There are hundreds of ETFs in Canada. Which ones are my favorites?
The evolution from Mutual Funds to ETFs
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 hundred of other investors and he buys and sells hundreds of different stocks during they year.
Other advantages of mutual fund was to have a professional making those decisions on your behalf.
The disadvantage 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 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 under performing.
Another disadvantage of mutual funds is the 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 which didn’t offer a commission, the advisor simply didn’t recommend it, even if it was the best fund for their clients interest.
And so the Index fund was invented. The index fund simply buys all the stock 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 funds company. This only happened at the closing at 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 their low management cost. Generally, a good ETF had 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 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 ETFs.
My favorite ETF supplier is Vanguard. Vanguard has built a reputation of 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: VDY – Vanguard FTSE Canadian High Dividend Yield Index ETF
- TSX: VRE – Vanguard FTSE Canadian Capped REIT 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
This is the largest ETF provider in Canada.
- TSX: XIU – tracks the S&P/TSX 60 Total Return Index
- TSX: XIC – tracks the S&P/TSX Capped Composite 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: XGD – tracks the S&P/TSX Capped Gold Index
- TSX: XFN – tracks the S&P/TSX Capped Financials Index
- TSX: XMA – tracks the S&P/TSX Capped Materials Index
- TSX: XRE – tracks the S&P/TSX Capped Real Estate Investment Trust Index
- TSX: XTR – tracks the S&P/TSX Income Trust Index
- TSX: XDV – tracks the Dow Jones Canada Select Dividend Index
- TSX: XCG – tracks the Dow Jones Canada Select Growth Index
- TSX: XCV – tracks the Dow Jones Canada Select Value Index
- TSX: XEN – tracks the Jantzi Social 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.