If you’re already contributing money to your Tax-Free Savings Account (TFSA), you probably know it’s one of the most powerful tools that Canadian investors have at their disposal. However, the TFSA is only as powerful as the Canadian stocks and exchange-traded funds (ETFs) that you buy and hold inside it.
The entire reason the TFSA offers such a significant opportunity to Canadians is its tax-free nature that can significantly improve the compounding effect over the long haul.
So, not only do you not want to use your TFSA as an actual savings account, you want to ensure the stocks and ETFs you buy for your TFSA grow your hard-earned money consistently for years to come.
That’s why many Canadian investors especially prefer to own ETFs. Instead of trying to pick a handful of individual stocks, ETFs allow investors to gain instant diversification, often across dozens or even hundreds of companies, all with a single purchase.
That diversification is essential for retail investors, because it helps mitigate some risk and can also help smooth out volatility while still offering exposure to long-term market growth or passive income opportunities.
So, if you’ve got cash in your TFSA that you’re looking to put to work, here are three ETFs I’d consider snapping up right now.
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One of the best ETFs Canadian investors can buy in their TFSAs
When it comes to picking the best ETFs to buy for your TFSA, there’s no question that BMO S&P 500 Index ETF (CAD-HEDGED) (TSX:XSP) is one of the top choices Canadians have.
Buying an index ETF is one of the easiest ways to gain broad exposure to the market, and the XSP offers a simple way to invest in some of the largest and most successful companies in the world on the S&P 500.
That means exposure to hundreds of major U.S. companies across sectors like technology, healthcare, consumer goods, financials, and more.
Canadians often want broad exposure to the TSX, which makes a lot of sense and can complement an ETF like the XSP. However, the S&P 500 offers broader exposure to every sector, and many of the largest U.S. stocks have operations all over the world.
That’s why there’s no question that one of the best ETFs that Canadian investors can buy in their TFSA today is the XSP.
Two top covered call ETFs that are perfect for dividend investors
In addition, the XSP, if you’re a dividend investor looking to boost the yield that your TFSA generates, two of the best Canadian ETFs to buy now are BMO U.S. High Dividend Covered Call ETF (TSX:ZWH) and BMO Canadian High Dividend Covered Call ETF (TSX:ZWC).
First, the ZWH is one of the best to buy and hold for years because it offers exposure to a portfolio of high-quality U.S. dividend-paying stocks while also using a covered call strategy to enhance income.
What using a covered call strategy means is that the fund sells options on a portion of its holdings in exchange for option premiums. Those premiums are then added to the dividends generated by the underlying stocks, which allows the ETF to produce a higher overall yield.
That’s why these covered call ETFs are so ideal for dividend investors. The ZWH ETF, for example, offers a current yield of roughly 6.3%.
It’s worth noting, though, that the trade-off of that higher yield is that some capital gains potential may be capped during strong market rallies. However, in more moderate market environments where stocks move sideways or only gradually higher, the strategy can be very effective at boosting income.
Meanwhile, the ZWC ETF offers investors a similar setup except with exposure to a diversified portfolio of Canadian companies across sectors such as financials, energy, utilities, and telecommunications.
These are generally mature, cash-generating businesses that already offer attractive dividends on their own, so when the premiums from selling covered calls are added, investors receive a significant yield.
In fact, with stocks selling off over the last week, the yield that the ZWC currently offers has climbed to roughly 5.7%.
So, if you’re looking for top Canadian ETFs to buy in your portfolio today, both the ZWH and ZWC are two of the best picks for boosting your passive income.
