Top Canadian Index Funds

Top Canadian Index Funds

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Introduction

Investing in one of the top Canadian index funds is the best way to diversify your portfolio.

The performance of an index is tracked via investments called index funds. ­­

In Canada, the top index funds have lower costs than actively managed mutual funds and less volatility than equities.

Your money will be distributed among a variety of stocks and industries, helping to diversify your portfolio. They don’t have significant commission fees either because they are passively managed.

Index funds can be the ideal option for you if you’re searching for a low-cost investment that limits your risk while exposing you to the greatest firms in the Canadian economy.

Canadian index funds are excellent investment options for Canadian expats.  

In the sections below, we’ll break down these substantial investments and assist you in selecting the top Canadian index funds.

What Is An Index Fund?

A market index, such as the S&P 500 in the United States or the S&P/TSX Capped Composite in Canada, is what index funds simply track. In an effort to match the index’s performance, they often include all of the companies in that index.

Index funds are a subset of the fund family that also consists of segregated funds, exchange-traded funds, and mutual funds. The management of funds might be active or passive.

While mutual funds and exchange-traded funds (ETFs) may adopt an active, passive, or hybrid investment methodology, index funds monitor an index and are therefore regarded as passively managed.

An active fund manager handpicks stocks to fulfill a certain goal or objective. The manager selects numerous individual stocks to produce a diversified fund, guided by the investing strategy of the fund (e.g., value, growth).

As opposed to this, investing in index funds allows you to instantly diversify your portfolio without having to do any stock selection.

These funds can be immediately purchased through an online brokerage, with the exception of segregated funds. Segregated funds, which can be purchased through an insurance firm, are technically insurance products.

Aside from these similarities, index funds differ significantly in a few key ways. Let’s examine how each of these funds is different from index funds in order to be clear.

Index Mutual Funds vs Index ETFs

Many brokerages will refer to index funds in their advertising as either index mutual funds or index exchange-traded funds (ETFs). A major stock index, such as the TSX/S&P Composite, is followed by an investment known as an index ETF.

The language is complicated, but this is effectively how it works. While many index funds perform this function, index ETFs offer the advantage of trading during regular trading hours, much like equities.

The term “index mutual fund” is usually shortened to “index fund,” which refers to a fund that passively monitors a market index but is less liquid than an ETF that trades like stocks intraday.

13 Top Canadian Index Funds

1. BMO S&P/TSX Capped Composite Index ETF 

As a leading Canadian index fund that closely mimics the S&P/TSX Capped Composite index, the BMO S&P/TSX Capped Composite Index ETF is a market leader.

Around 95% of the overall Canadian stock market is represented in this index, which includes the biggest Canadian corporations that trade on the Toronto Stock Exchange (TSX).

The management expense ratio (MER) is a further desirable aspect. 0.06% is quite low. Thus, for every $10,000 invested, you’ll only pay $6.

Overall, this Canadian index ETF is ideal for novices looking to get started in index investing as well as experts looking for a solid investment for a buy-and-hold strategy.

2. iShares S&P/TSX 60 Index Fund

The iShares S&P/TSX 60 is another powerhouse among Canadian index funds. This index fund, as its name implies, follows the S&P/TSX 60 market index, which includes the 60 largest stocks by market cap that are traded on the TSX.

In addition to being the oldest Canadian ETF available, the S&P/TSX 60 Index Fund also boasts the biggest equity size. The index fund’s compound annual return rate since 2002 has been 7.9%, and its MER is a low 0.18%.

This index fund is ideal for long-term investors, both novice and experienced alike, much as the S&P/TSX Capped Composite Index ETF.

3. Vanguard FTSE Canada All Cap Index ETF 

The FTSE Canadian All Cap Index is a market index composed of Canadian equities with big, mid, and small capitalizations. These equities are drawn from the FTSE World Stock Index Series, which accounts for about 98% of the world’s investable market.

What makes this index fund so appealing? For starters, it provides you with broad exposure to several types of equities in the Canadian market. Unlike the two Canadian index funds mentioned above, this index ETF will expose you to mid and small-cap growth firms.

The index fund has a low MER of 0.5% as well. If you already have investments in the two Canadian index funds described above, the Vanguard FTSE Canada All Cap Index ETF is a wise choice for broader diversification.

4. TD US Equity Index ETF

Another index ETF, this one provided by TD, follows US stocks as well. The 500 largest US firms by market cap, which are nearly identical to the S&P 500 index, are what TPU attempts to mimic in terms of performance.

As TPU is unhedged, the impact of changes in the value of the US and Canadian dollars is captured. The identical approach is available as a second ETF under the ticker THU, which is hedged.

Your portfolio has no small companies since you have only invested in an index that tracks big American companies.

The yield on TD’s ETF is also not particularly high. In terms of assets, it has a sizable fund, and its MER is extremely low.

