3 Top Canadian ETFs to Buy for Instant Diversification

Buy one ETF and instantly own slices of thousands of companies worldwide, without having to pick individual winners.

Key Points
  • XEQT gives you a low-cost, globally diversified all-equity portfolio that rebalances automatically.
  • VFV is a cheap way to own the S&P 500, but it’s concentrated in big U.S. tech and adds U.S.-dollar exposure.
  • XEI holds high-dividend Canadian stocks and pays monthly income, but it’s concentrated in a few Canada-heavy sectors.

One ticker can now buy tiny pieces of more than 8,000 companies around the world. No spreadsheet gymnastics, no guessing which bank or technology stock wins next, and no portfolio requiring the organizational skills of an air-traffic controller.

That reach helps explain why exchange-traded funds (ETF) have become such useful portfolio building blocks. Investors can spread their money across industries and countries immediately, then spend considerably less time worrying about one disappointing earnings report.

An ETF holds a basket of investments but trades on an exchange like an individual stock. Some track entire markets, while others focus on one country, sector, or strategy. The right choice depends on the job an investor needs it to perform. For broad global growth, U.S. market exposure or Canadian dividend income, three funds stand out.

ETF is short for exchange traded fund, a popular investment choice for Canadians

Source: Getty Images

XEQT

iShares Core Equity ETF Portfolio (TSX: XEQT) offers the widest reach of the group. Through five underlying funds, it holds exposure to roughly 8,395 stocks across Canada, the United States, developed international markets, and emerging economies in July.

BlackRock automatically rebalances the portfolio around its target weights, while its 0.20% management expense ratio keeps the structure relatively inexpensive. XEQT also targets 100% equities, making it better suited to investors with long timelines and enough patience to sit through market declines. Investors wanting greater exposure to the companies leading the U.S. economy may prefer a more focused second option.

VFV

Vanguard S&P 500 Index ETF (TSX: VFV) tracks 500 large U.S. companies, giving Canadians access to businesses such as the largest market caps in the United States, through one TSX-listed fund.

Its 0.09% management expense ratio leaves very little friction between investors and the index. VFV stock also trades in Canadian dollars, although the fund remains exposed to changes in the value of the U.S. dollar.

The S&P 500 has become increasingly concentrated in its largest technology holdings, so VFV stock isn’t as evenly diversified as the ETF’s count suggests. Investors seeking more income and a stronger Canadian tilt may find the final ETF more useful.

XEI

iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) held 75 Canadian dividend stocks in July. Its portfolio includes banks, pipelines, utilities, energy producers, and other established businesses selected for stronger income potential.

XEI offered a distribution yield near 3.5% and paid investors monthly, while charging a 0.22% management expense ratio. That combination could suit retirees or other investors who want regular cash without researching dozens of separate dividend stocks.

Foolish takeaway

Diversification can reduce company-specific risk, but it can’t prevent losses when entire markets decline. XEQT carries full equity-market exposure, VFV stock leans heavily toward the United States, and XEI concentrates on several economically sensitive Canadian sectors.

Those differences also mean investors shouldn’t automatically buy all three in equal amounts. XEQT already owns Canadian and U.S. stocks, so adding VFV stock or XEI would deliberately increase exposure to those markets.

XEQT can build an entire global equity portfolio, VFV offers low-cost access to leading U.S. companies, and XEI adds monthly Canadian dividend income. Choosing the fund that matches the portfolio’s missing piece could turn one simple purchase into years of diversified growth.

Fool contributor Amy Legate-Wolfe 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.

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