ETF INVESTING

This practical guide walks Canadians through building a well-diversified exchange traded fund (ETF) portfolio. Learn how to set an asset mix aligned with your risk tolerance, choose between all-in-one or custom ETF solutions, and structure your investments tax-efficiently across TFSAs, RRSPs, and taxable accounts for long-term success.

What is an ETF and Why Do Canadians Use Them

An exchange-traded fund is a pooled investment fund that holds a basket of securities, such as stocks, bonds, or commodities, and trades on a stock exchange throughout the day just like a stock. Instead of buying dozens or hundreds of individual securities, investors can gain instant diversification with a single trade.

ETFs are built to be simple, transparent, and cost-efficient. Many offer broad market exposure, tracking well-known indexes across Canadian, U.S., and global markets. Others focus on bonds, sectors, or factors, making them useful building blocks in an ETF portfolio. For most investors, the biggest draw is cost: ETF management expense ratios (MERs) are typically much lower than those of comparable mutual funds. Core index ETFs often charge ~0.03-0.20%, while asset-allocation ETFs (all-in-one portfolios containing a full diversified mix) generally fall in the ~0.20-0.30% range.

ETFs are also transparent. Most issuers publish their holdings daily, and index methodologies are made public, so investors always understand what they own. Because ETFs trade intraday, they offer liquidity, though prices may differ slightly from the net asset value (NAV), and investors should be aware of bid-ask spreads and modest premium/discount behaviours.

In Canada, ETF adoption continues to rise thanks to increased fee awareness, easy access through discount brokerages, and the growth of robo advisors, which commonly build portfolios using low-cost ETF building blocks. Compared with buying individual stocks or bonds, ETFs provide simpler rebalancing, broader diversification, and often a lower all-in cost, making them a preferred choice for Canadians constructing long-term, diversified portfolios.

ETFs at a Glance

• What it is: A fund holding many securities
• How it trades: Bought and sold intraday on exchanges
• Typical costs: ~0.03-0.30% MER
• Where it fits: TFSA, RRSP, taxable accounts
• Pros: Diversified, low cost, transparent
• Cons: Market risk, bid-ask spreads, potential tracking error

Pros and Cons of ETFs vs Mutual Funds

ETFs generally offer lower MERs, especially for broad index strategies, though investors pay trading commissions and bid-ask spreads. Mutual funds typically have higher MERs but no intraday trading costs.

ETFs trade throughout the day with options like limit orders and Dividend Reinvestment Plans (DRIPs), where supported, while mutual funds are priced only at day-end.

ETFs can also be more tax-efficient because of in-kind creation/redemption and lower index turnover, though they still issue taxable distributions. Mutual funds may distribute more capital gains depending on the strategy. Actual fees and tax outcomes vary by product, so always verify for specific funds.

Where to Hold ETFs: TFSA, RRSP, and Taxable Accounts

Account selection plays a major role in your after-tax returns. Here’s how each type works (note: this section is for general education only; confirm details with the Canada Revenue Agency or a tax professional).

• Tax-Free Savings Account (TFSA): Investments grow tax-free, and withdrawals are not taxed. However, foreign withholding taxes on U.S. and international ETF dividends are not recoverable in a TFSA. Many investors place broad Canadian equity ETFs or growth-oriented holdings here to maximize long-term compounding.
• Registered Retirement Savings Plan (RRSP): Growth is tax-deferred, and contributions may be tax-deductible. A key advantage is that U.S. dividend withholding tax may be exempt when holding U.S.-listed ETFs directly inside an RRSP (if the underlying securities are held directly). Withdrawals, however, are taxed as income.
• Taxable Accounts: Dividends and interest are taxed annually, while capital gains are taxed only when realized.

In practice, investors often optimize “asset location” (holding fixed income in registered accounts, using U.S.-listed ETFs in RRSPs for withholding-tax efficiency, and placing Canadian equity ETFs in TFSA or taxable accounts as appropriate).

