I don’t know who needs to hear this, but income isn’t free money. Whether it’s a dividend from a stock or a distribution from an exchange-traded fund (ETF), the math is the same.
On the ex-dividend or distribution date, the price of that stock or the net asset value of that ETF drops by the exact amount paid out, all else being equal. It doesn’t matter if it recovers later in the day. It’s just an accounting mechanic.
That’s important to understand because there’s a lot of interest in using a Tax-Free Savings Account (TFSA) for passive income. And that’s fine. It’s certainly better than leaving cash sitting idle and losing purchasing power to inflation.
But if you’re still years, or even decades, away from needing that income, chasing yield may not be the best move. If you’re willing to delay gratification, your TFSA can be much more powerful as a compounding machine.
Loading up on double-digit yield stocks or funds often means taking on more risk or sacrificing long-term growth. Instead, the focus should be on two things: low fees and broad diversification.
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Why low fees and global diversification matter
When you invest, there are forces working for you and against you. Markets, over time, tend to grow. That’s the tailwind. But fees, poor diversification, and bad timing decisions can all drag your returns down.
Many investors end up underperforming not because markets fail, but because they get in their own way. The simplest solution is to aim for the market’s average return while removing as many obstacles as possible.
Diversification is a big part of that. The global stock market includes thousands of companies, yet only a small percentage of those stocks drive most of the long-term gains. If you’re holding just a handful of names, the odds of consistently picking those winners are low.
That’s why John Bogle, the founder of Vanguard, popularized the idea of “buying the haystack.” Instead of trying to find the needle, you own every stock from different sectors, sizes, and countries.
The second piece is cost. Fees come directly out of your returns, and they compound over time just like gains do, except in the wrong direction. Paying high fees for a concentrated portfolio makes little sense when you can own a broadly diversified one at a fraction.
The ETF that puts this into practice
One ETF that captures this approach is the iShares Core MSCI All Country World ex Canada Index ETF (TSX: XAW).
It holds more than 8,200 stocks from around the world, giving you exposure to the United States, developed international markets like Japan, the United Kingdom, and Germany, as well as emerging markets such as China, India, and Brazil.
Importantly, it excludes Canada. That’s actually a feature. Many Canadian investors already have a home bias through individual stocks or other holdings. Using this ETF as the foundation of your portfolio helps you diversify globally without doubling up on Canadian exposure. Even if your Canadian picks underperform, the rest of your portfolio is still tied to the broader global market.
It’s also cost-efficient. With a 0.22% management expense ratio, you’re getting access to thousands of stocks across multiple regions at a relatively low cost. The ETF handles rebalancing and underlying exposure for you, making it a hands-off solution.
