Once you realize that you will need to invest in more than just GICs to reach your goals, where do you start? For most investors just starting out, the first place they start is a mutual fund that invests in Canadian stocks. Hopefully from our previous blog posts, you already know that while mutual funds are easy to buy, very often they are incredibly expensive for what you get.
Fortunately, there is a much less expensive option: Canadian stock ETFs. Canadian investors have an almost overwhelming level of choice when it comes to Canadian stock ETFs. In the following sections, we will outline the broad ETFs available and ETFs that specialize in individual economic sectors. Finally, we provide our top picks.
Broad Canadian Stock ETFs
The main stock index in Canada is the S&P/TSX Composite Index. It tracks the largest stocks in Canada, all of the big banks, insurance companies, oil companies and phone companies are in the index.
S&P offers a few different versions of the index. There is the main S&P/TSX Composite Index (“TSX”), and the S&P/TSX Capped Composite Index (“Capped TSX”) which limits the amount in any one stock to 10%. The Capped TSX was created largely in response to the tech bubble in 2000 when Nortel made up almost 40% of the TSX. These indexes cover the companies that account for approximately 95% of the value of the Canadian stock market.
At $1.97 billion, the iShares Core S&P/TSX Capped Composite Index ETF (XIC) is the largest ETF that tracks the Capped TSX. As you can see, XIC’s MER is also the lowest.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.10% | 0.00% | 0.09% | 0.19% |
BMO’s offering, the BMO S&P/TSX Capped Composite Index ETF (ZCN) is a little smaller at $1.2 billion, while it’s MER is a little higher. On the days we calculated the bid/ask spread it was lower than on XIC, but the spreads can fluctuate quite a bit. Since the difference in total cost is so low, either would be a good choice.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.13% | 0.00% | 0.05% | 0.18% |
Vanguard’s offering, the Vanguard FTSE Canada Index ETF (VCE) tracks a different index, the FTSE Canada Index, which is comparable to the TSX. This is the cheapest of the broad Canadian stock ETFs.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.09% | 0.00% | 0.07% | 0.16% |
An Even Broader Choice
The three ETFs above all track Canadian large and mid-cap stocks. Vanguard also offers an ETF that includes exposure to small-cap stocks in the Vanguard FTSE Canada All Cap Index ETF (VCN). Small-cap stocks have often outperformed large cap stocks, this is particularly apparent in the US. Canadian small cap stocks behave a little differently since most of them are in the energy sector. For most of the last year, VCE has outperformed VCN. But if you want exposure to the entire Canadian stock market, you could consider VCN instead of XIC, ZCN or VCE.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.11% | 0.00% | 0.11% | 0.22% |
A Much Narrower Choice
The largest ETF in Canada at $9.57 billion is the iShares S&P/TSX 60 Index ETF (XIU). It tracks the S&P/TSX 60 Index which is a subset of the S&P/TSX Composite Index. While you might think that this is an index of the 60 largest companies in Canada, it isn’t. It actually leaves out some of Canada’s largest companies in industries such as insurance and energy, since those sectors already have many large companies to choose from. XIU is also more expensive than the broad ETF choices above while giving you a narrower exposure to Canadian stocks.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.18% | 0.00% | 0.11% | 0.29% |
Sector ETFs
While a broad exposure to Canadian stocks is perfect for most investors, there are some that may be better served by investing only in certain economic sectors and ignoring others. The Canadian stock market is dominated by the energy and financial sectors, two sectors that often experience significant declines or are often the target of social responsibility advocates.
If you are very environmentally conscious and do not want to have any of your investments in the oil & gas sector, you can choose sector ETFs that only invest in the economic sectors you are comfortable with.
Or, you may want more exposure to Canadian tech companies, utilities or REITs. In that case you could add sector ETFs to supplement your investment in a broad ETF, or buy a basket of ETFs that effectively replicates the TSX but without the sectors you don’t want.
iShares, BMO, First Asset and Horizons all offer sector funds. Vanguard’s sole sector offering is a REIT ETF.
