If you’re just getting started with investing, I still think the best option for most Canadians is an all-in-one asset allocation exchange-traded fund (ETF). These products provide diversified exposure to stocks and bonds, automatically rebalance their holdings, and require very little ongoing maintenance.
But if you want something between an all-in-one ETF and picking individual stocks, there’s another approach worth considering: building your own portfolio using index ETFs.
Index ETFs track established market benchmarks rather than relying on active managers to select securities. That generally makes them cheaper than actively managed funds while still providing broad diversification across hundreds or even thousands of companies.
You also get more control over your portfolio’s geographic exposure. Want to emphasize U.S. stocks, maintain a meaningful allocation to Canadian companies, or diversify internationally? You can choose the proportions yourself. And you don’t need much money to begin. With $1,000, I’d consider starting with the following three ETFs.
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Vanguard S&P 500 Index ETF
The Vanguard S&P 500 Index ETF (TSX: VFV) is a dirt-cheap way to access blue-chip U.S. stocks at a 0.09% expense ratio.
It tracks the S&P 500 Index, which includes approximately 500 leading U.S. businesses weighted by market capitalization. That gives you exposure to companies such as Microsoft, Apple, Nvidia, Amazon, and Alphabet.
VFV is particularly attractive for investors who want exposure to the U.S. economy and its dominant technology companies. However, its market-cap weighting means the largest stocks account for a substantial portion of the portfolio.
It’s also worth remembering that VFV holds U.S. equities without hedging currency exposure, so changes in the Canadian dollar can affect returns. All else being equal, a rising U.S. dollar will help it, while a strong Canadian dollar can hurt it.
iShares S&P/TSX 60 Index ETF
For Canadian stocks, I’d consider the iShares S&P/TSX 60 Index ETF (TSX: XIU) at a 0.18% expense ratio.
XIU tracks 60 of Canada’s largest and most liquid publicly traded companies, providing exposure to major banks, insurers, energy producers, pipelines, railways, and other established businesses.
I like XIU because it offers a straightforward way to participate in the Canadian stock market without having to choose between individual banks or energy companies. It also pays a decent 2.1% trailing 12-month yield.
The main drawback is sector concentration. Canada’s economy and stock market are heavily weighted toward financials, energy, and materials, so XIU doesn’t provide the same sector diversification as a broad U.S. index.
BMO MSCI EAFE Index ETF
Finally, I’d add the BMO MSCI EAFE Index ETF (TSX: ZEA) for international diversification at a 0.22% expense ratio.
ZEA tracks developed stock markets excluding Canada and the United States, which includes countries such as Japan, the United Kingdom, France, Germany, and Switzerland.
That provides exposure to businesses and industries that aren’t as heavily represented in North American stock markets, including European industrial companies, global consumer brands, pharmaceuticals, and Japanese manufacturers.
ZEA also helps reduce dependence on the performance of U.S. technology stocks and Canada’s financial and energy sectors. However, it doesn’t include emerging markets such as India, China, or Brazil.
How I’d put the three together
The good news is that you don’t need to choose one ETF over the others. For a simple, all-equity portfolio, I’d consider allocating 50% to VFV, 25% to XIU, and 25% to ZEA. With an initial $1,000 investment, that means putting $500 into U.S. stocks, $250 into Canadian stocks, and $250 into developed international markets.
This provides a reasonable geographic balance while keeping the portfolio straightforward to manage. However, it’s still a 100% stock allocation, so investors need to be comfortable with substantial market volatility.
I’d review the weights quarterly and rebalance when necessary, ideally by directing new contributions toward whichever ETF has fallen below its target allocation rather than selling existing holdings.
More importantly, I’d focus on the habits that matter over time. Reinvest distributions instead of spending them, make use of available Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) contribution room, and contribute regularly whenever you receive a paycheque. And when markets inevitably decline, try to stay the course rather than abandoning your strategy.
