New Investors – 3 Ultra Cheap ETFs for Max Diversification

If you’re looking for an easier way to create a diversified portfolio that mitigates risk, consider exchange-traded funds like the iShares S&P/TSX Capped Composite Index Fund.

| More on:
exchange traded funds

Image source: Getty Images

If you’re a new investor building a portfolio for the first time, you’d do well to look into exchange-traded funds (ETFs). Providing you with built-in diversification, (spreading your eggs across more than one basket), they help you to reduce risk in your portfolio.

Mathematically speaking, the more stocks you own, the lower your risk. There are two kinds of risk: market risk (the risk in the overall market), and specific risk (the risk in one stock). You can’t avoid market risk, but if you hold thousands of stocks, you reduce specific risk to near-zero.

For most people, going out and buying thousands of stocks isn’t practical. Fortunately, ETFs make it easy to gain access to this volume of stocks. These funds buy the whole market, instead of just a handful of stocks, providing you with all of the diversification you need. On this note, I’ll explore three ultra-cheap ETFs that could help you diversify your portfolio and mitigate risk.


The iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) is an index fund that tracks the S&P/TSX Composite Index. That’s an index of 240 large companies that make up the bulk of the TSX. 240 stocks is a significant amount of diversification. Studies show that you can capture 90% of the benefit of diversification with just 20 stocks, so XIC has you more than covered for a Canadian fund. That’s not to say it’s all you need for a truly diversified portfolio: you need U.S. and global funds for that. But XIC provides ample Canadian exposure in one convenient package with a mere 0.04% fee and a 2.5% dividend yield.

The S&P 500

Next up we have the Vanguard S&P 500 Index Fund (TSX:VFV)(NYSE:VOO). One of the world’s most popular index funds, it has stood the test of time, out-performing the vast majority of active funds over its lifetime.

VFV invests in U.S. stocks, but can be bought as a Canadian fund. If you buy the Canadian version of the fund, you don’t have to pay the IRS dividend withholding tax on it. The dividend withholding tax is a tax that the U.S. takes from dividends paid to foreign investors. It’s 15%, so buying the S&P 500 via VFV can save you a substantial amount of money. On the flipside, the Canadian version of the fund has a 0.08% fee, which is double that of the U.S. version. So, the gains from saving on taxes aren’t “free.”

Global stocks

Last but not least, we have the Vanguard FTSE All-World ex-US Fund (NYSE:VEU). This is an ultra-diversified index fund that holds thousands of countries from around the world, but excludes the U.S. and certain emerging markets. If you’re looking for diversification, it’s hard to do much better than VEU. The fund boasts 3,650 stocks, which is far more than you would get with VFV or XIC. VEU has a 0.07% management fee, which is a little higher than some other funds, but it’s still quite low. Overall, it’s a worthy addition to any diversified portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has positions in Vanguard S&P 500 ETF. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

3 Canadian Dividend Stocks to Buy Hand Over Fist

These three Canadian dividend stocks each offer a unique opportunity, making them some of the best investments to buy at…

Read more »

Chalk outline of two arrows pointing in opposite directions
Top TSX Stocks

2 TSX Stocks That Can Deliver Massive Gains in a Recession

Restaurant Brands International (TSX:QSR)(NYSE:QSR) stock and another recession-resilient firm that can win big in 2023.

Read more »

Growing plant shoots on coins
Stocks for Beginners

For New (and Old) Investors: 3 Dividend-Paying ETFs With Lower-Risk Profiles

Three dividend-paying ETFs with lower-risk profiles are suitable for new and old investors alike.

Read more »

Hand holding smart phone with online shop concept on screen
Tech Stocks

Is Now the Time to Buy Shopify Stock?

Shopify stock (TSX:SHOP)(NYSE:SHOP) hasn't hit these lows in years. So is it a great time to buy the dip, or…

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

Retirement Wealth: 2 Oversold Canadian Stocks to Buy Now and Own for Decades

These industry-leading dividend stocks look cheap right now and have increased their distributions annually for decades.

Read more »

money cash dividends
Tech Stocks

Got $1,000? 3 Cheap Stocks to Buy Right Now

If you've got cash on the sidelines that you're looking to put to work, here are three cheap stocks that…

Read more »

Tired or stressed businessman sitting on the walkway in panic digital stock market financial background
Dividend Stocks

2 of the Safest TSX Stocks Right Now

The stock market is heading towards a crash. Investors are seeking the safety of dividends, and these two stocks provide…

Read more »

question marks written reminders tickets
Tech Stocks

Nvidia Stock Is Down 60%: Should You Buy?

Nvidia (NASDAQ:NVDA) stock has slipped over 60% as short-term headwinds hurt its revenue. But a long-term view of the stock…

Read more »