Top Canadian Equity ETFs for your portfolio

Some things change but many things stay the same.  I recall we’re getting close to 400 Exchange Traded Funds (ETFs) listed on the Toronto Stock Exchange now but you probably only need one, just one, broad market Canadian Equity ETF for your portfolio.  This is especially true if you’re a long-term investor seeking to keep things simple.  Reading My Own Advisor you might already know an ETF is like a low-cost version of a mutual fund you can buy and sell like a stock.   If you missed my post about ETFs 101 check it out.

While I believe many Canadian dividend paying stocks are worth owning directly there’s more to Canada’s equity market than just companies that pay dividends.  In fact, you could be missing out (on returns) by only owning dividend paying stocks – total return is what matters.   To reap the benefits of market returns less miniscule money management fees today’s post will highlight my top Canadian Equity ETFs, sharing some reasons why I like these products and what to be mindful of as well.

What are the key benefits of investing in these ETFs below?

  • With some products you can own most of the Canadian stock market for a rock-bottom fee.
  • You get distributions (income) usually on a quarterly payment schedule.
  • You can ride the market returns by investing in indexed ETFs, so you don’t need to worry about significant market underperformance.

I’ll share a quote about this last point from a famous investor, advice he recently provided to the trustee of his will:

My advice to the trustee could not be more simple:  Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”  -Warren Buffett

Here are some more investing lessons from Warren Buffett here.

Now, check out my top choices below and let me know what you think in a comment below.

ZCN – BMO S&P/TSX Capped Composite Index ETF

I like the fact that securities in this ETF are capped at 10%, meaning, you won’t suffer from any future “Nortel effect” if and when one company tends to rule the Canadian equity market.  This ETF is low-cost, eligible to use in virtually every brokerage account and provides decent distributions.  This guy is a winner.

At the time of writing this post:

  • Management Expense Ratio (MER) = 0.05%
  • Distribution yield usually pays about 3%
  • Quarterly payout
  • The top holdings are the big-5 Canadian banks, Canadian National Railway, Suncor, Enbridge and Canadian Natural Resources.

XIU – iShares S&P/TSX 60 Index Fund

This ETF basically holds some of the biggest and most dependable blue-chip stocks in Canada.  It could be considered a dividend-ETF except it’s methodology doesn’t indicate such. Let’s face it, if the companies XIU holds aren’t making money, not many companies in Canada are.  At the time of this post, 10-year returns for XIU are over 8% and since 1999, over 7%.  That’s good.  Disclosure:  I own this ETF.

Updated facts:

  • MER = 0.18%
  • Distribution yield about 3%
  • Quarterly payout
  • The top holdings are the big-5 Canadian banks, Canadian National Railway, Suncor, Enbridge and Canadian Natural Resources.

XIC – iShares S&P/TSX Capped Composite Index ETF

Want to own the entire Canadian equity market for the lowest-fee possible?   Get this one and put almost every single professional mutual fund manager to shame.

Updated facts:

  • MER = 0.05%
  • Distribution yield usually between 2.5-3%
  • Quarterly payout.

XEI – iShares S&P/TSX Equity Income Index ETF

This product holds 75 of the biggest companies in Canada, using a methodology that includes among others:  using the median dividend yield of all stocks in the S&P/TSX Composite with non-zero indicated annual dividend yields, and takes the top 75 stocks for its holdings selected with an annual dividend yield above the median.  Based on this structure I could have easily (and probably should have) included XEI in my top Canadian Dividend ETFs post but I reserved a home for it here because of its equity orientation.  What’s to like about XEI?

Updated facts:

  • MER = 0.20%
  • Distribution yield consistently over 4%
  • Monthly payout
  • The top holdings are the big-5 Canadian banks, pipelines (TransCanada, Enbridge, Pembina), and the country’s biggest telecommunications companies (Bell, Rogers, Telus and Shaw).

VCN – Vanguard FTSE Canada All Cap Index ETF

I’ve mentioned this before on this site but Vanguard Canada rocks thanks to their low fees and diversified products.   I don’t see many downsides to this product.  This ETF has 245 holdings and tracks the performance of a broad Canadian equity index which includes the returns of large-, mid- and small-capitalization, publicly traded securities in the Canadian market.  Flip a coin between holding this product and other ETFs above, namely XIC and ZCN.

Updated facts:

  • MER = 0.06%
  • Distribution yield usually about 2.5%
  • Quarterly payout.

VCE – Vanguard FTSE Canada Index ETF

VCE has fewer holdings (75) than its broader market cousin, VCN (245) and the methodology is largely focused on larger Canadian stocks.  The top-10 holdings tend to dominate this product with ~50% of assets from the big-5 Canadian banks, pipelines (TransCanada, Enbridge, Pembina), Suncor, Canadian National Railway and Brookfield Asset Management.


