Individual stocks offer higher profit potential, although the risk of losses is equally high. The market is sensitive to so many factors that price fluctuations, sometimes wild swings, are a common occurrence. To manage these risks, you can diversify by spreading exposure across different sectors.
Unfortunately, picking stocks to build a portfolio is cumbersome and time-consuming. Fortunately, a practical solution is available. Exchange-traded funds (ETFs) trade like stocks but offer instant diversification. If you’re a Tax-Free Savings Account (TFSA) investor, the top-performing Canadian ETFs also pay dividends.
In the current environment, the energy and financial sectors are the top performers thus far. You can invest in ETFs focused on either sector. A third option is a broad-market ETF with exposure to nearly all primary sectors, except real estate.
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Canadian energy sector
BlackRock’s iShares S&P/TSX Capped Energy Index ETF (TSX:XEG) is a passively managed index fund focused on the Canadian energy sector. The fund tracks and replicates the performance of the S&P/TSX Capped Energy Index. XEG, up 38.5% year to date, mirrors the energy sector’s performance (+37.5%). At $26.46 per share, the yield is 2.51%, paid quarterly.
The ETF has 26 holdings and is heavily weighted towards oil & gas exploration & production companies and integrated oil & gas companies. XEG started trading on the TSX in March 2001, delivering a total return of +681.9% total since inception. Its three-year total return is +104.2%, representing a 26.9% compound annual growth rate (CAGR).
Prospective investors would have the mega-cap oil & gas companies in one basket. Suncor Energy and Canadian Natural Resources are the top two holdings.
Banking giants
Canada’s banking sector, principally the Big Six banks, is known worldwide as the bedrock of stability. BMO Global Asset Management enables investors to gain exposure to all six banks through BMO Equal Weight Banks Index ETF (TSX:ZEB).
Note the “equal weight” because the fund manager ensures an equal allocation of the big bank stocks rather than market capitalization. The strategy lessens security-specific risk. As of this writing, all the big bank stocks have posted market-beating returns, following their impressive second-quarter fiscal 2026 results. The group has collectively withstood the market volatility.
ZEB, a 17-year-old ETF, trades at $72.22 per share. Current investors enjoy a 25.33% year-to-date gain on top of the 2.41% yield. The payout frequency is monthly.
Broad market exposure
Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) is the top pick if sector-specific ETFs are not to your liking. It tracks the broad Canadian equity index and invests in high-yield TSX dividend stocks. The basket has 61 holdings consisting of large-, mid-, and small-cap stocks.
While the ETF leans towards energy titans and banking giants, it also provides exposure to the top dividend payers in eight other primary sectors. Performance-wise, VDY outperforms the broad market year to date at +23.8% versus +10.2%. If you invest today, the share price is $75.66. The dividend offer is 3.24%, with a monthly payment schedule.
Practical alternative
Owning ETFs is a simple, practical, hands-off way to secure instant diversification. Moreover, the top-performing Canadian ETFs are suitable holdings in a TFSA for earning reliable, tax-free passive income.
