One portfolio can own approximately 3,237 stocks before its investor finishes breakfast. No reading thousands of annual reports, or memorizing thousands of chief executive officers. Three exchange-traded funds (ETFs) can do the shopping in a few clicks.
Source: Getty Images
Why ETFs work
An ETF pools many investments into one security that trades like a stock. Understanding how ETFs work is especially simple with broad index funds because they follow a market rather than attempting to identify its next superstar.
More holdings don’t automatically mean less risk. Vanguard warns that diversification can’t guarantee a profit or prevent losses during a falling market. Investors must still inspect geography, sector concentration, fees, and overlap. Owning three technology-heavy ETFs may be diversification wearing a fake moustache.
The timing deserves attention after powerful market gains. XIC returned 32.2% during the year ended July 31, while XEF returned 25.5%. VFV delivered 26.9% during the year ended June 30. Those results shouldn’t become forecasts, although they provide an excellent reason to spread new money beyond whichever market won most recently.
XIC
The iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) holds 220 Canadian companies. Banks, pipelines, energy producers, miners, railways, and Shopify give investors exposure to domestic dividends, commodity demand, infrastructure investment, and an improving economy.
Its $56.30 price and tiny 0.06% management expense ratio (MER) make it an inexpensive core holding. The top 10 positions represent approximately 38% of the fund, however, while Canada remains heavily exposed to financials and resources. A banking slump or commodity downturn would therefore leave a mark. Even so, it’s a great way to get in on some of the biggest names on the TSX.
VFV
The Vanguard S&P 500 Index ETF (TSX: VFV) owns 506 large American stocks, adding global businesses such as Nvidia, Apple, Alphabet, Microsoft, and Amazon. Artificial intelligence (AI), cloud computing, digital advertising, and healthcare innovation provide growth engines largely missing from the TSX.
VFV ETF recently traded at $186.29 and charges a 0.09% MER. The danger hides inside its success. Technology represents 38% of assets, the top 10 holdings account for another 38%, and the portfolio trades around 27.5 times earnings. VFV stock is also unhedged, so a strengthening Canadian dollar can reduce its Canadian-dollar return.
XEF
The iShares Core MSCI EAFE IMI Index ETF (TSX: XEF) supplies the missing geography through 2,511 companies across Europe, Asia, and Australia. Its top 10 holdings make up only about 14% of assets, offering a much wider ownership spread.
XEF recently traded at $51.87, carries a 0.23% MER, and trades around 18.8 times earnings. That valuation sits well below VFV ETF’s, while the strong one-year return shows a rally doesn’t require a U.S. mailing address. Currency movements, geopolitics, slower regional growth, and the exclusion of emerging markets remain risks.
Three funds, one portfolio
| ETF | RECENT PRICE | HOLDINGS | PRIMARY MARKET | MER | MAIN CONCENTRATION RISK |
|---|---|---|---|---|---|
| XIC | $56.30 | 220 | Canada | 0.06% | Financials and resources |
| VFV | $186.29 | 506 | United States | 0.09% | Mega-cap technology |
| XEF | $51.87 | 2,511 | Europe, Asia, and Australia | 0.23% | Developed markets only |
An investor with a long horizon might place 30% in XIC, 45% in VFV, and 25% in XEF, then rebalance yearly. That example remains entirely invested in stocks, so anyone needing money soon or preferring smaller swings should consider bonds or cash as well.
All three funds can fall during a stock market correction. Keep contributing through those uncomfortable periods, and the next great company won’t need to be predicted in advance. There’s a good chance one of these ETFs already owns it.
