Fun fact. Did you know that U.S.-listed exchange-traded funds (ETFs) are subject to a 15% foreign withholding tax on dividends before the cash even reaches you?
That applies even inside a Tax-Free Savings Account (TFSA). And unlike a non-registered account, there is no foreign tax credit to recover any of that.
Now, the impact depends on what you own. If you are holding a broad market ETF or a growth-focused strategy, the dividend yield is usually low, so the drag is minimal. In those cases, it still makes sense to hold U.S. equities in a TFSA.
But if you are chasing higher income, that withholding tax becomes much more noticeable. It eats into your yield and reduces your total return. That is why there is a strong case for keeping at least some Canadian equity exposure in a TFSA.
Here are three Canadian ETFs worth considering, each serving a different role. One for broad market exposure, one for large-cap blue chips, and one for income.
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Buy the broad Canadian market
The Vanguard FTSE Canada All Cap Index ETF (TSX: VCN) is about as simple and diversified as it gets.
For a 0.06% management expense ratio, you get exposure to over 200 Canadian stocks across large, mid, and small caps. It is a full representation of the domestic equity market.
If your goal is to own the Canadian economy and not think too much about it, this ETF does exactly that.
The current 12-month trailing yield is around 2.1%, with distributions paid quarterly.
Blue chip Canadian stocks
If you want to focus more on the most established companies, BMO S&P/TSX 60 Index ETF (TSX: ZIU) is a solid alternative.
Unlike VCN, which includes smaller companies, this ETF holds the 60 largest names in the Canadian market.
That makes it more concentrated, with even heavier exposure to financials and energy. It is a bit more top-heavy, but you are getting the biggest and most dominant players.
The management expense ratio is slightly higher at 0.14%. In return, you get a modestly higher yield, currently around 2.2% on a forward-looking basis.
Canadian dividend stocks
If your focus is income, the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) is worth a look.
This ETF holds about 75 Canadian dividend-paying companies and offers the highest yield of the three. Right now, the 12-month trailing yield sits around 3.9%, and distributions are paid monthly.
The trade-off is cost. With a 0.22% management expense ratio, it is still reasonable, but noticeably higher than a broad-market ETF like VCN. You are paying a bit more for that higher income stream.
