Exchange-traded funds (ETFs) offer an easy and affordable way to create a diversified portfolio of stocks. But what are ETFs? How are they different from stock? How do ETFs work? And how can you make money with ETFs as a Canadian investor?
In this guide, we’ll show you how to invest in ETFs in Canada, explain the benefits and alert you to the risks of investing in ETFs.
What are ETFs?
ETFs are low-cost investment funds that can be traded on a stock exchange such as the Toronto Stock Exchange (TSX). These funds are made up of a basket of securities, such as stocks and bonds.
If you want to invest using ETFs in Canada, you can start by opening an online brokerage account. Through a brokerage account, an investor can buy and sell ETFs in the same way as buying and selling stocks. Investing in ETFs makes it easy to create a diversified portfolio and spread your investment across a wide range of asset classes, including Canadian and international stocks, fixed income, debt, foreign currencies, commodities and metals.
There are two main types of ETFs in Canada:
Passive ETFs. Also known as indexed ETFs or index funds, these funds aim to replicate the returns of a specific index or benchmark. For example, you may want to invest in a fund that tracks the performance of the S&P 500.
Active ETFs. Active ETFs aim to outperform the market or a particular index to generate higher returns. These generally come with a higher level of risk and usually have higher management fees.
How do you make money with ETFs?
There are two ways to make money with ETFs:
Capital gains. If the unit price of an ETF rises in value over time, you can sell your units for more than what you paid for them.
Dividend income. Just like companies that pay out dividends to their shareholders, ETFs also pay dividends. These are usually distributed on a quarterly basis.
There are lots of good reasons to consider investing in ETFs:
Diversify your portfolio. Buying units in just one ETF allows you to invest in many stocks and asset classes at once. By spreading your money across asset classes, you can minimize your level of risk.
Save on fees. ETFs tend to have lower fees than traditional managed funds or LICs. They also help you save on brokerage fees — while investing in an ETF may provide exposure to dozens of stocks, you’ll only pay one brokerage fee. You can find more details on the cost of investing in ETFs further down the page.
Easy to get started. Not only are ETFs a beginner-friendly investment option, but they also allow you to invest with only a small amount of money. You can buy as little as one share in an ETF, while some brokers also allow you to buy fractional shares of ETFs.
Hands-off investing. Rather than researching and then selecting a broad range of investments on your own, the ETF issuer does all the hard work of choosing investments for you. You must choose the ETFs and purchase the units via a broker or online share trading platform.
Tax-effective investment. Because most ETFs attempt to track the performance of a specific index, there is usually a low turnover of investments when compared to actively managed funds. This results in fewer capital gains tax (CGT) liabilities for investors.
Easy exit. Because ETFs are traded on the stock market just like shares, you can sell ETF shares whenever you need to access the cash in your investment. You’re not locked in for a fixed term, so this makes ETFs a flexible option.
Finder survey: Are men or women more likely to consider whether commission-free ETFs are offered when choosing a stock trading platform?
Response
Female
Male
Whether commission free ETFs are covered
24.85%
22.47%
Source: Finder survey by Pollfish of 1001 Canadians, January 2024
How to choose the best ETFs in Canada
If you want to invest in ETFs, consider the following factors when comparing funds:
Your investment goals. The first thing you need to do before you start comparing ETFs is work out what you want to achieve with your investment. Do you want steady returns or more of a high-risk/reward strategy? What is your investment timeframe? Once you have a goal in mind, you can start your search for the right ETF.
Active or passive. Is the fund passive and designed to mimic the performance of an underlying index, or is it actively managed to try and outperform the market?
Management fees. Check the fund’s management fee, which is expressed as a percentage. Passive ETFs tend to have lower fees than actively managed ETFs.
Check the price. ETF issuers provide net asset value (NAV) information for each ETF. Compare the NAV with the buy and sell prices listed on your online trading platform to work out if you’re getting a fair deal.
Markets and sectors. Consider the assets an ETF invests in. Some track large-cap companies in the US, while others invest in emerging markets, specific industries, commodities or currency. Make sure the assets the fund tracks align with your investment goals.
Use a screener. Your online trading platform will provide screening tools to help you find ETFs that suit your investment goals. You can filter results based on factors such as asset class, market sectors and themes, geographical focus, management fees and more. Alternatively, there are also plenty of free online screeners available.
