traded noted, unit investment trust and exchange-traded funds.
Another angle of investor confusion is the settlement periods. The settlement date is the day you pay for your purchase and the day you get cash for selling a fund. The ETF settlement date is always two days after a trade is placed.
Now, that was the list of the Top 7 Best Canadian ETFs to buy in 2020. Even though I’ve mentioned the ETF prices in US Dollars, it does not mean that you cannot trade the same on TSX or Canadian Stock Exchange. It’s a personal choice and I’ll leave it to you as an investor to decide.
All of the choices mentioned above offer something premium and robust annual returns. You are free to pick the one you like and add it to your portfolio for investments.
Also, the S&P Index funds are time tested and always do well over the long horizon of time. So do keep that in mind before making the selection.
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