Exchange-Traded Funds (ETFs) can represent a variety of stocks, bonds, and other assets. In the long run, their growth is relatively safe and impressive. ETFs make a great addition to any type of portfolio, small or big.
Most famous ETFs on the market track the progress of many companies you might know. Your ETF might rise in value alongside stocks like Apple, Microsoft, Walmart, Amazon, Starbucks, and others (see also the best Canadian stocks to buy). Instead of managing all of those stocks, you can buy an ETF that holds them in one portfolio.
You can get an ETF that tracks just a few companies or get an ETF that tracks hundreds of companies. You can also spread your exposure among both mature and emerging markets. The more diversified your ETFs’ assets are – see also Canadian bank ETFs – the less risk you will face investing.
Our recommendation:
The Best ETFs to Buy and Hold
The stock market goes through periods of rapid growth and decline. Not even Warren Buffet can predict with perfect accuracy the best stock, ETF, mutual fund, or what the stock market will do tomorrow. It’s fair to say long term; the stock market will approach new all-time highs as economic growth continues.
There are a few market index ETFs worth holding for us living in Canada in the long run. These products all have relatively different risks and potential for rewards
1. iShares Core SP 500 Index (XUS)
This ETF tracks 500 stocks of the largest companies available on US markets. There is a relatively low risk involved with this investment over time.
XUS is part of the ETFs offered by Blackrock. Blackrock is an investment management corporation located in New York. They are currently the world’s largest asset manager with more than USD$9 trillion in assets.
iShares Core SP 500 Index is an investment designed to diversify your portfolio. It is low cost and is intended to be a long-term core holding. It aims to create growth by replicating the performance of the S&P 500 Index.
It offers a strong rate of return with reduced risk, perfect for those who want guaranteed gains.
XUS is available on the Toronto Stock Exchange. This means you can purchase the stock using Canadian dollars. However, keep in mind that non-U.S. residents will have to pay a foreign withholding tax of 15%.
The growth of XUS has remained steady since its introduction to the stock market. Dividends are paid semi-annually to all investors.
iShares Core SP 500 Index (XUS) is a great option for those looking for a low-risk investment with the opportunity to make considerable gains (check out investing in silver, too).
The top 10 holdings for XUS are:
- iShares Core S&P 500 ETF
- USD Cash
- Apple Inc
- Microsoft Corp
- Amazon Com Inc
- Alphabet Inc Class A
- Facebook Class A Inc
- Alphabet Inc Class C
- Tesla Inc
- Nvidia Corp
The current holdings are heavily weighted to iShares Core S&P 500 ETF, which has a current weight of 94.48%.
2. iShares NASDAQ 100 Index ETF (XQQ)
This ETF has more associated risk than XUS but also provides more potential for growth. It follows the growth of 100 blue-chip companies. These companies are mostly involved in the technology sector.
This is one of the top-performing growth equity ETFs. It is available on the Toronto Stock Market and trades in Canadian dollars.
This ETF aims to provide its investors with long-term capital growth. XQQ replicates the performance of the net of expenses of the NASDAQ-100 Currency Hedged CAD Index.
It is classed as a medium-risk investment. The majority of the underlying assets (more than 48%) are in the technology industry. This industry is growing at an accelerated rate, resulting in faster growth of investments.
Performance is based on exposure to the following sectors:
- Information Technology
- Communication
- Consumer Discretionary
- Health Care
- Consumer Staples
- Industrials
- Utilities
- Cash and/or Derivatives.
The top 10 holdings for this ETF are:
- Apple Inc
- Microsoft Corp
- Amazon Com Inc
- Tesla Inc
- Alphabet Inc Class C
- Alphabet Inc Class A
- Facebook Class A Inc
- Nvidia Corp
- PayPal Holdings Inc
- Adobe Inc
3. iShares MSCI Min Vol USA Index ETF (XMU)
This is an ETF for conservative investors. The stocks in this ETF are known to avoid volatility swings and perform better during recessions.
XMU follows minimum volatility strategies. This aims to smooth out any ups and downs in the market. This can reduce your losses if the market takes a downward turn, while still allowing you to make gains during an upward turn. Following minimum volatility strategies can result in long-term investments being more successful.
XMU tracks an index measuring the performance of low volatility U.S. equities includes in the MSCI USA Index.
Although there are different risks associated with these ETFs, they all have the potential for exceptional gains over the long run.
XMU replicates the performance of the net of expenses of the MSCI USA Minimum Volatility Index (USD). It aims to give long-term capital growth with a low to medium risk level.
Similar to XQQ, XMU also has most of its underlying assets in the technology industry. However, this is less heavily weighted. XMU has 25.38% of its assets in the tech industry, compared to 48.65% for XQQ. This results in a more balanced portfolio.
