I’m really not a fan of how the Tax-Free Savings Account (TFSA) is named. The word savings throws people off. A lot of Canadians treat it like a place to park cash, maybe earning a bit of interest in a Guaranteed Investment Certificate (GIC) that barely keeps up with inflation over time. It really should have been called the Tax-Free Investment Account. That would’ve made the purpose a lot clearer.
If you’ve got $21,000 sitting in your TFSA, which conveniently lines up with three years of $7,000 contributions, leaving it idle is a missed opportunity. Assuming you have a long time horizon and can tolerate market ups and downs, there’s a simple way to put that money to work with just one exchange-traded fund (ETF).
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Why invest your TFSA?
At some point, you’re not going to be able to work forever. Whether it’s age, health, or simply wanting to stop, there will come a time when your paycheque disappears. At that point, you’ll need other sources of income to support your lifestyle.
Canada does have a solid foundation with the Canada Pension Plan (CPP) and Old Age Security (OAS). But for most people, those programs alone aren’t enough to maintain the same standard of living in retirement.
Many Canadians also have Registered Retirement Savings Plans (RRSPs) or workplace pensions. But the TFSA offers something unique. Every dollar of growth, every dividend, and every capital gain is completely tax-free. That makes it one of the most powerful tools you have, so it makes sense to grow it as much as possible.
And while no one can predict which company, sector, or country will outperform over the next 20 years, one thing is far more likely: the global stock market as a whole will be higher. That means owning thousands of companies across North America, Europe, Asia, and beyond, spanning all 11 sectors, from technology and healthcare to energy and financials, and across large, mid, and small-cap stocks.
Buy it all with this one simple ETF
One of the easiest ways to do that is with iShares Core Equity ETF Portfolio (TSX:XEQT). Yes, it really can be that simple, just buy XEQT! There’s no need to overcomplicate it. One ETF, broad diversification, low fees, and time in the market.
This ETF holds more than 8,400 stocks from around the world. About 25% of the portfolio is allocated to Canada, which helps reduce currency risk and provides some tax efficiency. Around 45% is invested in the United States, with the rest spread across developed international markets and emerging economies.
The structure is what’s known as an ETF of ETFs. Instead of buying multiple funds yourself, XEQT wraps them into a single product. It automatically maintains the target allocation and rebalances over time, so you don’t have to.
Costs are low as well. The management fee is 0.17%, reduced from 0.18%. That should bring the overall management expense ratio down from around 0.20% to 0.19%, making it a very cost-effective way to own the global market.
From there, the strategy is straightforward. Invest consistently and reinvest the distributions. XEQT currently offers a 12-month trailing yield of about 1.59%, paid quarterly. Each payout can be used to buy more shares, which compounds your growth over time.
