Understanding Canadian ETFs to Increase your Wealth

By Maude Gauthier | Published on 06 Jun 2024

exchange traded funds

Exchange-traded funds (ETFs) are the new darling of self-directed investors. Although they were first introduced several years ago, the democratization of investing has made it easier than ever to buy ETFs. Are ETFs really beneficial? What are their limitations? How do you actually buy them? How do you make the right choice? Here are a few tips to help you get started with Canadian ETFs.

The Benefits of ETFs

ETFs are often designed to diversify your portfolio while respecting your investor profile, all at low cost. An ETF is a basket of securities in a single fund. Many aim to reproduce a particular index, such as the S&P 500 or the TSX, or a certain market sector, such as technology.

Firstly, an ETF can help you diversify your portfolio. In particular, they generally offer balance between the main sectors of the economy, such as financial services, energy and technology which evolve at different paces. An ETF integrates a representative sample of securities. This reduces the effects of market volatility resulting from price fluctuations. With a diversified portfolio, it’s much less likely that all the stocks in it will underperform at the same time. The gains of some will offset the losses of others.

Secondly, ETFs are a passive way of managing your portfolio. According to Dalbar, stand-alone investors risk underperforming a stock market index. Several cognitive biases come into play, preventing people from holding winning stocks over the long term. If you choose individual company shares by yourself, you will likely make mistakes. Passive investments can then become a very pragmatic choice… and a profitable one! An ETF that tracks an index is likely to save you time and money.

Of course, an ETF is not a guaranteed investment, and there is always a risk of loss. But the risk is no greater with an ETF than with any non-guaranteed investment. The risks associated with a fund are similar to those of the investments that make it up.

Index ETFs

Index ETFs aim to track an index, such as the S&P 500, and do not seek to outperform their benchmark. The particular index the ETF tracks determines how investments are weighted. Several indices may hold the same investments, but in different proportions. An ETF that mimics one or the other will therefore perform differently, even if both have Apple shares in their bundle!

For example, Vanguard’s VFV fund seeks to replicate the S&P 500. At the time of writing, the S&P 500 is up over 12% year-to-date, while VFV is up over 15%. The replication is far from perfect, but it remains a popular ETF from a well-established provider.

All-in-One ETFs

There are “all-inclusive” things other than resorts in the Caribbean. All-in-one ETFs are likely to make you just as happy. As the ultimate passive investment, they can be used on their own, meaning all your money goes into one ETF. Either way, these all-inclusive ETFs are designed to take the guesswork out of investing!

These ETFs offer typical asset allocation portfolios, such as growth-oriented (80% equities, 20% bonds), balanced (60% equities, 40% bonds) or conservative (40% equities, 60% bonds), among other choices. Do these words sound like gibberish to you? If so, establish your investor profile, which will guide you towards an informed choice. Once you’ve established your risk profile, your entire portfolio can fit into a single ETF. That’s why they’re called all-in-one ETFs. They offer the equivalent of a portfolio of several ETFs combined.

For example, BlackRock’s XGRO is approximately 80% equities and aims to provide long-term capital growth by investing primarily in one or more exchange-traded funds managed by BlackRock. It includes units in XIC (which tracks the S&P/TSX) and GOVT, a U.S. Treasury bond fund, among others.

Thematic ETFs

The demand is on the rise and providers are creating new ETFs every year. Do you have a special interest in health, technology, or even crypto? There is an ETF for you. When you sense that a sector will take off, you may be tempted by a thematic ETF. These don’t offer the level of diversification of index ETFs and you’ll need to balance your entire portfolio yourself. You can use these to supplement your portfolio by investing a smaller amount in a sector you like.

Real estate, healthcare, precious metals, etc., there is something for everyone. One example is the price of gold with iShares Gold Bullion ETF (CGL), the oldest and largest gold ETF in Canada. In Healthcare, CI Investments offers the CI Health Giants Covered Call Options ETF (FHI).

How Do You Make Money with ETFs?

With a self-managed ETF, you retain a larger percentage of the returns than with investments made with a flesh-and-blood advisor. You’ll pay less than 0.5% in management fees in most cases. Indexed and all-in-one ETFs often have very low fees, around 0.1%. On the other hand, advisors’ fees add up to 2% or more in most cases.

Does your mutual fund outperform an ETF? Not necessarily. If, once the management fee is deducted, the return remains higher, it’s probably not worth swapping your mutual fund for an equivalent ETF. But it’s worth checking out!

A fee of 2.5% is equivalent to $250 on an investment of $10,000, while a fee of 0.20%, for example, takes only about $20. Over time, your savings and investments will likely grow (we hope so!). When you add up all that $250 or more, you’re looking at tens of thousands of dollars that you’re missing out on. Note, however, that you should always check the management fees of each ETF because some are specialized and their fees are then a little higher.

With ETFs, you can also receive dividends. It all depends on the one your choose, but most pay a small percentage of the value of the shares, such as 1% to 3%. On the product sheets, you need to look for the yield and its frequency of distribution to know how much you will receive.

Another way to make money with your ETF shares is… just to sell them. On the shares you sell, you will recover your starting capital, with, hopefully, a capital gain (the return). Half of that gain is taxable at your marginal tax rate, unless the investment is in a TFSA, for example.

How to Buy ETF Shares

There are dozens of ETF providers in Canada. Those with the largest market shares are BlackRock Canada, BMO and Vanguard Investments Canada. There’s also Global X, CI Investments, Mackenzie and TD Asset Management, to name but a few. I recommend that you stick with the big providers to start with. There’s less risk of running into problems.

You can buy an ETF through an advisor, but to save on fees, which is one of their great advantages, you are better off with direct brokerage. Don’t worry, it’s simple. You need a phone or a computer, and you’re in business!

Here are the main steps:

  • Open a direct brokerage account, for example with National Bank, Desjardins, Wealthsimple or another financial institution. Compare brokerage platforms to find the right one for you. 
  • Choose the type of account you want, following the rules and contribution limits (TFSA, RRSP, not registered, etc.).
  • Transfer money from your checking account. It will remain in your cash balance until you have chosen your ETF. You don’t need to know which one you’ll choose when you open the account and transfer the funds.
  • Allow time to view the data of the ETFs you are interested in. For example, check their management expense ratio (those are management fees).
  • Type the ticker of the ETF (such as “VFV”) into your brokerage account’s search tool. Verify that this is the ETF you really want to buy and click on the button to purchase it.
  • Buy it by placing an order at market! This means that you will buy the shares immediately by clicking on the button, at their current price at that time. There are other types of order that you might explore once you are used to buying shares.
Maude Gauthier is a journalist for Hardbacon. Since completing her Ph.D. in communications at University of Montreal, she has been writing about finance, insurance and credit cards for companies like Fonds FMOQ and Code F. As a responsible user of credit cards, she can spend hours reading the fine print to fully understand their benefits. Because of their simplicity, she developed a preference for cash back cards. After suffering steep increases with her former insurer, she can now proudly say that she saved hundreds of dollars by shopping around for her auto and home insurance. In her free time, she reads novels and enjoys streaming popular shows (and possibly less popular shows, like animal documentaries).