Investing in a Tax-Free Savings Account (TFSA) is a savvy move for Canadians aiming to build passive income. But many of us may not know where to begin! That’s why an exchange-traded fund (ETF) can be a smart move. Allocating $15,000 into a globally diversified ETF like iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW) is an especially strategic choice. Today, let’s explore how this approach can work for you.
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Into XAW
XAW offers exposure to a broad spectrum of international equities, excluding Canadian stocks, providing diversification across various markets and sectors. This diversification can help mitigate risks associated with investing in a single market, enhancing the potential for stable, long-term returns.
As of writing, XAW was trading at $46.15 per unit. With a $15,000 investment, this purchase grants you access to a portfolio of global companies, including holdings in iShares Core S&P 500 ETF, iShares Core MSCI EAFE IMI Index ETF, and iShares Core MSCI Emerging Markets IMI Index ETF, among others.
And that purchase gives you a lot of returns. In terms of performance, XAW has demonstrated solid returns. For instance, in 2023, the fund achieved an 18.16% return, following a -11.77% return in 2022 and an 18.23% return in 2021. These figures highlight the fund’s resilience and growth potential over time.
Future outlook
Looking ahead, the global diversification of XAW positions it to capitalize on growth opportunities across various markets. While past performance doesn’t guarantee future results, the fund’s broad exposure can help navigate market fluctuations, aiming for steady growth.
An attractive feature of XAW is its semi-annual distributions, with a yield of approximately 1.50%. In a TFSA, these distributions are tax-free, allowing your investment to grow more efficiently. Reinvesting these distributions can further enhance your compound growth over time.
The management fee for XAW is 0.20%, with a management expense ratio (MER) of 0.22%. These low fees ensure that more of your money remains invested, contributing to your overall returns. So, by holding XAW within your TFSA, you can benefit from tax-free growth and withdrawals, maximizing your passive-income potential. This setup allows your investment to compound without the drag of taxes, accelerating your path to financial goals.
Bottom line
So, let’s say you put that $15,000 towards XAW and let it grow for a decade. In that time, you enjoy a continued compound annual growth rate (CAGR) of 9.35%. Then, you add on the dividend, rising by a CAGR of 2.35% over the last five years. Here is what you could achieve over a decade while reinvesting dividends.
| Year | Share Price | Shares Owned | Share Value | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $46.15 | 325 | $14,998.75 | $0.66 | $214.50 | $15,213.25 | $50.47 | 4 | 329 | $16,604.63 |
| 2 | $50.47 | 329 | $16,604.63 | $0.68 | $223.72 | $16,828.35 | $55.19 | 4 | 333 | $18,378.27 |
| 3 | $55.19 | 333 | $18,378.27 | $0.69 | $229.77 | $18,608.04 | $60.35 | 4 | 337 | $20,337.95 |
| 4 | $60.35 | 337 | $20,337.95 | $0.71 | $239.27 | $20,577.22 | $65.99 | 4 | 341 | $22,502.59 |
| 5 | $65.99 | 341 | $22,502.59 | $0.73 | $248.93 | $22,751.52 | $72.16 | 3 | 344 | $24,823.04 |
| 6 | $72.16 | 344 | $24,823.04 | $0.75 | $258.00 | $25,081.04 | $78.91 | 3 | 347 | $27,381.77 |
| 7 | $78.91 | 347 | $27,381.77 | $0.77 | $267.19 | $27,648.96 | $86.29 | 3 | 350 | $30,201.50 |
| 8 | $86.29 | 350 | $30,201.50 | $0.79 | $276.50 | $30,478.00 | $94.36 | 3 | 353 | $33,309.08 |
| 9 | $94.36 | 353 | $33,309.08 | $0.81 | $285.93 | $33,595.01 | $103.18 | 3 | 356 | $36,732.08 |
| 10 | $103.18 | 356 | $36,732.08 | $0.83 | $295.48 | $37,027.56 | $112.83 | 3 | 359 | $40,505.97 |
In summary, investing $15,000 from your TFSA into XAW provides a diversified, low-cost, and tax-efficient strategy to build passive income. One that could create $40,505.97 in a decade! With its global reach and consistent performance, XAW can be a valuable component of your investment portfolio, helping you achieve financial independence.
