Diversification is essential for Canadian investors looking to grow their portfolios while managing risk. Studies show that a well-diversified portfolio can reduce volatility by up to 25%. All while still delivering solid returns over time. By spreading investments across different sectors and assets, investors can better withstand market fluctuations and capitalize on opportunities for growth, thus making diversification a key strategy for long-term success. But which sectors should investors go for?
Where to look
For Canadians investing through their Tax-Free Savings Account (TFSA), two key sectors stand out for long-term growth: technology and renewable energy. The tech sector has been a driving force on the TSX, with impressive gains over the past decade. Yet renewable energy stocks have also surged as the global shift towards green energy picks up momentum. Both sectors are positioned for significant growth as they align with global trends in innovation and sustainability, thereby making them prime candidates for TFSA investments.
At the same time, investing in individual companies for the long term can be challenging. The average lifespan of companies on the TSX is about 20 years, with many either merging, going bankrupt, or being acquired. In fact, nearly half of all companies listed on the TSX a decade ago no longer exist today. This highlights the difficulty of predicting which companies will thrive long term, especially in volatile or rapidly changing industries.
Keep it safe
This is why exchange-traded funds (ETF) offer such a compelling option. And if there is one Canadians can easily consider, it’s the iShares S&P/TSX 60 Index ETF (TSX:XIU). XIU provides exposure to Canada’s top 60 companies across various sectors, ensuring built-in diversification. Over the past decade, XIU has delivered an average annual return of around 7%, thus making it a solid choice for Canadians seeking steady growth. By holding a basket of established companies, XIU reduces the risks associated with betting on individual stocks while capturing the overall performance of the Canadian economy.
Furthermore, XIU’s low management fees and ease of access make it an excellent choice for TFSA investors who prefer a passive, hands-off approach. With over $10 billion in assets under management, it’s one of the most popular and liquid ETFs on the TSX, ensuring that investors can enter or exit positions easily without significant costs or delays.
Investing in XIU not only mitigates the risks tied to individual company failures. It also provides strong long-term growth prospects in the Canadian market. In fact, it offers a year-to-date increase of 13% at writing, with a 3% dividend yield! Its blend of top-performing sectors, including finance, energy, and materials, ensures that investors can benefit from a wide range of market opportunities. All while enjoying the tax advantages of a TFSA.
Bottom line
Diversifying your portfolio is one of the smartest moves for long-term growth and stability, especially in a TFSA. By spreading investments across various sectors and assets, you reduce risks and boost your chances of steady returns. Pairing this strategy with investments in strong sectors like technology, renewable energy, and ETFs such as XIU ensures you’re well-positioned for the future, allowing you to enjoy both growth and tax benefits!