TPU follows the Solactive US LargeCap NR CAD index rather than the S&P 500 index, most likely because it costs TD less money to do so.

5. S&P/TSX Canadian Dividend Aristocrats Index Fund

There is presently just one ETF that follows Canada’s Dividend Aristocrats. In instance, there are over a dozen funds south of the border that follow dividend growth firms in the United States.

Aristocrats are equities that have increased their dividends for at least five years in a row.

The index fund tries to mirror the S&P/TSX Canada Dividend Aristocrats Index’s investment. Stocks must have a market capitalization of at least $300 million to be included in the Index.

The portfolio presently has 97 stocks. It is one of the easiest dividend growth strategies to execute.

The investment company charges MER fees of 0.66% and distributes a monthly dividend with a current yield of 3.83%. From 2014 to 2019, the business increased the qualifying dividend per share from $0.76101 to $1.11098.

This is equivalent to 9.2% on average per year. Comparatively, over the same period, the dividends paid by the Canadian Dividend Aristocrats increased by about 11.8% overall.

Yet, given how many businesses reduced their dividends during the 2020 pandemic, its growth has recently stalled. Yet, it ought to be able to maintain that rate of expansion going forward.

This index fund has reasonably maintained pace with the TSX Index during the past 10 years. Nevertheless, in a post-pandemic climate, it has severely underperformed, mainly because this ETF just doesn’t have a lot of exposure to the huge rises in energy and material companies.

The majority of the sectors represented by the Aristocrat index fund’s holdings make up little more than 20% of its total assets. The banking industry, which has the top sector weighted at 29%, is the lone exception.

Intriguing and out of the ordinary are the top 10 holdings. No stock makes up more than 2.91% of holdings, and they only make up 24.3% of total holdings.

Slate Grocery REIT and Fiera Capital Corp, two virtually unheard-of companies that aren’t even among the top 15 holdings of other top Canadian index funds on this list, are currently included in two of the top five holdings.

6. TD Canadian Equity Index ETF

TTP is an additional affordable index ETF that tracks the Canadian market this time. TTP, possibly due to cost considerations, uses an index provided once more by Solactive to attempt to imitate the whole Canadian stock market.

Given the sectoral slant of the Canadian stock market, TTP has a respectable dividend yield. In addition to having a relatively low MER, the ETF is very huge in size.

Keep in mind that by investing in a Canadian index ETF such as TTP, you are not diversifying outside of Canada. You’ll also be strongly concentrated in industries like finance, minerals, and energy.

TTP is an excellent low-cost index ETF due to its ability to provide diversity in the Canadian stock market at a very low MER.

7. iShares S&P/TSX Capped Info Tech ETF

The performance of the TSX Index has lagged behind that of the American markets over the previous ten years in a considerable way. The principal cause? technology exposition In the TSX Index, information technology barely make up 10.3%.

Despite the fact that this is much more than in previous years, it is still nothing compared to the exposure in the country to the south. The top-weighted industry, which makes up 23.4% of the S&P 500, is information technology.

An outstanding cluster of IT firms is emerging in Canada. To put it mildly, the pandemic and the COVID-19 market crisis caused XIT to surge.

Due to the short-term decline in tech businesses’ appeal, it has since experienced a significant downturn. For Canadians who are okay with a little more risk, this is still a fantastic index fund.

It costs a good amount to own this index fund, with management costs of 0.61%. Yet, despite the significant dip in 2022, the gains have been well worth the costs.

The fund is still beating the TSX Index over the past five years by a staggering 11% annualized pace, despite a significant, 40%+ drawdown in 2022. During a ten-year period, it grows even larger, exceeding it by 14% yearly.

Only $10,000 invested in XIT over the past ten years would have left you with total returns of $55,000, which should give you an indication of how extreme this is. The TSX, Just $15,000.

However, prior results do not guarantee future success. If you are a market bull, though, you should anticipate steady outperformance from XIT.

A purchase of XIT represents a significant wager on its top four holdings, even though this ETF does contain other IT businesses. So why is it weighed so heavily?

This industry’s youth is reflected in its lack of diversification. As previously said, technology hasn’t had a significant representation on the TSX and has only just started to grow.

This is a highly focused ETF suitable for individuals seeking to invest in the best TSX-listed technology businesses as well as those with higher risk tolerance.

8. Invesco NASDAQ 100 Index ETF

The performance of the NASDAQ 100 index is what QQC tries to passively imitate. The impact on your returns is replicated by QQC using exchange rates between US and Canadian currencies. This currency impact is mitigated by QQC.F.

Just keep in mind that if you just invest in funds that follow the NASDAQ 100, your risk is spread out over a select few industries. An American index that places a lot of emphasis on technology is the NASDAQ 100.

Given the nature of the businesses that make up the underlying index, the ETF’s yield is rather modest. The growth of the fund should mostly come from capital gains.

The track record of the tiny ETF QQC is quite brief. For an index ETF, its MER is really a bit high.

