2 Canadian ETFs I’d Lock Into a TFSA and Never Touch

Let the broad diversification and low fees of these two Canadian ETFs work for you!

Key Points
  • Long-term compounding works best when investors stay invested and avoid drag from taxes.
  • VCN provides broad exposure to the Canadian stock market through a low-cost, diversified portfolio.
  • VDY combines above-average dividend yield with a decent history of long-term capital appreciation.

Investors often understand the importance of compounding in theory, but then interrupt the process in practice. They jump in and out of positions, try to time the market, chase whatever sector is performing well at the moment, or panic sell during downturns. Every time you interfere with a long-term strategy, you risk reducing the power of compounding.

The good news is that patience tends to be rewarded. Historically, investors who trusted the long-term trajectory of markets and remained invested through short-term volatility have generally come out ahead. The market does not move in a straight line, but over long periods, economic growth and corporate earnings have tended to push asset prices higher.

Taxes can also interfere with compounding, which is why the Tax-Free Savings Account (TFSA) is such a powerful tool. Not only are capital gains and dividends sheltered from tax, but Canadians continue to receive additional contribution room each year. For many investors, maximizing TFSA room should be one of the first priorities when building long-term wealth.

With that in mind, here are two Canadian exchange-traded funds (ETFs) I could realistically see buying, holding, and largely ignoring for years on end as part of a retirement strategy.

ETFs can contain investments such as stocks

Source: Getty Images

Vanguard FTSE Canada All Cap Index ETF

Vanguard FTSE Canada All Cap Index ETF (TSX: VCN) is about as close as you can get to owning the investable Canadian stock market in a single purchase.

The ETF holds large-, mid-, and small-cap Canadian companies across sectors including financials, energy, industrials, materials, utilities, and telecommunications.

Because it owns such a broad basket of Canadian stocks, VCN works well as a long-term compounding vehicle. You are not making a bet on a particular sector or company. Instead, you are effectively betting on the long-term growth of Canadian businesses as a whole.

The ETF also keeps costs low with a 0.06% expense ratio, which is critical for long-term investors. After all, every dollar paid in fees is one less dollar available to compound on your behalf.

VCN does offer a respectable 2.01% dividend yield, but income is not really the main attraction here. The bigger appeal is broad diversification and low-cost exposure to the Canadian market.

Vanguard FTSE Canadian High Dividend Yield Index ETF

For investors who eventually want to spend some of the income generated by their TFSA, Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) deserves consideration.

VDY focuses on higher-yielding Canadian dividend stocks, particularly in sectors such as financials, energy infrastructure, pipelines, utilities, and telecommunications. It charges a 0.22% expense ratio and pays a 3.24% yield.

The monthly distributions from this ETF can be attractive for investors seeking tax-free income from their TFSA. Whether you choose to reinvest those distributions or spend them is entirely up to you.

Historically, the ETF has also delivered strong share price appreciation. Many of the underlying companies are large, profitable businesses with durable competitive advantages and long histories of paying dividends.

As a result, investors have benefited from both income generation and capital appreciation over time. For those looking to turn a TFSA into a future income-producing asset, VDY strikes a compelling balance between yield and long-term growth.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

man in suit looks at a computer with an anxious expression
Dividend Stocks

Dividend Income in a TFSA: Why I Love This Tax-Free Setup

If you don't like paying tax on your passive income, use this tax-free set up in your TFSA to generate…

Read more »

woman looks ahead of her over water
Dividend Stocks

TFSA Retirement Plan: 2 Dividend Stocks Paying Nearly 6% Annually for Tax-Free Passive Income

These industry leaders now offer attractive dividend yields.

Read more »

middle-aged couple work together on laptop
Dividend Stocks

How I’d Build a $250-a-Month Income Plan Without Chasing the Biggest Yields

A roughly $75,000 portfolio can supply $250 a month on average without relying on unusually high yields.

Read more »

golden sunset in crude oil refinery with pipeline system
Dividend Stocks

Enbridge vs. TC Energy: Which Pipeline Stock Is the Better Buy Going Into 2027?

Let’s evaluate Enbridge and TC Energy across historical returns, growth prospects, dividend track records, and valuation to determine which pipeline…

Read more »

dividends grow over time
Dividend Stocks

How to Structure a $20,000 TFSA for Lifelong Monthly Income

These TSX stocks offer high yields and distribute monthly dividend payouts. Sustainable payouts generate steady income.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use Your TFSA to Average $408.75 per Month in Tax-Free Passive Income

This strategy can lower risk while also boosting yield.

Read more »

some investments are riskier than others
Dividend Stocks

Manulife vs. Sun Life: Which Stock Makes More Sense for a Retirement TFSA?

Sun Life offers slightly more starting income, while both insurers bring growth opportunities and market-sensitive risks.

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

Starting With $25,000: How I’d Build Towards $500 a Month in Dividends

A $25,000 starting portfolio can become a useful income engine, with contributions doing more of the work than a giant…

Read more »