The top 10 holdings for XMU are:
- Microsoft Corp
- Accenture PLC Class A
- Eli Lilly
- Waste Management Inc
- Kroger
- Adobe Inc
- Regeneron Pharmaceuticals Inc
- Visa Inc Class A
- Gilead Sciences Inc
- Republic Services Inc
4. iShares Core SP 500 Index (XUS)
Few funds have as good of a reputation as iShares Core SP 500 Index ETF. Also known by the ticker symbol XUS, this fund represents the world’s most renowned index, the SP 500.
The SP 500 index is made up of the 500 largest publicly traded companies in the US. The growth of the SP 500 is determined by the progress of the following 11 market sectors:
- Industrials
- Communication Services
- Energy
- Technology
- Financials
- Health Care
- Public Utilities
- Real Estate
- Consumer Staples
- Consumer Discretionary
- Materials
In other words, XUS represents the majority of the US market. The Canadian market is only dominated by financials, industrials, real estate, materials, and oil ETFs (see what the best Canadian energy ETFs are). For this reason, many analysts believe the US market to be safer than Canada.
The robust US economy makes up for roughly a quarter of the world’s GDP and features every business type. Some of the fund’s largest positions include Microsoft, Apple, Amazon, Facebook, Berkshire Hathaway, Google (Alphabet), Johnson Johnson, JPMorgan Chase, and Visa. This diverse list includes companies deeply woven into society all around the world. As they continue to grow, so will products like the iShares Core SP 500 Index ETF.
You might be concerned about a recession or periods of instability in the market.
From the Great Depression to the 2008 housing crisis, the US market has always regained footing. In fact, after every recession, the US stock market prices have risen to new all-time highs. As long as you hold the ETFs patiently, you can expect exceptional gains in the long term.
XUS has nearly tripled in the past ten years. Its index has returned an annual average of 9% since its creation. Such gains are much higher than what you can find with even the best Canadian equity and bond products.
Like other assets traded on the stock market, XUS pays a dividend to its owners. It has been consistent in paying between 1% and 2% in annual dividends. After years of holding the security, these payments add up to significant sums.
As of August 17, 2020, one share of XUS is worth $55.35 on the Toronto Stock Exchange.
5. iShares NASDAQ 100 Index ETF (XQQ)
iShares NASDAQ 100 Index ETF (XQQ) is another fund recognized as a staple in many of the best Canadian portfolios. Instead of focusing on the entire market, XQQ tracks 107 companies listed on the NASDAQ.
The majority of these stocks are technology companies. Because XQQ puts a large emphasis on tech, it is riskier than the SP 500. Nonetheless, the index tracked by this fund has recovered from every market crash it has seen.
Although relatively risky, XQQ does offer more potential for growth. Technology has been advancing with extraordinary momentum. The following list shows the largest positions currently in the XQQ:
- Apple
- Microsoft
- Amazon
- Google (Alphabet)
- Intel
- Cisco
- Comcast
- PepsiCo
These 8 companies make up roughly half of the ETF’s value. In other words, XQQ’s value is dependent on their performance. XQQ does not contain any stocks related to the financial industry. This fact attracts many investors. It is the reason why XQQ barely lost ground during the 2008 housing crisis.
Fortunately, most of the companies listed above have proven to succeed for many decades. Even during the COVID-19 pandemic, XQQ has shown exceptional performance.
Since this ETF’s creation, it has grown an average of 18% per year.
In years to come, technology will continue to be a critical factor in your everyday life. In the next few years, the world will advance towards reliance on artificial intelligence (AI) and 5G cell service. Companies on the XQQ are positioned to supply society with these in-demand services. As a result, XQQ will most probably remain one of the strongest funds on the market.
6. iShares MSCI Min Vol USA Index ETF (XMU)
The Ishares MSCI Min Vol USA Index ETF is designed for defensive investors. It is less risky than XUS and XQQ.
Most of the holdings in XMU are value stocks. Unlike the growth stocks on XQQ, value stocks usually grow at a more stable and predictable pace (see also how to find undervalued stocks).
By definition, growth stocks rise faster than their businesses grow. Consequently, many growth stocks eventually become overvalued. In contrast, value stocks rise at a rate closer to their business’ growth. While overvalued growth stocks generally plummet in times of market turmoil, value stocks do a better job of holding their ground.
The stocks in the Ishares MSCI Min Vol USA Index ETF are not traded as frequently as popular stocks. Thus, XMU is not a volatile investment. When the market is performing well, the stocks in XMU will not rise as much as highly traded stocks. But, when the market goes down, their drop will not be nearly as steep.
Unlike XQQ, XMU distributes weight evenly across its 200 holdings. No stock makes up more than 2% of the fund’s value. Again, this reduces unwanted drastic price shifts.
