ETF INVESTING

Exchange-traded funds (ETFs) have become one of the most popular ways for Canadians to invest. They combine the diversification of mutual funds with the flexibility of stocks, often at a lower cost. Each ETF is a basket of investments that can include stocks, bonds, or other assets, and it trades on an exchange throughout the day.

Before investing, it’s essential to understand how fees and expenses reduce returns, as highlighted in the ETF Facts. In this guide, you’ll learn how to invest in ETFs in Canada, including which accounts to use, the costs involved, and how to confidently place your first ETF order.

How Do ETFs Work?

An exchange traded fund is an investment fund that holds a basket of securities and trades on an applicable exchange just like a stock. According to the Canadian Investment Regulatory Organization (CIRO), ETFs can provide exposure to different markets, sectors, or asset classes within a single trade.

Most ETFs are passive, tracking an index like the S&P/TSX Composite. However, there are also actively managed ETFs.

ETF vs. Mutual Fund

While both pool investors’ money, they differ in how they trade. ETFs trade throughout the business day at market prices, while mutual funds are priced only once daily.

Invest in ETFs Using These Accounts

Canadians can invest in ETFs through several types of registered accounts or in a non-registered account.

Tax-Free Savings Account (TFSA)

Allows your investments to grow tax-free. Withdrawals are also tax-free, but amounts are added back to contribution room only on January 1 of the following year.

Registered Retirement Savings Plan (RRSP)

Designed for retirement. Contributions are tax-deductible, reducing taxable income today, and investments grow tax-deferred until withdrawal.

First Home Savings Account (FHSA)

Helps Canadians save for a first home. Contributions are tax-deductible, and qualifying withdrawals are tax-free.

The Cost of Investing in ETFs

According to the CSA’s ETF Facts, every ETF carries a few layers of costs.

• Management Expense Ratio (MER): An annual percentage covering management and operating expenses. ETFs typically have lower MERs than mutual funds.
• Trading Commissions: Fees paid to your brokerage when buying or selling. Many platforms now offer commission-free ETF trades.
• Bid-Ask Spread: The difference between what buyers pay and sellers ask. Highly traded ETFs usually have tighter spreads.
• Foreign Exchange (FX) Fees: Trading U.S.-listed ETFs may involve currency conversion fees.
• Optional Market Data Fees: Advanced traders may subscribe to a market data package.

Hedged vs. Unhedged ETF Types

Currency-hedged ETFs use financial instruments to minimize the impact of exchange rate movements. This suits those seeking stability over shorter periods.

Unhedged ETFs leave currency exposure open. Over the long term, currency effects often even out, so many investors prefer the simplicity of unhedged exposure.

How to Pick an ETF

• Define the Role: Core ETFs (broad exposure) vs. Satellite ETFs (specific sectors).
• Check Costs: Look at the MER and trading commissions.
• Check Structure & Index: Understand if it tracks a benchmark like the S&P/TSX 60.
• Check Distributions: See if it pays dividends and if it offers a DRIP.

Step-by-Step Guide: How to Invest in ETFs

1. Choose Your Account. Decide between TFSA, RRSP, FHSA, or non-registered based on tax goals.
2. Shortlist ETFs. Narrow options based on index, MER, and liquidity.
3. Read the ETF Facts. Review fees, risks, and holdings in this standardized document.
4. Set Up Your Platform. Create a watchlist and ensure your account is funded.
5. Pick an Order Type. Use Limit Orders to control price, rather than Market Orders.
6. Time Your Entry. Avoid the first and last 15 minutes of the trading day. Midday offers better liquidity.
7. Preview and Confirm. Check ticker, quantity, and price before submitting.
8. Review and Track. Confirm execution and record your average cost.

Build a Simple ETF Portfolio

Most Canadians can start with a mix of core ETFs.

• Conservative: ~60-70% core bond ETFs and 30-40% equity ETFs.
• Balanced: ~40-60% equity ETFs and 40-60% bond ETFs.
• Growth: ~70-90% equity ETFs and 10-30% bonds.

Common ETF Pitfalls

• Trading at wide spreads: Use limit orders.
• Chasing yield: Focus on total return, not just income.
• Ignoring currency: Be aware of FX exposure.
• Forgetting DRIP: Reinvest distributions automatically.

Safety & Investor Protection

The Canadian Investment Regulatory Organization (CIRO) oversees investment dealers. Client assets are protected by the Canadian Investor Protection Fund (CIPF) in case of firm insolvency.

Start Investing in ETFs Today

Investing in ETFs in Canada is approachable when you follow a clear process: choose the right account (TFSA, RRSP, FHSA, or non-registered), select core ETFs to build a diversified foundation, review ETF Facts for fees, risks, and distributions, and place your first trade using a careful, step-by-step approach.

Next steps:

• Open an account: Start investing confidently with a transparent fee structure.
• Fund your account: Ensure your cash or transfer is ready to invest.

Starting with a simple, well-structured portfolio helps you grow confidence and improve your investment strategy over the long term.