Read the ETF Facts sheet. It’s vital that you thoroughly research any ETF before you buy. Start by reading the ETF Facts sheet, which outlines the fund’s objectives, investment mix, fees, risk level and past returns.
Investing in ETFS: Compare online discount broker platforms
ETFs are bought and sold just like regular stocks, so you’ll need to choose an online broker before investing in ETFs.
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ETF fees and costs
When you invest in an ETF, the first cost you’ll need to know is the ETF unit price. But there are also a few fees you should be aware of:
Management fees. Just like any other managed fund, ETFs have management fees. You will often see the fund’s management fee referred to as the management expense ratio (MER). This fee is charged by the ETF issuer and is usually included in the unit price. ETFs typically charge lower fees than unlisted managed funds, but this isn’t always the case.
Brokerage fees. You may need to pay a brokerage fee to your stock trading platform whenever you buy or sell ETF units. However, some brokers now offer commission-free ETF trading in Canada.
The buy/sell spread. This is the difference between the highest price you’re willing to pay for an ETF unit and the lowest price at which a seller is happy to sell.
Before you invest in an ETF, make sure you read the information provided by the ETF issuer for full details of any fees that apply and how they will affect your investments.
How to invest in ETFs in Canada
Ready to invest in an ETF? Here’s what you need to do.
Step 1: Choose a broker
The first thing you need to do is choose an online stock trading platform.
One of the key factors to consider when choosing a platform is brokerage fees — the fees you’ll pay every time you buy or sell units in an ETF. There are plenty of low-commission brokers out there, and some even offer commission-free ETF trading.
You’ll also need to find an online trading platform that’s easy to use and offers reliable customer support. When you find the right broker, signing up for an account is free by providing your name, contact details, SIN and proof of ID.
Step 2: Research ETFs that suit your investment goals
Think about what you want to achieve by investing in ETFs:
How much do you want to invest?
What is your investing timeline?
How much risk are you willing to accept?
Once you have a clear picture of your investment goals, you can compare suitable ETFs. You might be interested in passive ETFs, which aim to replicate the performance of indices like the S&P 500 or ETFs that are actively managed in an effort to outperform the market. Alternatively, you might want to invest in a specific market sector, such as renewable energy or commodities.
Make sure to carefully research the details of any ETF you’re interested in. Read the ETF Facts document on the fund issuer’s website to find out about the value, performance and investment mix of the ETF.
Step 3: Place a buy order
Once you’ve chosen an ETF to invest in, log in to your trading account and search for the ETF’s ticker code. You have two main options when placing a buy order:
Market order: Buy ETF units at the current market price
Limit order: Only buy ETF units based on a price you set
Step 4: Track the performance of your ETF
While most ETFs are suited to a “buy and hold” investment strategy, it’s still important to track the performance of your ETF. Is it performing as you expected? Does it still align with your investment goals?
Remember that markets can suffer from volatility in the short term, so it’s important to keep your eye on your long-term goals.
Quick steps to invest in ETFs
If you’ve researched the benefits and risks of investing in ETFs and you’re ready to get started, you’ll need to sign up for an online trading account:
Compare and find the best online share trading platform for you
Sign up for a trading account. You’ll need to provide personal details and proof of ID
Transfer money into your trading account
Log in to your account
Search for the ETF you want and place a buy order
Types of ETFs in Canada
There are many different types of ETFs in Canada. Looking beyond the basic distinction between passive and active ETFs, funds can be broken down into the following categories:
Index ETFs. These funds are designed to track and replicate the performance of a benchmark index. For example, if an ETF tracks the performance of the S&P 500, it would invest in the 500 largest companies listed on US stock exchanges. You can choose a market-weight ETF (companies with larger market capitalizations make up a larger portion of the fund’s investment mix than smaller companies) or an equal-weight ETF (equal weighting is given to each company in the index).
Sector tracking ETFs. These ETFs focus on the performance of companies in a specific market sector, such as energy, health care or real estate.
International ETFs. These ETFs provide exposure to international stocks. Some invest in stocks from individual countries, often the USA, while others focus on developed or emerging markets.
Thematic ETFs. Thematic ETFs invest in line with a specific theme, such as environmental sustainability or robotics. For example, the Horizons Global BBIG Technology ETF (BBIG) invests in companies in the secondary battery, biotechnology, internet and gaming industries, while the Harvest Clean Energy ETF (HCLN) invests in clean energy providers.