Updated facts:

  • MER = 0.06%
  • Distribution yield usually between 2-3%
  • Quarterly payout.

FXM – First Asset Morningstar Canada Value Index ETF

This product by First Asset Management hit the shelves just over two years ago and it’s worth a look.   This ETF holds stocks considered to be of “good value” based on characteristics like low price earnings and low price to cash flow ratios.  The MER for this active management is higher than some of my “best of” ETFs above but you’re paying for outstanding performance of late.  Two year returns for FXM as of April 30, 2014 are over 22% compared to the ETF benchmark of about 12.6%.

At the time of writing this post:

  • MER = 0.60%.
  • Distribution yield just under 2%.
  • Quarterly payout.

In summary I think these products deliver both great value and benefits to Canadian investors.  Many of these products are more diversified than the top Canadian Dividend ETFs I wrote about recently and they cost less, so that’s win-win for investors.  As mentioned above there’s more to the equity market than just dividend paying stocks even though that steady income is nice.  As always, if you’re unsure how these or any financial products may fit into your investment plan, talk with a qualified financial professional who can help you make some sound decisions for your financial future.  There’s much more to investing than buying a product.

Do you own any of these products above?  What top Canadian equity ETFs did I miss?  What are your favourites?

32 Responses to "Top Canadian Equity ETFs for your portfolio"

  1. Yes, so many great products to choose from! Nice job collating these :). I’ve chosen XEI for my domestic equity holding. Presently, fortunately, I don’t need to beat the market nor even obtain market returns. My required annual return on investment needs to be 3-4% and I’m happy with the dividend return from XEI which will be more stable over the longer term then the other part of total return barring some black swan event! I think XEI is reasonably diversified compared to XIC with the former being perhaps more conservative with higher allocations to utility/telecommunication equities. One must individualize and the total return ETFs of course are the best bet to achieve equity market returns for the average index investor. But Warren’s suggestion above of 90% equity! Yikes, but then it depends on one’s time horizon, one’s required rate of return, and of course one’s constitution!

    1. Hey Harvey,

      A good reminder that everyone’s investing goals are different: “Presently, fortunately, I don’t need to beat the market nor even obtain market returns. My required annual return on investment needs to be 3-4%”

      I think this is why some folks favour equity income/dividend income oriented ETFs; they cannot rely on the capital appreciation for living expenses. Total return is great in your “accumulation” phase of investing but probably doesn’t make as much sense for living expenses.

      Thanks for your comment.

  2. 400 ETFs on the Toronto market – that’s more than the number of stocks in a Canadian-focused ETF! That’s a good reminder that a lot of them are not very useful to investors.

  3. Thanks Mark
    Very timely for me. I have been watching and learning the etfs for sometime and looking at all of these.
    We don’t have the long term you and most of your readers have but also don’t have to rely on the returns for monthly living or retirement. We are topping up our TFSAs for this year and considering the stock values to date, will add a couple of etfs. Currently good dividend stocks in there. I’m thinking of XEI in one and maybe ZCN or other in the second. Thanks again for your constant top quality info.

    1. Thanks Doc. I can appreciate not every investor is looking for capital appreciation, some investors near or in retirement are looking for more income-oriented products, so hopefully this post and the top Canadian dividend ETFs post helped readers narrow-down some choices:

      I keep some ETFs in our TFSAs but most of the TFSAs hold CDN stocks and REITs. I figure this will be good passive income in the future and while we wait, we get dividends reinvested and some capital appreciation as stock values rise over time.

      Chat again soon, appreciate the comments.

  4. Dividends on the Prairie · Edit

    Thanks for the great article on ETFs. I own XIC in my RRSP and was considering XEI for part of my TFSA so this help solidify my decision. I find the large amount of ETFs overwhelming and really appreciate articles that narrow down the choices with explanation. Now I’d love to see a similar post for US ETF choices : )

    1. I think XIC and XEI are great products (some of the best amongst other, not so good options) so I think it’s hard to wrong with either although XIC is more diversified.

      Stay tuned for my post in a few weeks: top International Equity ETFs (that will include some U.S. choices 🙂

  5. I’ve owned XIU for ages now and it’s been pretty good. I’ve fallen off the investing wagon though and rarely, if ever, look at my portfolio and rebalance it as I should.

    I also own some XMD. I’ve had XIC in the past, but for some reason I decided to split it between XIU and XMD. I think it was because I already had XIU and then I bought XIC, after which I realized there was a LOT of overlap. XIU and XMD don’t overlap much but having them both is probably similar to owning XIC (without putting much thought into it).

    I really need to do a better job at diversifying globally. I do hold some VTI to get exposure to the USA, but it is a small portion of my portfolio for sure. I don’t have much in the foreign markets, which is something I want to correct.

