April is halfway over! If you haven’t yet filed your taxes, consider doing so as the deadline is fast approaching. It’s never a pleasant task, but it’s best to get it done quickly.
Another personal finance task that should be on your horizons is contributing to your tax-free savings account, or TFSA, for the year. This year, you can sock away another $6,500, which is $500 higher than previous years, to help offset the effects of inflation.
That being said, holding too much cash in a TFSA isn’t a good idea as the account can be a potent instrument for growth. If you have a high-risk tolerance and are okay with the volatility of stocks, then my following ETF pick could be a good way to invest that $6,500 contribution.
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Ground rules
When I pick ETFs, I look for two primary considerations:
- Broad diversification across sectors and market cap sizes. This means the ETF should hold small-, mid-, and large-cap stocks, and from all or most of the 11 stock market sectors.
- Low fees: This means the ETF should charge a low expense ratio, ideally 0.25% or less. The lower this is, the better your long-term returns are.
‘Duh,’ both of these factors seem obvious, but they can be significant causes of investment risk if neglected. Poor diversification and excessive fees can easily erode expected returns.
My ETF pick
A possible ETF for a $6,500 TFSA contribution that fits both these rules is the BMO S&P/TSX Capped Composite Index ETF (TSX: ZCN).
Here are a few of the reasons why I’m a big fan of this ETF:
- High diversification: ZCN holds around 230 Canadian stocks weighted by market cap from all the sectors in our economy.
- Low fees: ZCN charges a 0.06% expense ratio, which works out to around $6 in fees annually for a $10,000 investment.
- Reputation: ZCN is managed by a highly reputable fund manager and has attracted over $7 billion in assets under management.
- Liquidity: ZCN has a high daily trade volume and low bid-ask spread, making it easy to buy and sell using any self-directed brokerage.
- Dividends: Thanks to its portfolio of Canadian stocks, many of which are large-cap, blue-chip dividend payers, ZCN currently pays a decent annualized distribution yield of 3.4%.
To put it plainly, few other ETFs do as good of a job as ZCN when it comes to providing affordable exposure to the broad Canadian market. If you want to track the TSX, this ETF does the job fine.
If you really like some of the individual stocks held in this ETF, you’re free to overweight them as you see fit (and the Fool has some other fantastic suggestions below).
