So, you want some tax-free income, do you? Canadian exchange-traded funds (ETF) can be an excellent option. ETFs are like buying up a portfolio with one click, giving you access to a slew of companies, sectors, and market caps. What’s more, they’re managed by professionals rather than an investor in their spare time.
Couple this with a Tax-Free Savings Account (TFSA), and investors can be in for big returns. But what are the right options? Today, let’s look at the two I would consider first and foremost.
A broad market ETF
A great option to consider first is a broad market ETF. These ETFs track a broad market index, such as the S&P/TSX Composite Index or the FTSE Canada All Cap Index. This gives you exposure to a large number of Canadian companies, which can help to reduce your risk.
If you want a solid choice, then consider iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC). This ETF tracks the performance of the S&P/TSX Capped Composite Index. This means the ETF holds all the same stocks (or a representative sample) as the index in the same proportion. The S&P/TSX Capped Composite Index is a broad market index that includes most of the large and mid-sized companies listed on the Toronto Stock Exchange (TSX).
The ETF seeks to replicate, net of expenses, the performance of the S&P/TSX Capped Composite Index. By investing in XIC, you’re essentially buying a piece of the entire Canadian stock market. Because XIC tracks a broad market index, it offers diversification across different sectors of the Canadian economy. This helps to reduce risk, as the performance of your investment won’t be tied to the success of any one company or sector.
What’s more, XIC has one of the lowest management expense ratios among Canadian ETFs, currently at 0.00%. This means you keep more of your returns. And XIC is a very liquid ETF, meaning it’s easily bought and sold on the TSX. This is important if you ever need to sell your shares quickly. So, if you’re looking for a long-term investment, XIC can be a good way to grow your wealth over the long term.
A dividend ETF
Now, this is great to get you a lot of exposure quickly. But if you want cash that can be used to reinvest, then a dividend ETF is a strong option as well. These ETFs focus on companies that have a history of paying dividends to shareholders. This can be a good way to generate income from your investments.
In this case, Vanguard Canadian High Dividend Yield ETF (TSX: VDY) is a solid option. This ETF seeks to track the performance of the FTSE Canada High Dividend Yield Index. This means VDY invests in a basket of Canadian companies that tend to pay out a large portion of their profits in dividends. With just a click, this ETF provides exposure to a portfolio of high dividend-yielding Canadian companies. This can be an attractive option for investors seeking income from their investments.
The FTSE Canada High Dividend Yield Index that VDY tracks is market-capitalization-weighted but with a focus on dividend yield. This means companies with a higher proportion of their share price paid out as dividends will have a larger weighting in the index.
Yet VDY offers some diversification across different sectors of the Canadian economy since it holds a basket of companies, but because it focuses on high-dividend payers, it may be more heavily weighted towards certain sectors, like utilities or financials, that are known for their high dividends. It, too, has a low management expense ratio without fees eating up your returns. So, if you’re looking for long-term holds, these two are certainly the first to consider.