    1. It’s good that you aren’t looking at your portfolio every day 🙂 To help with the rebalancing you could set a day (or even month) once a year when you do it. The studies I’ve seen show that rebalancing can add 0.5 – 1% per year to your returns. If you had a 60/40 allocation to stocks and bonds you would have to switch to around 83% in stocks to get that kind of returns. But by using rebalancing instead you are decreasing your risk instead of increasing it.

      I also believe a lot in diversifying globally. Not only is Canada’s market just a few percent of the world, but other markets have very different short-term performance (in the long run most developed markets have similar results) and adding in different currencies like that helps too. I’ll be posting something soon that demonstrates this 🙂

      1. I’m with you Richard…and Stephen….I’m trying to invest more globally going-forward as well. I want to own more VTI and VXUS.

        Thanks for the comment and stay tuned for a future post, re: top International Equity ETFs!

    2. Hey Stephen,

      I’m a big fan of XIU, even with only 60 companies. I’ve toyed with the idea of selling all XIU for XIC but the returns for XIU have been good: 10-years ~ 8.8% and I’ve owned it for 5 years now: 8.8% as well. No complaints whatsoever.

      I also need to buy more global ETFs…working on that, when the correction hits. Just not sure when that will happen!

  6. What do you think about momentum ETF’s? I have owned WXM for more than a year and am very happy. I would like to find an equivalent one for the US or international but none seem to match the performance of WXM.

    1. The WXM product has done very, very well in a short period of time. Long-term, the jury is out for me personally. Back-testing seems to suggest returns would be knocked-out of the park but the trouble is going-forward, as nobody can predict the future…at least anyone I know can’t.

      I don’t own WXM myself but I can see the appeal for sure.

      There is an YXM product from First Asset, for the U.S. market, have you started to research that one?

      This link was to the CDN $$ hedged version. There is a non-hedged version but the fee is the same.

      1. Thanks, I’ll have a look at YXM. Another thing you can do with WXM is look at the list of holdings for some ideas and also see what criteria they use for inclusion. Might not be current holdings but still worth a look.

        1. Funny you say that Steven, because looking at the top holdings of some funds, this is the first part of my screening process whether to hold an individual stock or not. I figure if the company is “good enough” to be held by some billion-dollar fund, it could be good enough for me.

          On the topic of ETFs, I always look at the benchmark first to see if it’s worth holding.

          Thanks for the comment.

  7. ” but you probably only need one, just one, broad market Canadian Equity ETF for your portfolio”
    totally agree. For my CDN equity I had VCN and FXM. Both done well so far. Recently, I sold both VCN and FXM and consolidated with ZCN and activated DRIP with Scotia iTrade. Yes, all you need is just one ETF to cover the CDN side and make sense for the rest of the portfolio also. Purchased at $20.47 a bit on the high side maybe…?

    for the US equity, I had VYM, VOE, VFV and SCHA. Sold all except VOE and replaced with one broad market ETF “SCHB” . Holding USD ETF’s in Questrade that have USD RRSP’s without currency conversion.

    Did the same with so many Bond ETF’s I had. Sold all and replaced with 1 low cost bond mutual fund.
    Much cleaner now. thanks

    1. I would think most investors would be able to get by with 1 CDN equity ETF, 1 international ETF, 1 U.S. ETF and 1 CDN bond ETF. If investors wanted to throw in a CDN REIT ETF or CDN Dividend ETF or both for some extra spice, no problem.

      This is if they are 100% indexers or passive investors. Things get a bit more complicated if the investor wants to own a few dividend stocks and ETFs, there is more “picking and choosing” and that makes things a bit more challenging maybe than necessary. Interesting enough, this is my dilemma!

      1. Yes, the dilemma is more on whether one should mix the plain vanilla broad market ETF’s with other ETF’s and mutual funds based on fundamental or factor based methodologies in order to capture additional beta…… I am sure John Bogle would disagree with this…but academic research (from what I have read in the papers) seems to support this method in order to increase return with almost same risk…etc…

        1. I think the majority of investors (80%+) could do very well long-term if they followed a simple recipe: saved lots (>15% of income), save often (monthly) and rebalanced their portfolio of 4-5 ETFs regularly (once per year). Investing doesn’t need to be fancy 🙂

  8. Hey Mark

    Years ago I bought a 30 6% rate bond and realized that with the drop in interest rates that I’m sitting on a pretty decent capital gain so decided to sell it and move it into ETFs. So this article has been a great help thanks


    1. A 6% bond would be pretty hard to find now, no? 🙂

      I’m glad this article helped highlight a few, great, low-cost and diversified ETF considerations for you Rob. Thanks for reading and supporting the site.

      1. Yeah no kidding. What I did was I called Td Waterhouse and asked for the lowest rated goverment bond they had, in this case NFLD Labadoour Hydro, BBB is memory serves me correct, but rather than building a bond latter I simply bought a 30 year bond. only reason was I kept forgetting about it! bit of luck there.


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