Since its creation, XMU has returned annual gains of around 16% while paying a yearly dividend of 1.65%.
The Ishares MSCI Min Vol USA Index ETF has performed better during selloffs and recessions. In fact, during the market selloff caused by COVID-19, XMU did not drop as much as broad market indexes.
As of August 17, 2020, one share of XMU costs $57.36 on the Toronto Stock Exchange.
How to Buy Exchange Traded funds
So you are interested in buying shares in XUS, XQQ, or XMU. Or, perhaps Vanguard FTSE Canada, one of the TSX 60 index products, or other investors’ favourites.
Like all other ETFs, they are traded on the stock market. To buy shares (see also Canada’s preferred shares), you will have to open a trading account with access to the Toronto Stock Exchange. You can easily do this online, through Questrade.
Many firms, including CIBC, TD, and Scotiabank all offer trading platforms. Although they are reliable, the Questrade platform is well recognized for granting access to Canadian and American markets. Setting up an account is simple.
On the Questrade home page, there is a button that reads “open account” in the upper right-hand corner. After clicking this button, you will be given options of trading accounts to open. After choosing a suitable account type, you will have to provide your social insurance number, government-approved identification, and the answers to a few simple questions.
Your account may take a couple of days to get approved. Following approval, you will be given an account number that you can use to wire in money.
You are now ready for the final step: buying the ETF. First, type the ticker (ex. XUS, XQQ, or XMU) in the search bar. Then, press the “buy” button. Finally, type in the number of shares you would like to purchase and your type of order. When confirming your order, you may find a low fee attached to the cost of your trade. However, it will most likely be less than $1.
Buy ETFs in CAD or USD?
Even though XUS, XMU, and XHU (discussed below) shares are priced with Canadian Dollars, these funds still bet on the US dollar. The funds are valued in US dollars and later converted to Canadian before listing on the market. On the other hand, XQQ uses a different strategy called currency hedging.
Currency Hedging is a technique that gives investors exposure to the Canadian dollar. XQQ tracks the daily movement of the QQQ and the Canadian dollar at the same time. If QQQ’s value does not change, but the Canadian dollar rises against the American dollar, XQQ will increase. If QQQ doesn’t move but the Canadian dollar lowers against the American, XQQ will decrease in value.
Over the past ten years, the US dollar has grown stronger in comparison to the Canadian dollar. As of August 8, 2020, one USD buys you 1.32 CAD.
If you believe the US dollar will continue to outperform the Canadian, buy XUS, XMU, XHU, or their US versions. In this case, buying QQQ would be better than buying XQQ.
If you believe the Canadian dollar will outperform the USD, buy Canadian hedged ETFs. The Canadian hedged versions of the recommended ETFs have the following tickers:
- Ishares Core SP 500 Index (XUS) = XSP
- Ishares MSCI Min Vol USA Index ETF (XMU) = XMS
- Ishares U.S. High Dividend Equity Index ETF (XHU) = XHD
Currency Hedging does have a negative impact on your ETF’s value. After all, it does cost fund managers to hedge currencies. These costs appear in the form of larger management fees that take away from your fund’s gains. Unless you believe the CAD will significantly outperform the USD, it is a better idea to buy American.
What are the Best ETFs for dividends?
Ishares U.S. High Dividend Equity Index ETF (XHU)
The iShares US High Dividend Equity Index ETF is favoured by defensive investors. Its safety comes from the fact that it is made up of stocks that pay high dividends. By owning XHU you will consistently receive monthly payments. These payments can come in cash or be reinvested in the ETF. This is one of the best ETFs dividend paying choice for Canadians.
Large dividend payments are usually a sign that a company has sturdy financials and increasing net profits. For this reason, many of the same value stocks on XMU are also found on XHU. Firms such as Verizon, Coca-Cola, and Pepsico make up top holdings in both funds.
Recently, the iShares U.S. High Dividend Equity Index ETF has performed exceptionally well. Since its creation, its price has risen an average of 5.5% annually. But, its price increases are not what makes it a desirable asset.
This ETF has historically paid annual dividends of over 3%. In the past 12 months, XHU has paid 3.4% of share prices in the form of dividends (over .28% monthly on average). Keep in mind that as share prices increase, you will receive more money in dividends.
The 75 companies followed by this index are regularly monitored by managers. The managers make sure these companies’ dividend yields are constant and dependable. Even while the market tanked due to COVID-19, dividend payments barely budged. For this reason, dividend investing is recognized to be one of the safest ways to put money in the market.
As of August 18, 2020, one share of XHU is worth $28.08. It can be bought on the New York Stock Exchange with the ticker symbol HDV.