9. TD Canadian Aggregate Bond Index ETF

In this list, TDB is the only ETF that tracks fixed-income indexes. The broad Canadian fixed-income market performance is tracked by this ETF. The Solactive Broad Canadian Bond Universe TR Index is another index that the ETF follows.

TDB offers a strong monthly annualized yield because it is an ETF that tracks bonds. Fixed-income ETFs and mutual funds often operate in this manner.

In terms of assets, TDB is a sizable ETF and is provided at a very low MER.

Being an exchange-traded fund that tracks bonds, TDB is viewed as having a lower risk profile than the ETFs on our list that tracks stocks. A better suitable index ETF for your portfolio would probably be if you have a low-risk tolerance.

To establish a well-balanced portfolio, you can also combine a fixed-income index fund with an ETF that tracks the S&P 500.

10. iShares Core S&P U.S. Total Market Index ETF

Lack of exposure to international markets is among the worst errors made by Canadian investors. The financial sector makes up a sizable portion of the TSX Index, which is also largely reliant on resources.

Investors should increase their exposure to stocks in the southern U.S. in light of this.

The best and most diversified method to do this is with the iShares Core S&P U.S. Total Market Index ETF. It is denominated in Canadian dollars and seeks to replicate the performance of the S&P 500.

It is a new ETF, having been created in 2015.

It boasts ultra-low MER costs of 0.07%, which considerably increases diversification. Nonetheless, it should be noted that this is rather deceptive.

The top ten securities account for only 23.82% of assets, while the portfolio has 3,600 equities, demonstrating excellent diversity. Unsurprisingly, technology dominates the top 10, with Microsoft, Apple, and Amazon at the helm. Johnson & Johnson and Berkshire Hathaway round out the top ten.

There is no better method to have a greater understanding of the financial markets south of the border. Nevertheless, keep in mind that it accomplishes this diversity by holding underlying ETFs.

And as a result, withholding taxes are applicable to the ETF. The XUU is subject to a 0.32% withholding tax regardless of whether it is kept in an RRSP because it contains underlying ETFs. Investors should also think about income taxes in this fund because withholding taxes will be applied to US dividends.

As a result, its MER has increased to 0.39%. Costs of 0.07% are still low, but less striking.

11. TD International Equity Index ETF

The TD product TPE additionally includes foreign equity coverage. The ETF’s limited or nonexistent exposure to North America is due to its foreign investment focus on mid- and large-cap corporations.

TPE does not have currency hedging. Your overall return will fluctuate depending on how the Canadian dollar is valued relative to other world currencies.

Due to its ability to diversify your portfolio outside of North America, the foreign equities category is crucial to take into account. The majority of portfolios built by professionals will include a sizeable allocation to international asset classes.

Compared to the majority of the index funds on this list of top Canadian index funds, TPE offers a little higher MER and an excellent yield. Remember that the costs of global and foreign funds are often greater.

12. Horizons Europe 50 Index ETF

Horizons provides an index ETF called HXX that is specifically targeted towards Europe. It follows the Solactive Europe 50 Rolling Future Index TR without actively changing it.

The top 50 corporations in the Eurozone by market capitalization are included in this index.

Currency risk is not hedged for HXX. The exchange rate between the Canadian dollar and other currencies will have an impact on your overall return.

HXX is a fantastic choice for investors who are interested in making investments in the Eurozone because it is a low-cost index fund that focuses primarily on this area. The ETF has a high MER and modest size.

HXX invests in just 50 underlying holdings, so you might want to think about boosting your portfolio’s diversification by including more Canadian index funds.

However, in recent years, the Eurozone’s markets have lagged behind those of North America.

13. CIBC Global Bond Ex-Canada Index ETF

The CIBC also provides the inexpensive index ETF CGBI. You may access international bonds through this index fund, which is a fantastic instrument for creating a portfolio with a wide range of investments.

The Morningstar Global ex-Canada Core Bond Hedged CAD Index serves as the benchmark for the ETF.

A geographically well-diversified bond portfolio may be produced for fixed-income investors by combining CGBI with TDB.

The Canadian dollar’s movement against other world currencies will not affect your profits because CGBI is hedged against them.

The ETF has a substantial MER and is priced aggressively. In the past, we have highlighted that funds with a worldwide mandate typically have higher fees.

Final Thoughts

If you are a new investor with a medium to low-risk tolerance, have the necessary investment capital, prefer a passive investing style, and intend to buy and hold the securities in your portfolio for the long term, finding and investing in the top Canadian index funds can produce significant returns for your portfolio.

Based on your financial objectives, there are a few disadvantages to investing in Canadian index funds that may prevent you from considering them as a good investment for your portfolio.

Let’s say you want to build a portfolio of inexpensive financial investments that will give you a respectable monthly income. If so, selecting dividend ETFs could be a better option for you.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.