Cash ETFs. These ETFs invest in cash deposits and savings accounts offered by banks to provide competitive interest returns. Income distributions from cash ETFs are typically paid monthly.
Fixed income ETFs. Also known as bond ETFs, these funds invest in a portfolio of bonds. They’re passively managed and pay interest monthly.
Currency ETFs. Currency ETFs invest in a basket of currencies or a single currency, for example, the British pound or US dollar.
Commodity ETFs. These ETFs provide exposure to commodities such as oil and precious metals. They allow you to diversify your portfolio beyond stocks and provide protection against inflation.
Physical ETFs vs synthetic ETFs
Physical ETFs. Standard ETFs are sometimes referred to as physical ETFs, and they work by purchasing the underlying assets (such as shares) on the benchmark index that the ETF aims to replicate. This means that when you invest in an ETF, you don’t actually own the underlying assets; these are owned by the ETF and you own shares in the ETF.
Synthetic ETFs. These types of ETFs are a little more complex. Not only do they directly own the underlying assets the fund invests in, but they also use derivatives to achieve their desired returns. Derivatives are instruments that derive their value from underlying assets (such as shares or commodities). The main advantage of synthetic ETFs is that they allow you to access investments that may otherwise be too expensive or simply impossible to buy, but they also come with added risk.
Leveraged ETFs and inverse ETFs
There are two other types of ETFs you should be aware of: Leverage and inverse ETFs.
Both offer the potential for high returns, but they’re more complicated than traditional ETFs and come with their own unique risks.
Leveraged ETFs use debt to magnify the returns of the index they track. So, if a leveraged ETF tracks the S&P 500, it aims to double or even triple the returns of the index. Of course, this potential for increased gains also means that any losses will also be amplified. Leveraged ETFs have higher management fees than regular ETFs and are typically not suitable for long-term investing.
Inverse ETFs are designed to move in the opposite direction to the index they track. So if the index falls, the value of the ETF will increase. Also known as short ETFs, they make it possible to profit from a falling market. But they’re also highly risky and are best suited to experienced traders.
ETFs and mutual funds are similar in many ways. Both allow you to pool your funds with other investors and access a diversified portfolio of assets, and both come with management fees. But there are also a few key differences between ETFs and mutual funds:
ETFs are traded during market hours. ETFs are traded on stock exchanges and their prices fluctuate throughout the day. Mutual funds are priced at the end of each trading day, and you purchase mutual fund shares directly from the fund.
ETFs have lower management fees. ETFs typically have lower management costs than mutual funds.
ETFs typically require a smaller minimum investment. You can invest in an ETF by purchasing as little as one unit, while some brokers also offer fractional shares of ETFs. However, many mutual funds require a minimum initial investment of between $500 and $3,000.
Risks of investing in ETFs
Although many ETFs are relatively safe index funds that track major indices, it’s also possible for an index fund to track a volatile global market, such as rare earth metals or the oil market. You should also remember that, technically, any kind of asset can be bundled into a fund, as well as risky derivative-type products. Always do your research before you invest.
Here are some of the main ETF risks to consider:
Losing money. If the underlying assets owned by an ETF don’t perform as hoped, the value of an ETF will fall – and the value of ETF units you own will fall along with it.
Tracking errors. ETFs don’t always exactly mimic the performance of the index they’re designed to track, with fees, taxes and other factors potentially resulting in lower-than-expected returns.
Fund overlap. If you hold multiple ETFs that invest in similar stocks, this can restrict the diversification of your portfolio.
Risks associated with individual ETFs. The underlying assets held by your ETF also come with their own risks. For example, if your ETF exposes you to investments that may be difficult to sell in certain market circumstances, such as commodities or emerging global markets, you’ll need to accept an increased level of risk.
Currency risks. If you invest in an ETF that tracks the performance of overseas assets, fluctuations in the Canadian dollar’s value will impact the value of your investment.
International taxes. If you buy units in an ETF that is listed in a country other than Canada, you may need to pay foreign taxes. Make sure you’re aware of all tax implications of an ETF before you commit any funds.
