There’s no question that the Tax-Free Savings Account (TFSA) is one of the best tools Canadians have at their disposal, especially if you’re buying high-quality ETFs for the long haul.
Since Canadians don’t generally pay tax on income earned inside a TFSA, it’s naturally an ideal place to hold investments for years and let compounding do the work. And with the rise in popularity of ETFs in recent years, it’s easier to start investing than it has ever been.
ETFs offer a tonne of advantages, but the most important for many investors is that they make it easy to invest across hundreds or even thousands of companies with a single purchase.
That’s why, if I were building a long-term TFSA I didn’t want to consistently manage, these are three of the best Canadian ETFs I’d consider holding for the long haul.
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One of the best index ETFs Canadians can buy and hold in their TFSAs
One of the first Canadian ETFs I’d buy and hold for years in my TFSA is the Vanguard S&P 500 Index ETF (TSX: VFV).
As its name suggests, VFV tracks the S&P 500, giving Canadian investors exposure to roughly 500 of the largest companies in the United States, many of which operate all over the world.
VFV is a no-brainer for many investors because it’s one of the simplest ways to gain exposure to the long-term growth of the U.S. economy and, to a lesser extent, the global economy.
That’s why, when investors assess how they performed against “the market,” they often compare their returns with the S&P 500.
However, it’s important to note that having exposure to 500 of the largest publicly traded companies in America doesn’t necessarily mean the fund is perfectly balanced.
Recently tech stocks have accounted for roughly 37% of the fund, while its 10 largest holdings make up nearly 40%.
So, although the VFV is one of the best Canadian ETFs to start with, you’ll want other ETFs and individual stocks to layer on top and complement that exposure.
A top Canadian ETF for passive income seekers
In addition to the VFV, the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) is one of the top funds Canadians can consider today, especially if you’re trying to boost the yield of your portfolio.
The fund holds dozens of higher-yielding Canadian stocks, many of which are established dividend payers, and currently offers a 3.4% yield. Another reason it’s so popular among dividend investors is that it pays distributions monthly.
The one caveat with the XEI is that financials account for roughly 32% of the fund and energy stocks represent another 29%.
So, whether you’re building a portfolio of Canadian ETFs in your TFSA or looking to complement these funds with some individual stocks, you’ll want to be mindful of doubling up on that exposure.
A top pick for investors wanting global exposure
One more ETF I’d consider if I were building a three-fund portfolio is the Vanguard FTSE Developed All Cap ex North America Index ETF (TSX: VIU).
VIU provides the geographic diversification that the other two funds lack, offering Canadians exposure to over 3,500 stocks across developed markets outside Canada and the United States.
For example, Japan is its largest market at roughly 23% of the portfolio, followed by the United Kingdom at approximately 13% and South Korea at around 9%. France, Switzerland, Germany, and Australia also have meaningful weightings.
However, because VIU is not currency hedged, movements in the yen, euro, pound and other currencies will affect its Canadian-dollar returns.
It also excludes emerging markets, so investors would need another fund if they wanted meaningful exposure to countries such as China, India, or Taiwan.
Nevertheless, VIU is still one of the best ETFs Canadian can buy if they want to diversify their TFSAs outside North America. And once you have a solid foundation of high-quality ETFs, you can start to look for some of the best individual stocks on the market to add alongside them.
