Dividend stocks are preferred holdings of most Tax-Free Savings Account (TFSA) users because they pay zero taxes on dividends or capital gains. However, given the heightened market volatility and war-driven anxiety, individual stocks could expose your portfolio to unnecessary risk. An exchange-traded fund (ETF) appears to be a better holding in your TFSA right now for safety and income.
ETFs offer instant diversification against a turbulent market while providing a tax-free cash flow. You can also be specific and focus on TSX’s heavyweight sectors, which represent the bedrock of the country’s economy. Three standout Canadian ETFs today are ideal long-term holdings in a TFSA.
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Safety net
The “Big Six” Canadian banks are staples not only in a TFSA but in any investment portfolio. BMO Equal Weight Banks Index ETF (TSX:ZEB) provides exposure to all of them, including the bank sector’s growth. At its unit price of $59.90, ZEB pays a 2.9% dividend yield paid monthly. The three-year total return is plus-88%.
According to its fund manager, BMO Global Asset Management, ZEB carries a medium-to-high risk rating due to market fluctuations. Nonetheless, the multi-decade dividend track record of these giant lenders assures income reliability.
A salient feature is the equal-weight allocation and balanced exposure, from the largest, the Royal Bank of Canada, to the smallest, the National Bank of Canada. With ZEB, you’d be investing in Canada’s banking industry as a whole, which is a very stable foundation.
Resource-driven cash flow
Energy is the top-performing sector thus far on the TSX, boasting a plus-25.6% year-to-date gain. With surging oil prices and threats to global supply due to the ongoing Middle East war, energy stocks are in the spotlight. The iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) mirrors the sector’s performance.
At $24.15 per unit, XEG is up plus-25.7% year-to-date. The targeted exposure is the Canadian energy sector, although the top 10 holdings are Oil & Gas Exploration & Production and Integrated Oil & Gas companies. This ETF provides resource-driven cash flow from cash flow machines.
If you invest today, the dividend offer is 2.9% (quarterly payout). Under normal conditions, XEG serves as a natural hedge against inflation.
No-brainer choice
BMO Canadian High Dividend ETF (TSX:ZDV) is a no-brainer holding for risk-averse investors seeking defensive diversification. Besides the medium risk rating and focus on high dividends, the holdings include industry titans and generous dividend payers from the TSX’s 10 primary sectors. Only technology has zero representation.
ZDV tilts toward safety, shielding TFSA investors from dividend traps. Also, the fund manager aims to deliver sustainable income with lower volatility than the market. At $29.70 per unit (+9.1% year-to-date), you can partake in the 3% distribution yield. Like ZEB, the payout frequency is monthly. With 62 stock holdings across various sectors, you can stay the course during market corrections or regardless of the economic environment.
The solution
War headlines heighten investors’ anxiety and often lead to market sell-offs. A solution to mitigate geopolitical risks in 2026 is to diversify. The three Canadian ETFs in focus offer relative safety over individual stocks, along with recurring income streams. Canadians can maximize TFSA contribution limits and have peace of mind amid the market turbulence.