ETF Portfolio Construction Step 1: Choosing an Asset Mix

Your asset mix, i.e., the percentage of equities, bonds, and other assets in your portfolio, is the single biggest driver of long-term risk and return. A portfolio with more equities (Canadian, U.S., international, and emerging markets) generally offers higher expected returns, but also higher volatility and deeper short-term drawdowns. A portfolio with more bonds (government or corporate, across short-, mid-, or long-term maturities) typically delivers lower volatility but also more modest returns. Some investors also include small allocations to cash or alternative assets, though ETFs for these are usually used sparingly.

The right mix depends on your time horizon, financial goals, and comfort with market risk. Shorter time horizons, such as saving for a home in the next few years, typically call for a more conservative asset allocation, with a higher allocation of fixed income investments. Long-term goals, like retirement many decades away, can often support a higher equity allocation, assuming the investor can stay invested during market downturns.

Behaviour matters as much as math. Even the most carefully engineered ETF portfolio can underperform your expectations if you abandon it during a market decline. A good asset mix is one you can stick with consistently, through both calm periods and volatility. Your allocation doesn’t need to be perfect, just appropriate, diversified, and sustainable.

Risk Capacity vs Tolerance When Weighing ETF Options

Understanding your risk profile requires distinguishing risk capacity from risk tolerance. Risk capacity is your financial ability to handle losses without jeopardizing key goals, shaped by factors like income stability, savings rate, time horizon, and emergency reserves. Risk tolerance, on the other hand, reflects your emotional comfort with volatility and temporary declines.

Your true risk profile is guided by the lower of the two. Choosing a realistic level of risk upfront helps create an ETF portfolio you can maintain over decades.

Sample Asset Mixes in Diversified Portfolios: Choose Based on Your Risk Level and Financial Goals

Below are three common asset mixes used in diversified ETF portfolios. Please note that these offer a starting point, and the ranges reflect broad historical patterns only. Past performance is not indicative of future results; actual outcomes depend on the index, the period, and market conditions.

Conservative Portfolio: 40% Equities, 60% Bonds

Designed for lower volatility and shorter time horizons. Historically offers modest returns with smaller drawdowns. This mix has shown lower volatility and is often associated with capital preservation strategies.

Balanced Portfolio: 60% Equities, 40% Bonds

A middle-ground mix aiming for steady long-term growth and moderate volatility. Often chosen by investors with medium-to-long-term goals who can tolerate some fluctuation.

Growth or Aggressive Portfolio: 80% Equities, 20% Bonds

Higher equity exposure increases expected returns and portfolio volatility. Often chosen for long-term horizons and by investors comfortable with larger market swings.

Whichever mix you choose, commit to periodic rebalancing (resetting your portfolio back to target weights). This discipline is essential for maintaining your intended risk level and ensuring your diversified ETF portfolio stays aligned with your long-term objectives.

ETF Portfolio Construction Step 2: Considering All-In-One ETFs

For many Canadian DIY investors, an all-in-one ETF, also known as an asset-allocation ETF, is the easiest way to build a globally diversified portfolio. These funds hold a pre-built mix of underlying stock and bond ETFs and automatically maintain the target allocation through ongoing rebalancing. Instead of managing multiple ETFs yourself, you buy one ticker and let the portfolio stay aligned with your chosen risk level.

The benefits are significant: one-ticket simplicity, wide global diversification, automatic rebalancing, and a structure that supports steady, long-term investing. Since you aren’t tinkering with your asset mix, these ETFs are often behaviourally friendly, helping investors avoid market-timing mistakes.

All-in-one ETFs are ideal for investors with smaller accounts, limited time, or a desire for automation. They remove the need to choose multiple ETFs or perform regular rebalancing. More advanced DIY investors, especially those managing large taxable accounts, optimizing asset location, or building custom tilts, may prefer a multi-ETF approach instead.

How Asset Allocation ETFs Work

All-in-one ETFs operate as fund-of-funds, holding Canadian, U.S., international (developed and emerging) equities, plus Canadian and sometimes global bonds. The provider performs internal rebalancing, keeping weights within specified bands so you don’t have to place multiple trades. Since these funds hold many ETFs that themselves own hundreds or thousands of securities, diversification is extremely broad, though home-bias levels vary by issuer.