SPDR Portfolio SP 500 High Dividend ETF (SPYD)
The SPDR Portfolio SP 500 High Dividend ETF is one of the best options for investors seeking fixed payments. This ETF tracks 80 companies in the SP 500 that yield high dividends.
Like all other companies in the SP 500, the stocks tracked by SPYD are blue chips or large caps. Most have been around for a long time and have survived multiple market recessions. Although not every stock tracked by SPYD is a value stock, it is still a safe investment in the long run, just like XUS/SPY.
Although SPYD does not screen companies for consistent yields, most companies followed by the index ETF contain large amounts of cash reserves. Due to these cash reserves, even if the market is crashing, these companies will most likely be able to pay their high dividends.
In the past ten years, SPYD returned an annual rate of 4%. In the last twelve months, SPYD has returned an average dividend of 6.4%. This dividend has also raised almost 5% annually, for the past three years.
As of September 24, 2020, one share of SPYD costs $26.58 (US dollars). This ETF can only be bought on the New York Stock Exchange. This best ETFs US product is available in Canada. Ask your Canadian-based financial advisor to show you how. It has tax implications, so also consult with your accountant.
iShares U.S. High Dividend Equity Index ETF and SPDR Portfolio SP 500 High Dividend ETF contain many of the same stocks. Unless you have adopted an extremely conservative investment strategy, there is not much use in owning both ETFs at the same time. XHU and SPDR already both offer exceptional diversity. It is recommended to buy these ETFs with a Registered Retirement Savings Plan account to avoid Canadian taxes on dividends
Reinvesting Dividends
XUS, XQQ, XMU, XHU and SPYD all offer dividend reinvestment plans (DRIP). If you want, your dividends will be automatically put towards buying new shares in the same ETF.
The dividends you receive may not be enough to buy an entire share of an ETF. Instead, it would buy a fraction of the fund. For instance, pretend you own one share of a $100 ETF which is going to pay a 2% dividend. If you choose to reinvest, you will own 1.02 shares of the ETF after it yields its dividend.
While dividends may seem to be very small payments, they do have a big impact on your returns in the long run.
For example, take the history of the SP 500 (which is tracked by XUS). If you started investing in June 2010, your return on the investment would be 190% after ten years. If you chose to reinvest your dividends for those ten years, your final return would be 250%.
It is strongly advised to reinvest your dividends, especially if you plan on holding your ETF for a while. The best ETFs with dividends are also some of the best ETFs in Canada.
How to Choose the Best ETF for Your Needs
Before investing in an ETF you will want to identify two facets of your life. One: how long you are willing to invest. Two: your risk tolerance. What ETFs best suit you, also depends on whether you have faith in say, the S P TSX 60 and have your eye on the FTSE Canada All Cap for example, or just care about the best ETFs 2020, regardless of the product you invest in.
Most ETFs that capture a broad enough section of the market will be profitable in the long run (including XUS, XQQ, XMU, XHU, and SPYD). However, of course, not all investors can store away their money for so long.
If you know you will need to take your money out of the market in the next year, you will be safest investing in XMU. When the economy enters a recessionary period, it usually takes the stock market a few years to recover. If you only wanted to invest for one year, you might be disappointed if the market declines. XMU, however, will likely not lose as much ground as others during a crash.
If you can save for the long run, invest in XUS or XQQ. Of the latter two, XQQ has larger growth potential, but it also comes with more risk.
If you are simply looking for a fixed, predictable income, invest in either XHU or SPYD.
As well, if you strongly believe one specific sector of the market will experience accelerated growth, you can find an ETF that tracks that side of the market. Keep in mind, the best ETFs in Canada for you may focus on the s p tsx 60, Canada all cap index, or even the best ETFs emerging markets. While the best low fee mutual fund or buying and selling options might appeal more to your neighbour.
There are many “best ETFS” out there, including the VanguardFTSE Canada All CapIndex ETF. In fact, we really like Vanguard Canada All Cap for their low fee and TSX 60 Index stocks. So, the best ETFs for 2020 and beyond are a matter of personal preference. We are providing you with a short list of the best ETFs on TSX for ETFs.
The Bottom Line
Investing in index ETFs is a great way to gain exposure to many stocks at the same time. The diverse nature of index ETFs minimizes risk over time.
When a stock starts performing poorly, investors panic because there is the possibility that the stock does not return to its previous price. On the other hand, when a market index ETF performs badly, investors do not have much to worry about. After every crash, the market as a whole, and thus index ETFs, eventually regain footing.
Despite their diverse nature, ETFs hold much of the same properties as stocks. They can be traded frequently throughout the day, and they can yield dividends.
For the average Canadian, investing in the US market can be a great way to grow your portfolio’s value. Most companies in these indexes do business in Canada. So, if you have faith in the Canadian economy, you have faith in these ETFs as well.