While the lure of better returns is tempting, we would caution against using any of the leveraged sector ETFs. They often have very high expense ratios (for ETFs) and are not designed to be long-term holdings.
In previous posts, we covered REIT ETFs, Oil ETFs and Gold ETFs. The other economic sectors to consider are consumer discretionary, consumer staples, utilities, tech, industrials, healthcare, materials and financials.
As financials are already well represented in the TSX, we will focus only on those sectors that are underrepresented in the index. Since there are no telecom, healthcare or consumer discretionary focused ETFs in Canada we won’t cover those sectors either. If you want more exposure to those sectors in Canada, you could purchase the shares of a handful of the companies in each sector.
Utilities
The utilities sector has the smallest weighting in the TSX. This sector includes companies that produce and transmit electricity (Emera), transport and sell natural gas (Fortis) and other fuels like propane (Superior Plus). A few ETF providers offer ETFs that focus on this sector.
iShares offers the S&P/TSX Capped Utilities Index ETF (XUT). XUT holds 12 stocks, all of which are Canadian. Utilities are known for their high dividend yield; XUT has a yield of 4%, 1% higher than XIC.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.60% | 0.00% | 0.11% | 0.71% |
BMO’s Equal Weight Utilities Index ETF (ZUT) tracks the Dow Jones Canada Select Equal Weight Utilities Index. Like XUT, this ETF holds 12 stocks, all of which are Canadian. ZUT’s dividend yield is also over 4%.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.62% | 0.01% | 0.07% | 0.70% |
First Asset’s Active Utility & Infrastructure ETF (FAI), invests in an actively managed portfolio of companies in the power generation and energy distribution business. Since this is an actively managed fund, the MER is higher and due to that and its small size, the bid/ask spread is high. Either XUT or ZUT would be a better choice for most investors.
| MER | TER | Bid/Ask Spread | Total Cost |
| 1.05% | 0.06% | 0.44% | 1.55% |
Technology
Canada doesn’t have any large tech companies like Apple, Microsoft or IBM, so IT makes up less than 3% of the TSX. The only ETF in Canada that offers exposure to Canadian IT companies is the iShares S&P/TSX Capped Information Technology Index ETF (XIT).
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.61% | 0.00% | 0.16% | 0.77% |
Consumer Staples
The consumer staples sector in Canada is comprised mostly of companies that own grocery stores (Loblaw) or that produce things that grocery stores sell (Saputo). The only ETF in Canada that offers concentrated exposure to the Canadian consumer staples sector is the iShares S&P/TSX Capped Consumer Staples Index ETF (XST).
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.61% | 0.00% | 0.08% | 0.69% |
Industrials
The industrials sector in Canada includes railway companies, airlines, and engineering and manufacturing companies. BMO S&P/TSX Equal Weight Industrials Index ETF (ZIN) is the only ETF in Canada that is focused solely on the Canadian industrials sector. iShares offers one that is globally diversified but it only has a little over 2% in Canadian companies.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.63% | 0.00% | 0.22% | 0.85% |
Materials
Companies in the materials sector in Canada are primarily in the mining, forestry, packaging, and chemicals industries. The iShares S&P/TSX Capped Materials Index ETF (XMA) is designed to track the S&P/TSX Capped Materials Index
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.61% | 0.00% | 0.11% | 0.72% |
The First Asset Can-Materials Covered Call ETF (MXF) invests in an actively managed portfolio of the 25 largest companies in the S&P/TSX Capped Materials Index. The fund manager may sell covered calls on up to 25% of each portfolio holding to generate income. This increases the cost substantially over the passively managed choices.
| MER | TER | Bid/Ask Spread | Total Cost |
| 0.70% | 0.59% | 0.99% | 2.28% |
So What Should You Do?
Unless you have a real dislike of financials or energy stocks, and are willing to pay more, then a broad Canadian stock ETF would be the best choice. XIC or ZCN are our favourites in that category.
If you do decide to go the sector ETF route, then focus on keeping costs as low as possible. Since you will need to buy several ETFs instead of just one, unless your broker has free ETF trading, you will need a fairly large investment portfolio (likely $100K+) before this makes sense from a transaction fee standpoint.
