Are you looking for Canadian exchange-traded funds (ETFs) to buy and hold forever in your Tax-Free Savings Account (TFSA)?
You’re making a wise choice.
Index ETFs are some of the cheapest and least risky investments on the market. By replicating the performance of an entire stock market index, they “diversify away” much of the risk in holding individual stocks. At the same time, by being passive funds, they do not incur large fees. Instead, they simply track indexes developed by third parties like S&P Global. As a result, they have no expensive managers to pay.
All of the above adds up to the simple fact that ETF investors tend to outperform stock pickers over time. In this article, I will explore two TSX index ETFs that are worth buying and holding forever.
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The TSX Composite
iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) is a Canadian broad market index fund. It tracks the S&P/TSX Capped Composite Index, which is comprised of the 240 largest Canadian companies by market capitalization. 240 stocks is a decent amount of numerical diversification. Also, the index represents many sectors, so the correlation in the underlying assets is not extreme. As a result of this, the fund is both diversified and relatively internally uncorrelated.
What kinds of assets does XIC hold?
They are all equities, but there are different stocks in different sectors. Among the sectors with the largest representation on the TSX are the following:
- Financials (two of the three biggest Canadian companies are banks)
- Utilities
- Energy companies
Relatively absent from the TSX, at least compared to the U.S. indexes, is technology. The biggest tech stock in XIC’s portfolio is Shopify, which is sixth by weighting. You have to go pretty far down the list from there before you see another tech name. This might be a positive thing, depending on how you look at it. Tech stocks, in general, have been rallying for most of the last two years and have gotten expensive as a result. The TSX has less of them than the U.S. indexes do, so it could be heading into another period of outperformance like the one it enjoyed in 2022.
XIC is a relatively inexpensive fund, with a mere 0.06% management expense ratio (MER). It’s also a popular, high-volume fund, which results in good liquidity and narrow bid-ask trends (basically low trading costs). This is an attractive combination of qualities for a fund to possess.
iShares Canadian Quality Dividend Fund
iShares Core MSCI Canadian Quality Dividend ETF (TSX: XDIV) is another iShares fund, and this one focuses on dividend stocks. A lot of investors are interested in dividend stocks because of their reputation for providing steady income whether stocks are up or down. Some would say that reputation is exaggerated, but it is true that dividend stocks pay you without you having to time stock sales.
In XDIV, you’ll find many of the same sectors that you’ll find in XIC, but with less tech exposure. The fund has a 4.76% dividend yield, which is above average. It’s enough to generate $4,522 if held as the only asset in a maxed-out $95,000 TFSA. The fund’s 0.1% fee is below average. Finally, the fund has a fairly high volume, so it’s pretty liquid. Overall, it looks like a good fund to consider.
