When it comes to long-term investing, a Tax-Free Savings Account (TFSA) is one of the best tools available to Canadians. It allows investments to grow tax-free. This benefit makes it an ideal vehicle for exchange-traded funds (ETF) that can compound over decades without losing gains to taxes.
Choosing the right ETFs for a TFSA means focusing on funds that offer diversification, steady growth, and reliable returns. TWO standout choices for long-term investors are the Vanguard FTSE Canada All Cap Index ETF (TSX: VCN), and the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI). These ETFs provide a strong mix of Canadian market exposure, passive income, and global diversification, thereby creating a well-rounded approach to wealth building.
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VCN
The VCN ETF is a solid option for investors who want broad exposure to the Canadian stock market. This ETF includes large-, mid-, and small-cap stocks, covering multiple sectors and giving investors a well-balanced representation of Canada’s economy.
Financials make up the largest portion of the fund. The ETF has faced some short-term volatility, with recent declines mirroring broader market trends. Yet over the long term, it has historically delivered steady returns. With a dividend yield of 2.61% and a net asset value of $45.62 as of writing, VCN remains an attractive option, especially for investors who want a hands-off way to participate in the Canadian market while collecting passive income.
XEI
For those seeking higher yields, XEI is a compelling choice. This ETF focuses on Canadian companies with strong dividend payouts, making it ideal for TFSA investors who want to generate tax-free income. The fund is heavily weighted in the financial and energy sectors. While these sectors can experience cyclical downturns, long-term performance has been resilient. Plus dividend-paying stocks tend to hold up well in volatile markets.
The ETF’s yield of 5.5% is well above the broader market average, providing investors with a steady stream of income that can be reinvested for compounding growth. Despite some fluctuations in value, the focus on dividends makes XEI a strong candidate for long-term investors looking to balance growth with stability.
Considerations
Looking at historical performance, these ETFs have proven to be reliable investments over time. VCN, with its all-cap exposure, has delivered returns in line with the Canadian market’s long-term average. XEI, thanks to its focus on high-yield stocks, has provided investors with consistent dividend income even during periods of market downturns. While no investment is without risk, these ETFs have demonstrated resilience through various economic cycles, making each well-suited for investors with a long-term horizon.
A TFSA is particularly well suited for ETFs because it allows investors to avoid capital gains taxes, dividend withholding taxes, and other fees that could eat into their returns in a non-registered account. By selecting ETFs like VCN and XEI, investors can maximize tax-free compounding over decades. The key to making the most of a TFSA is to stay invested for the long haul. Market downturns and short-term corrections are inevitable, but history shows that holding a diversified mix of assets over time leads to strong returns.
Bottom line
By focusing on strong, diversified ETFs and taking advantage of the TFSA’s tax-free benefits, investors can set themselves up for financial success. Whether looking for steady dividends, broad market exposure, or global growth, these ETFs provide the foundation for a portfolio – one that can weather market cycles and deliver solid returns over time.