Synthetic ETFs have all the same risks as physical ETFs, but they also expose you to additional potential problems:
Counterparty risks. Synthetic ETFs take out contracts with third parties, which are usually investment banks. If these third parties are financially unable to fulfill any commitments they make to the ETF, such as paying the return on the underlying index to the ETF, the performance of your investment will suffer.
Commodities risks. Most ETFs that track the performance of commodities are synthetic ETFs that track the futures price of a commodity or index. However, in some circumstances, the price of futures differs from the price of the actual commodity, so it’s essential to be aware of whether a fund tracks current or future commodity prices before you buy.
Tips for investing in ETFs
Keep the following tips in mind to help get better value for money when you invest in ETFs:
Time your trades. In the first and last 30 minutes of the day’s trading, there tends to be much more volatility in share prices. This means the spread between the ETF offer (for buyers) and bid prices (for sellers) can be wider.
Know the opening hours of the underlying market. Because spreads are wider to account for potential market volatility when an underlying market is not trading, placing buy and sell orders can be better when the market for the underlying asset is open.
Consider limit orders. The value of an ETF can change quite quickly throughout the day, as volatility in underlying markets drives it up or down. As a result, it’s safer to place limit orders rather than market orders when buying or selling, ensuring you get the price you want.
Choose carefully. ETFs come in all shapes and sizes and carry different levels of risk depending on the type of assets it tracks. For example, while an ETF focused on resource stocks might offer the potential for higher returns, it also comes with a higher risk attached than an index that tracks the top 200 stocks.
Bottom line
ETFs offer a simple and convenient way to diversify your investment portfolio. It’s easy to invest in ETFs in Canada via online brokers, and you’ll pay lower fees than if you invested in mutual funds. Just make sure you compare a range of ETFs to find funds that match your investment goals, then compare stock trading platforms to find the one that’s right for you.
Exchange Traded Funds (ETFs) FAQs
Yes, ETFs collect dividends from their investment portfolios and then distribute those dividends to investors on a regular basis, usually quarterly or half-yearly.
Yes, many robo advisers offer access to diversified ETF portfolios. You can find more info in our robo adviser guide.
Yes, there are ETFs available that track TSX indices and are traded on the TSX.
You can purchase as little as one share in an ETF. Some brokers will also let you buy fractional shares of ETFs, so check with your broker to find out if they offer this feature.
The tax implications of investing in ETFs vary depending on whether you hold them in a registered account such as a TFSA or in a non-registered account. If held in a non-registered account, you'll need to pay tax on any income and capital gains you earn from your investment. Seek advice from a tax professional for help understanding your tax obligations.
As a general rule, ETFs offer an easy and convenient way for beginners to start investing. Index ETFs allow you to create a diversified portfolio and are suited to long-term hands-off investing, while you can also get started with a low initial investment.
Yes, you can use a margin loan to fund the purchase of ETF units.
High-interest savings account (HISA) ETFs invest in high-interest savings accounts from a range of financial institutions. They're generally seen as a low-risk investment with the potential to offer higher interest rate returns than you can get with a regular savings account.
The best Canadian ETFs for you depend on your investment goals. You need to have a clear idea of your investment timeframe and your risk tolerance before deciding where to invest your money.
Yes. BMO Global Asset Management offers dozens of ETFs to investors. You can buy BMO ETFs through an online brokerage platform.
You can invest in a Canadian S&P 500 ETF through an online stock trading platform. Simply log in to your account, search for the ETF you want to invest in and place a buy order.
Index funds track a selection of stocks that make up an index. For example, the S&P500 and Nasdaq are indices that feature some of the world's biggest companies. An index fund will try to match the returns of its underlying index.
Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.
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To make sure you get accurate and helpful information, this guide has been edited by Romana King as part of our fact-checking process.
Tim Falk is a freelance writer for Finder. Over the course of his 15-year writing career, he has reported on a wide range of personal finance topics. Whether you're investing in stocks and ETFs, comparing savings accounts or choosing a credit card, Tim wants to make it easier for you to understand. When he’s not staring at his computer, you can usually find him exploring the great outdoors. See full bio
Jaclyn Hurst was an associate publisher at Finder. She has a Bachelor’s degree in Business from Redeemer University and a University Certificate in Management Foundations from Athabasca University. She’s as passionate about business and finance as she is about the great Canadian outdoors, organic Sumatra coffee and music. See full bio
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