When it comes to maximizing your Tax-Free Savings Account (TFSA), the key is to invest aggressively yet prudently.
With its tax-free status and limited contribution room, your TFSA is a powerful tool for wealth accumulation, but it’s not a place for reckless risks.
Instead of gambling on meme stocks or speculative penny stocks, a smarter move is to focus on diversified equity exchange-traded funds (ETFs).
These funds have consistently delivered robust long-term growth, making them ideal for the structured advantage of a TFSA. Here’s an ETF that perfectly fits this strategy.
Pick an index ETF!
When it comes to investing your $10,000 in a TFSA, you might be tempted to hunt for the hottest stocks or niche ETFs that promise to beat the market.
But let me tell you, it’s an uphill battle. One of my go-to references for this is the S&P Indices Versus Active (SPIVA) report, which offers compelling long-term data on just how difficult this endeavour can be.
Over the last 15 years, about 88% of all U.S. large-cap funds have underperformed the S&P 500 index, largely due to high management fees.
So, if you want to set your TFSA up for success and stack the odds in your favour, consider this simple advice: invest in an S&P 500 index ETF and call it a day.
Which ETF to pick?
Now, you can’t invest directly in an index like the S&P 500. Instead, you have to choose an ETF that tracks the index.
These ETFs operate by licensing the index from its provider and then purchasing all its constituent stocks in the exact proportions to replicate its performance.
The major advantage of this passive investment approach is the low fees—you’re not shelling out a significant amount for active portfolio management.
For your TFSA, I like BMO S&P 500 Index ETF (TSX:ZSP). Performance-wise, ZSP has delivered an annualized total return (i.e., with dividends reinvested) of 15.26% over the last decade.
It charges a remarkably low management expense ratio of just 0.09%. So, if you invest $10,000, you can expect to pay only about $9 in annual fees—a real bargain for such strong historical performance.
