Just Opened a TFSA? These Index ETFs Are Great for Beginner Investors

The BMO Canadian Money Market ETF (TSX:XMMK) is a great fund for beginners.

Andrew Button

Author Bio

Andrew “A.J.” Button is a financial writer with a longstanding interest in value investing and international markets. He began investing at a young age, building a portfolio of dividend stocks to help pay for university. After stepping away from investing for a time, he rediscovered his passion in 2019 when he began working as a freelance financial writer. Since then, Andrew has built a diversified investment approach spanning Canadian, U.S., and international equities, as well as guaranteed investment certificates (GICs) and money market funds. He is particularly interested in international stocks, drawn to their dividend potential and long-term growth opportunities, while maintaining an interest in Canadian businesses. Before joining The Motley Fool, Andrew worked as a freelance copywriter specializing in financial services. He continues to write for financial publications and share his thoughts on stocks through social media.

Education and Professional Credentials

Canadian Securities Course (CSC)
CFA Program Level I examination completed

Areas of Expertise

Value investing, Canadian equities, U.S. stocks, international equities, dividend investing, long-term investing, GICs, money market funds, and portfolio diversification.

Social Media Profiles

Published September 29, 4:50 pm EDT

If you opened a self-directed TFSA recently, you’re probably thinking hard about what to invest in. A self-directed TFSA gives you plenty of room to invest the way you want to. The downside is, you need to take the time to carefully pick the investments you will hold in it.

So, what types of assets should you hold in your TFSA?

There are many you could consider, but if the stock market is what you’re interested in, then exchange-traded funds (ETFs) are among the best choices. Holding ETFs in your TFSA gives you the benefit of diversification, cutting the time you’d otherwise spend researching stocks and boosting your risk-adjusted returns.

Many studies have found that ETF investing boosts investors’ returns while reducing their risk. On top of that, most Canadian ETFs are completely tax-free when held inside a TFSA. In the subsequent paragraphs, I will explore three ETFs that might be worth holding in your newly opened TFSA.

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The entire TSX

As a Canadian investor, buying the entire TSX is probably a logical choice. If you hold ETFs in a TFSA, you pay no dividend or capital gains taxes on them. If you hold Canadian ETFs specifically, you pay no withholding taxes either.

If you want to buy the entire S&P/TSX Capped Composite Index, you can do so through the iShares S&P/TSX Capped Composite Index ETF (TSX: XIC). It’s a fund that holds 220 of the 240 stocks in the index, making it pretty representative of the Canadian medium/large cap universe. The fund has a 0.05% management fee and a 0.06% management expense ratio (MER), which makes it relatively inexpensive. It also has high trading volume and a low bid-ask spread. Take all these characteristics together, and you have the makings of a high-quality index ETF.

High dividend stocks

If you’re looking to add a little extra income to your portfolio, the Vanguard FTSE Canadian High Yield Index ETF (TSX: VDY) is one to consider. It’s a fund built on the FTSE Canadian High Yield Index, which contains roughly 60 high yield Canadian stocks. Despite the name, VDY does not have a stratospherically high yield. At 2.9%, the yield is just slightly above average by the standards of Canadian markets overall. However, the fund does have a respectable amount of diversification (60 assets of which 58 are stocks), a relatively low fee (0.22%) and decent liquidity. For the yield-hungry TFSA investor, an investment in VDY could make sense.

Government bonds

Turning now to money market funds, we have the BMO Canadian Money Market ETF (TSX: ZMMK). This is a fund built on government bonds and short-term corporate notes rather than stocks. It holds a large amount of Canadian treasuries as well as short-term corporate borrowings. The ETF has 441 different bonds and bills, which is a high level of diversification. It has a 0.13% MER, which is low (i.e., the fund charges low fees). Finally, ZMMK is among the most popular money market funds in Canada, which gives it high liquidity and a low spread. For these reasons, ZMMK is a good fund to consider.