Costs and What to Look For

Asset-allocation ETFs typically charge an MER of ~0.20-0.30%, slightly higher than holding individual core index ETFs directly, but you’re paying for automation and built-in rebalancing. When trading, look for tight bid-ask spreads (ideally ≤0.10-0.20%), and be aware of small premiums/discounts relative to NAV.

Evaluate the index methodology behind each underlying ETF, focusing on consistent, low tracking error. Liquidity also matters: check the ETF’s assets under management (AUM), average daily dollar volume, and general market presence.

In practice, many investors find that simplicity helps reduce behavioral errors. With fewer moving parts, all-in-one ETFs reduce the chance of behavioural errors and keep your portfolio aligned with its intended risk profile with minimal effort.

ETF Portfolio Construction Step 3: Building a Custom ETF Portfolio

For investors who want more hands-on control, building a custom ETF portfolio is a flexible alternative to all-in-one funds. The goal isn’t complexity, but rather the ability to fine-tune your allocation, optimize for taxes, or incorporate specific tilts with intention.

Start by choosing ETFs across the major asset classes and geographies:

• Equities: Canada, U.S., international developed markets, and emerging markets.
• Bonds: Canadian government and corporate bonds, or a broad global aggregate bond ETF.

A key principle is avoiding unnecessary home bias. Canada represents only a small percentage of global market capitalization; overweighting it should be an intentional choice, not an accident. Use broad, low-cost, market-cap-weighted ETFs as your core building blocks and avoid overlapping exposure (e.g., owning both a global fund that includes the U.S. and a separate U.S. fund unless you adjust for duplication).

Keep the ETF count modest, e.g., 3 to 5 ETFs work for most people. Too many products increase rebalancing complexity and encourage tinkering. Create a clear plan:

1. Set target weights (e.g., 60/40 or 80/20).
2. Automate contributions where possible (e.g., monthly TFSA/RRSP deposits).
3. Define rebalancing rules: annually or when allocations drift beyond preset bands (e.g., ±5%).
4. Consider asset location: bonds often fit best in registered accounts, whereas U.S.-listed ETFs may be more tax-efficient in RRSPs, and Canadian equities can fit well in TFSA/taxable accounts.

When comparing ETFs, use a simple screening rubric:

• MER: Lower is generally better.
• AUM & liquidity: Higher AUM and tighter spreads help trading.
• Bid-ask spread: Aim for tight spreads during market hours.
• Replication method: Prefer physical replication for core holdings.
• Distribution schedule: Monthly vs quarterly.
• Withholding tax considerations: Especially for foreign equities in different account types.

Common pitfalls include product bloat, chasing factor or thematic fads, and mixing too many regional funds without understanding how they overlap. A small, disciplined ETF lineup will outperform a chaotic one in practice.

Sample 3-5 ETF Portfolios

Here are simple templates you can adapt to your risk level. These are examples only, not formal recommendations.

3-ETF Core Model

• Global Equity (ex-Canada): 40-60%
• Canadian Equity: 20-30%
• Canadian Aggregate Bonds: 20-40%

This model covers most major markets with minimal overlap and suits Conservative, Balanced, or Growth portfolios by adjusting the equity/bond split.

5-ETF Expanded Model

• U.S. Equity: 25-40%
• International Developed Equity: 15-30%
• Emerging Markets Equity: 0-10% (optional sleeve)
• Canadian Equity: 10-25%
• Canadian or Global Aggregate Bonds: 20-40%

To tailor this model, you may increase equities for Growth allocations (e.g., 80/20) or raise bond exposure for Conservative mixes (e.g., 40/60).

No matter the model, establish tolerance bands (e.g., ±5 percentage points) and rebalance when allocations drift beyond them. Watch for overlap, e.g., a global ex-Canada fund paired with separate U.S. and international funds can double-count regions unless you adjust weights.

