My Favorite Canadian ETFs for long term investing

Canadian ETFs, which ones are my favorites?

The evolution from Mutual Funds to ETFs

Canadian ETFs are my prefered way of investing — Painting an apartment with friends.

First of all, what is an ETF? ETF stands for Exchange Traded Fund. Many investors are familiarized with the term “Mutual Fund,” whereas many investors pool their money, give it to a mutual fund manager and that mutual fund manager would buy and sell stocks according to his investment style.

Mutual funds were the favorite investment vehicle for many small investors. With a small amount of money, they bought instant diversification. Imagine that your capital is only $10,000. By giving this amount to a mutual fund manager, the manager takes your money, along with the money of hundreds of other investors and he buys and sells hundreds of different stocks during the year.

Another advantage of mutual funds was to have a professional making those decisions on your behalf.

The disadvantageS of Mutual Funds were many. The number one was the cost. Most Canadian Mutual funds charge 2.5% to 3% management fees. This is fine if the end result is a great performance, but the problem is that investors were not receiving great performance, they were receiving less than mediocre performance. When compared to a benchmark, let’s say the average return for Canadian stocks, they were underperforming.

Another disadvantage of mutual funds is compensation for financial advisors. Financial advisors would have a conflict of interest. They would feel tempted to recommend to their clients the funds which would give them the biggest commission. If there was a fund that didn’t offer a commission, the advisor simply didn’t recommend it, even if it was the best fund for their client’s interest.

Index funds

And so the Index fund was invented. The index fund simply buys all the stocks that have similar characteristics, lest say: All Canadian Big Companies, or All Canadian Banks, or All Canadian Oil. The index buys all those stocks, without doing any individual stock research, picking and choosing. It so happens that when you pool all those stocks together and charge small managing fees (because you have no research staff, nor experts choosing and picking) the returns are consistently higher than the returns of managed mutual funds.

The problem with Mutual Funds and Index Funds is that you have to buy them directly from the mutual fund company. This only happened at the closing of the market.

The birth of ETFs

And so, the ETF was invented. The ETF is the same index fund, but now it can trade freely in the stock market as if it was a regular stock. This means that the process to buy an ETF which represents the whole Canadian economy is no different from buying a regular stock. You can log into your trading account and just buy it.

Another great advantage of ETF is its low management cost. Generally, a good ETF has a management cost of less than 0.5%. When you compare that with the cost of Mutual Fund with a cost of 3%, the decision is a no-brainer.

This brought me to one of my most important investment philosophies: Invest in low-cost ETF costing no more than 0.5%.

Which ones are my favorites Canadian ETFs and from which Suppliers?

I will not include bonds in this list and will not include a whole bunch of new ETFs called Smart Beta nor Sector investing. I will only include plain vanilla Canadian ETFs.

Vanguard

My favorite ETF supplier of Canadian ETFs is Vanguard. Vanguard has built a reputation for low-cost ETFs and it has transformed the industry. The lowering of ETFs prices has been called “The Vanguard Effect.” Vanguard has done for the personal finance industry what Amazon.com had done to the retailing industry. It offers great products at very low prices. Either way, these are my favorite funds.

TSX: VCN – Vanguard FTSE Canada All Cap Index ETF
TSX: VUN – Vanguard U.S. Total Market Index ETF
TSX: VFV – Vanguard S&P 500 Index
TSX: VXC – Vanguard FTSE All-World ex Canada Index ETF
TSX: VDU – Vanguard FTSE Developed ex North America Index ETF
TSX: VE – Vanguard FTSE Developed Europe Index ETF
TSX: VA – Vanguard FTSE Asia Pacific Index ETF
TSX: VEE – Vanguard FTSE Emerging Markets Index ETF

BackRock Inc.

This is the largest ETF provider in Canada.

TSX: XIU – tracks the S&P/TSX 60 Total Return Index
TSX: XMD – tracks the S&P/TSX MidCap Index
TSX: XCS – tracks the S&P/TSX SmallCap Index
TSX: XEG – tracks the S&P/TSX Capped Energy Index
TSX: XIT – tracks the S&P/TSX Capped Information Technology Index
TSX: XFN – tracks the S&P/TSX Capped Financials Index
TSX: XMA – tracks the S&P/TSX Capped Materials Index
TSX: XSP – tracks the S&P 500 Index (currency hedged)
TSX: XSU – tracks the Russell 2000 Index (currency hedged)
TSX: XIN – tracks the MSCI EAFE 100% Hedged to CAD Dollars Index (currency hedged)
TSX: XEM – tracks the MSCI Emerging Markets Index Fund Index
TSX: XWD – tracks the MSCI World Index Fund Index

All the other Canadian ETF companies

There are many other ETF providers, but they are either too expensive, or have little liquidity, or are not a great product for investors.

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