TFSA Investors: This Canadian ETF Could Have Upside in a Bull Market

If you’re looking for an ETF that capitalizes on recent bullishness in the TSX, consider iShares S&P/TSX 60 Index ETF (TSX:XIU).

Last week saw significant bullishness in the S&P/TSX Composite Index, which rose 1.25% after rising 1.21% the week before. It was a pleasant surprise for investors, many of whom have been taken with recession anxiety in the past few months.

The gains were driven in part by positive economic news coming out of the United States, including strong job growth and a fed rate cut. Many of Canada’s top companies export to the U.S. and can do well in such an environment — even with our own GDP crawling along at 0.1% growth year over year.

If present growth rates continue, we may be witnessing the start of a new bull market — or, perhaps more accurately, the early 2019 bull market resuming its course after a stagnant summer. If that’s the case, there’s one Canadian ETF that you’ll definitely want to own going forward.

iShares S&P/TSX 60 Index ETF

iShares S&P/TSX 60 Index ETF (TSX: XIU) is an index fund derived from the TSX 60. Like many other index funds, it’s based on an equally weighted holding of an established basket of stocks. In this respect it’s no different from its sister fund, XIC. However, it has some characteristics that give it slightly better results.

First, XIU excludes all but the 60 largest TSX stocks, which means it doesn’t have any holdings in the small-cap energy stocks that have been holding the TSX back in recent years. It also excludes all cannabis stocks except for Canopy Growth, which worked out well this year, because that sector has also been underperforming.

Because it excludes many of the underperforming stocks on the TSX, XIU has delivered slightly better returns than XIC. That could change with stronger oil and a renaissance in cannabis stocks, but it has held true historically.

Why it could have upside

The TSX 60 is made up mainly of banks and energy stocks, both of which stand to gain in a bull market.

In periods of strong economic growth, people borrow more money, so there’s the potential for upside in banking.

Economic growth historically tended to drive oil prices higher, although that’s been less the case since 2014.

You may have noticed that I’m talking about economic growth here, rather than stock market gains. The two aren’t synonymous: this year, Canada’s stock market gains have dramatically outpaced GDP growth. However, with so many Canadian companies doing business with the U.S., all we need is continued economic strength in that country for many TSX large caps to continue growing.

Dividend potential abounds

One big advantage of the iShares S&P/TSX 60 ETF is its dividend yield. As of this writing, it yielded 2.7%, slightly higher than XIC and far higher than any S&P 500 index ETF.

2.7% is a pretty respectable yield. It’s not as high as you’d get by investing in a fund focused solely on banks, but it’s very high for an extremely diversified index ETF.

Foolish takeaway

The TSX hasn’t been a huge grower over the past five years. Owing to the weakness in energy stocks, it has dramatically underperformed compared to U.S. markets. This year, however, we’ve seen the TSX come to life, hitting record highs and flirting with 17,000 points. If these trends persist, then XIU will prove to have been a worthy pick.

Fool contributor Andrew Button owns shares of iSHARES SP TSX 60 INDEX FUND.

More on Dividend Stocks

man shops at grocery store
Dividend Stocks

A High Dividend Yield Can Be a Warning Sign: Here’s Why

A high dividend yield can signal trouble. TELUS and Slate Grocery REIT show why investors should examine what supports their…

Read more »

Real estate investment concept
Dividend Stocks

Paying Off the Mortgage or Saving for Retirement First? A Guide for Your 40s and 50s

Find out how rates, renewals and tax rules shape your choice in your 40s and 50s, and where blue chip…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

$14,000 in a TFSA: 2 Stocks I’d Buy for Meaningful Monthly Cash Flow

Cardinal Energy (TSX:CJ) and another monthly income play that's fit for those seeking huge dividends and deeper value.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use a TFSA to Generate an Average of $500 in Monthly Tax-Free Income

Unlock the potential of a TFSA for tax-free savings. Discover strategies to generate income while minimizing taxes for the future.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

This Stock Pays You a 4.7% Dividend Every Single Month

Sienna Senior Living's seemingly safe 4.7% monthly dividend yield, eligible dividend tax perks, and strong growth potential appear attractive today

Read more »

Piggy bank with word TFSA for tax-free savings accounts.
Dividend Stocks

Most Canadians Pick the Wrong Investing Account First: Don’t Be One of Them

Your first investing account matters far more than your first stock. Compare the TFSA, RRSP and FHSA for 2026 and…

Read more »

money goes up and down in balance
Dividend Stocks

Building a Retirement Paycheque: Where Each Dollar Comes From

Thinking about retirement? Find methods to create passive income to cover daily expenses and enhance your financial freedom.

Read more »

Three children jump on an outdoor trampoline
Dividend Stocks

The RESP Deadline is December 31: Ottawa Adds 20% for Free

An affordable RESP contribution can attract a 20% basic grant, with December timing, catch-up limits, and the child's age shaping…

Read more »