Execution at a Canadian Brokerage

Executing your ETF strategy is straightforward, but a few practical steps can improve outcomes and reduce avoidable mistakes. Canadian investors commonly use platforms such as Questrade, TD Direct Investing, and Wealthsimple Trade, each with different commission structures and ETF trading policies. For example, Questrade offers commission-free ETF buys (commissions apply on sells), while others may provide zero-commission trading but charge FX conversion fees if you trade U.S.-listed ETFs.

Be aware that limit orders allow you to have better control over your execution price than market orders. Keep in mind the first and last half hour of the trading day may have a wider bid-ask spread, especially for ETFs with lower liquidity. Always confirm DRIP eligibility and enroll if you want distributions automatically reinvested.

Whether using mobile or desktop platforms, review each order carefully: ticker, buy/sell side, quantity, limit price, and time-in-force. Mistakes are rare but costly. After each trade, save your trade confirmations and any distribution slips for accurate adjusted cost base (ACB) tracking, particularly in taxable accounts.

Tax-Aware ETF Portfolio Construction for Canadians

Structuring your ETF portfolio with taxes in mind can meaningfully improve after-tax returns. Always confirm with the CRA or consult with a tax professional for confirmation of tax rules.

• TFSA: Ideal for high-growth equities or international ETFs. Withdrawals are tax-free, but foreign withholding taxes on U.S./international dividends cannot be recovered.
• RRSP: Suitable for equities and fixed income. Holding U.S.-listed ETFs can reduce withholding tax on eligible dividends. Withdrawals are taxed as income.
• Taxable accounts: Favour Canadian equities for dividend tax credits and broad, low-turnover ETFs to minimize distributions. Track adjusted cost base carefully for rebalancing or DRIP reinvestments.

When trading, defer gains when possible and harvest losses thoughtfully, keeping in mind superficial loss rules. Always maintain clear records, as tax rules can change.

Capital Gains Considerations

Rebalancing a taxable account can trigger capital gains, which are taxed when realized. To reduce impact, consider using new contributions to bring weights back in line rather than selling existing holdings.

Tax-loss harvesting allows you to offset gains with losses, but be mindful of the superficial loss rules. Track your adjusted cost base carefully, including DRIP reinvestments and corporate actions. Inclusion rates and provincial tax rules vary, so check current CRA guidance.

ETF Portfolio Mistakes to Avoid

Common ETF portfolio missteps can erode returns or increase risk. Key pitfalls include:

• Chasing performance or hot themes instead of sticking to your plan.
• Ignoring fees, bid-ask spreads, or trading during illiquid periods.
• Over-diversifying into overlapping funds (“diworsification”), which dilutes strategy.
• Emotional trading, such as selling during market drawdowns.
• Neglecting rebalancing and record-keeping, including ACB tracking and distribution slips.

ETF Portfolio Maintenance Checklist

Keeping your ETF portfolio on track requires a simple, repeatable routine. Key steps include:

• Annual Review: Check that your portfolio still aligns with your target mix, monitor drift, fees, distributions, and ensure your financial goals or time horizon haven’t changed.
• Rebalancing: Apply your chosen method, log trades, and update your adjusted cost base (ACB) records.
• Product Hygiene: Replace ETFs that have been closed or merged and review any changes in mandates or fees.
• Record-Keeping: Maintain a lightweight tracker for holdings, target weights, review dates, and notes.

Build the ETF Portfolio That Aligns with Your Financial Goals

Building a Canadian ETF portfolio doesn’t have to be complicated. Whether you choose a simple, all-in-one asset allocation ETF or a custom DIY mix, the keys are discipline, diversification, and low costs.

Align your portfolio with your time horizon, risk tolerance, and financial goals, use tax-efficient accounts, and stick to a regular rebalancing and maintenance routine. Avoid common pitfalls like chasing performance, over-diversifying, or neglecting records.

With thoughtful planning and ongoing monitoring, ETFs offer a flexible, low-cost path to building a diversified investment portfolio that can grow steadily over the long term while keeping fees and complexity manageable.

Considerations for Getting Started

• Reviewing your current ETF asset mix.
• Picking the approach that suits your lifestyle and comfort level.
• Opening an account so you can start investing.