The TFSA is one of the few accounts where Canadians can earn investment income without giving a cut to the Canada Revenue Agency. That makes it an ideal home for ETFs you plan to hold for years, letting compounding do the work without tax drag eating into returns.
But with thousands of ETFs listed on the TSX, narrowing down which ones deserve a permanent spot in your TFSA can feel overwhelming. However, when looking at the market for such ETFs, I keep coming back to three funds that cover the major bases: U.S. growth, Canadian income, and international diversification.
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Vanguard S&P 500 Index ETF
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Vanguard S&P 500 Index ETF (TSX: VFV) is one of the simplest ways for Canadians to own the biggest companies in the United States. The fund tracks the S&P 500, giving investors exposure to roughly 500 large-cap American businesses, many of which operate globally.
VFV trades at $187.77 and carries a management expense ratio of just 0.09%. The trailing yield sits around 0.85%, which is not going to impress income seekers. But that is not the point. VFV is a growth engine, not an income play. Over the past year, the fund has delivered a total return of roughly 25%.
However, there’s a caveat worth understanding here; the S&P 500 is not as diversified as the 500-stock count suggests. Technology stocks account for roughly 37% of the fund, and the 10 largest holdings make up nearly 40% of the portfolio. That concentration has driven strong returns, but it also means VFV is more exposed to a handful of mega-cap names than some investors realize.
iShares S&P/TSX Composite High Dividend Index ETF
If VFV handles growth, XEI (TSX: XEI) is what handles income. This fund holds 75 Canadian dividend stocks ranging from banks, pipelines, and utilities all the way to energy producers selected for their higher yields and established payout histories.
At the time of writing, XEI trades at $39.66 and offers a distribution yield of roughly 3.5%. What makes it particularly appealing for TFSA investors is that it pays distributions every month, not quarterly. That monthly rhythm makes it easier to reinvest and compound, especially for those building a portfolio from scratch.
There is a catch here though; sector concentration. Financials account for about 32% of the fund, and energy represents another 29%. That is a heavy bet on two sectors that can be cyclical. Investors holding individual bank or pipeline stocks alongside XEI need to be mindful of doubling up on that exposure.
Vanguard FTSE Developed All Cap ex North America Index ETF
The first two funds are heavily North American. VIU (TSX: VIU), however, fills the gap, offering exposure to over 3,600 stocks across developed markets outside Canada and the United States.
Japan is the 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 carry meaningful weightings.
As of this writing, VIU trades at $49.88 and yields around 2.2%, with distributions paid quarterly. It is not currency hedged, so movements in the yen, euro, and pound will affect Canadian-dollar returns. It also excludes emerging markets, meaning investors who want exposure to China, India, or Taiwan would need another fund.
Foolish takeaway
No single ETF does everything. But together, these three cover a lot of ground.
VFV gives you the growth engine of the U.S. economy. XEI delivers monthly income from established Canadian dividend payers. And finally, VIU adds international exposure that the other two lack entirely.
None of them are flashy with an exciting story about a turnaround or a breakthrough product, but that is precisely the point. These make up for a TFSA you do not have to constantly manage.
For investors looking to build a long-term portfolio without the headache of stock picking, these three ETFs are a solid place to start and a comfortable place to stay.
