Do you want to retire with over $1 million in your Tax-Free Savings Account (TFSA) and/or Registered Retirement Savings Plan (RRSP)?
You might feel tempted to resort to some extreme measures to achieve that goal, such as high-risk short-term trading, but in fact, the slow and steady approach is more likely to get you there. Studies show that those who hold diversified index funds for the long term tend to outperform those who attempt riskier strategies aiming to “get rich quick.” While it might not sound glamorous to get a 10% annual return with index funds, such an outcome is actually a reasonable one to expect; most attempting truly superior returns fail to get what they’re after, in many cases losing money. With that in mind, here are three Canadian exchange-traded funds (ETFs) worth holding for decades.
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Total Canadian market
iShares S&P/TSX Capped Composite (TSX: XIC) ETF is a broad-market Canadian ETF that invests in the TSX Index, the most watched index of Canadian stocks. The TSX Index consists of about 240 stocks and XIC actually holds about 220 of them. So, the fund is quite diversified and represents the index that it tracks fairly well.
In addition to having an ample amount of diversification, the XIC ETF has many other qualities that make it a suitable investment for a great many Canadians.
First, it represents many different sectors, meaning that weakness in one asset class can be offset by strength in another. This is important because a high level of numerical diversification can provide less risk reduction than you’d think if all of the assets tend to move together as one.
Second, it has a very low management fee of 0.05% and a 0.06% management expense ratio. This means that when you invest in XIC, you are not paying out an excessive percentage of your gains to a fund manager.
Third and finally, XIC is a very popular fund with high trading volume, which lowers the bid-ask spread. The “bid-ask spread” is a price gap that market makers capture when they execute your trades; the smaller it is, the less you pay them. So, you could think of XIC’s high liquidity and volume as another form of “low fee.”
Canadian dividend stocks
BMO Canadian Dividend ETF (TSX: ZDV) is a Canadian ETF of high-dividend stocks. It consists of 50 stocks spread across sectors like banking, utilities and energy. The fund has a 3.74% dividend yield, which is much higher than the TSX’s present 2.5% yield. Its management expense ratio — 0.39% — is a lot higher than XIC’s. However, this fund targets dividend-paying names and is therefore correlated with the “value” factor. At a time when tech stocks are soaring to dizzying and, some would say, unsustainable heights, it might be worth holding in your portfolio.
U.S. stocks
Last but not least, we have Vanguard S&P 500 ETF (TSX: VFV). This is the TSX-listed version of the famous Vanguard S&P 500 Index Fund. It is similar to the US-listed VOO fund, except it has a higher management expense ratio (0.08% vs. 0.04%) and built-in currency hedging. VOO has some advantages over VFV, such as the dividends being tax-exempt if held inside an RRSP. However, VFV spares you the currency conversion fees you’d pay if you held VOO in a Canadian dollar account. Also, because VFV trades in Canadian dollars, the returns you see reported by your broker each day are the returns you actually earned.
