ETF INVESTING

Understanding AI & ESG ETFs in Canada

Artificial intelligence (AI) and Environmental, Social and Governance (ESG) investing remain two of the most influential forces shaping global markets in 2025, and Canadian investors are paying attention.

This article explores the growing universe of AI and ESG ETFs listed on the Toronto Stock Exchange (TSX), offering an educational, non-advisory look at how these funds work, what they hold, and how to evaluate their costs and transparency.

Designed for Canadian retail investors, financial professionals, students, and more, this guide will help you understand how these thematic ETFs operate and how they may support a diversified portfolio.

ESG ETFs Defined

Environmental, Social, and Governance (ESG) ETFs are exchange-traded funds that incorporate non-financial sustainability metrics into their investment process. In Canada, these funds use ESG data to screen, weight, or actively evaluate companies based on factors such as carbon emissions, labour practices, board diversity, and overall governance quality. The goal is to give investors exposure to equity or fixed-income markets while aligning portfolios with responsible investing principles.

Most ESG ETFs listed on the TSX follow one of two structures:

• Index-based ESG ETFs track sustainability-screened benchmarks, such as MSCI ESG Focus, FTSE4Good, or the S&P/TSX ESG Leaders Index, using transparent rules to include or exclude companies. These benchmarks may apply negative screens, removing sectors like thermal coal, controversial weapons, or tobacco. Others apply positive screening, favouring “best-in-class” firms with high ESG ratings relative to sector peers. Index methodology is critical because two ESG ETFs can hold very different portfolios depending on how their benchmark defines sustainability.
• Actively managed ESG ETFs, offered by some issuers, are where portfolio managers integrate ESG analysis directly into security selection rather than tracking an index. These strategies may combine fundamental research with third-party ESG data providers such as MSCI ESG Research LLC.

Key Canadian ETF providers, such as BlackRock iShares, BMO Global Asset Management, and Vanguard Canada, offer a range of ESG solutions covering global equities, Canadian equities, and corporate bonds. Each fund discloses its methodology through ETF fact sheets, management reports, and index provider documentation, helping investors understand screens, scoring models, and portfolio holdings before making decisions.

Common ESG Screens & What They Exclude and Include

ESG screening determines which companies make it into an ETF’s portfolio, and in practice, these screens can differ significantly across issuers.

Common ESG Exclusions

Common exclusions include industries linked to:

• Fossil fuels
• Thermal coal
• Tobacco
• Civilian firearms
• Controversial weapons
• Gambling or adult entertainment (in some cases)

These negative screens aim to remove firms with elevated environmental or social risks.

Common ESG Inclusions

On the inclusion side, ESG ETFs often favour:

• Renewable energy producers
• Low-carbon leaders
• Companies with strong labour standards
• Firms demonstrating robust corporate governance, such as diverse boards and transparent reporting practices

Positive screens may also prioritize companies improving their ESG scores over time.

However, not all ESG labels are created equal. The S&P/TSX ESG Leaders Index and MSCI Canada ESG Select apply different weighting rules and thresholds, leading to different sector exposures. Similarly, BlackRock iShares may apply best-in-class scoring, while BMO ESG ETFs may blend exclusions with broader sustainability factors. Understanding these variations is key to evaluating how each ETF defines “responsible investing.”

Pros, Cons, and Common Misconceptions About ESG ETFs

ESG ETFs offer several advantages for Canadian investors, but they also come with limitations that are important to understand.

Pros of ESG ETFs

On the positive side, ESG strategies allow investors to align portfolios with personal or institutional values, while limiting exposure to companies exposed to environmental or social controversies. Some ESG indexes also show slightly lower volatility because they tilt toward larger, higher-quality firms. These products can appeal to long-term investors seeking a balance between financial returns and responsible investing principles.

Cons of ESG ETFs

ESG ETFs are not without trade-offs. Since they exclude certain companies or sectors, they may experience tracking error relative to their parent index and sometimes offer reduced diversification, especially in Canada’s resource-heavy market. Actively managed ESG ETFs also tend to carry higher MERs, and the industry continues to grapple with greenwashing, where marketing overstates actual sustainability practices.

Misconceptions About ESG ETFs

A few misconceptions persist. ESG investing does not guarantee outperformance, and “sustainable investing” is not the same as impact investing, which specifically targets measurable social or environmental outcomes. ESG criteria are inherently subjective; ratings differ across data providers and index methodologies. For that reason, investors should review an ETF’s fact sheets, transparency reports, and index rules to understand how ESG decisions are made.

AI/Thematic AI ETFs Defined

Artificial intelligence (AI) ETFs are thematic exchange-traded funds that invest in companies developing, enabling, or benefiting from AI technologies. Unlike broad technology ETFs, which hold a wide mix of software, hardware, and IT services firms, AI ETFs focus specifically on businesses advancing machine learning, automation, data infrastructure, robotics, and semiconductor innovation. This creates more targeted exposure to the companies shaping the next generation of digital transformation.

Pure-Play vs. Broad AI Exposure

AI ETFs listed in Canada generally fall into two categories:

• Pure-play AI ETFs include firms whose business models revolve primarily around AI, such as chipmakers, cloud computing innovators, and AI software developers. These funds offer more direct exposure to AI innovation but may be more volatile due to concentration in high-growth sectors.
• Broad AI or AI-adjacent ETFs hold both AI developers and firms using AI to enhance operations in industries like finance, healthcare, logistics, and consumer tech. They offer more diversification while still capturing AI’s long-term growth trajectory.

Canadian AI ETFs and Global Indexes

Since Canada’s market has relatively few AI-focused companies, many TSX-listed AI ETFs track U.S. or global benchmarks. Examples include:

• Evolve Artificial Intelligence ETF (ARTI): Actively managed
• Invesco Next Gen AI ETF (INAI): Index-based

These ETFs often hold global giants such as semiconductor manufacturers, cloud providers, robotics developers, and enterprise software firms.

Why AI ETFs Matter for Canadian Investors

AI adoption is accelerating across nearly every sector of the global economy. For Canadian investors seeking exposure to this innovation cycle, AI ETFs provide a convenient, diversified way to capture growth trends without selecting individual stocks.

Types of AI Exposure (Enablers, Adopters, Robotics/Semiconductors)

AI Enablers

Enablers build the hardware and infrastructure powering AI models. This includes NVIDIA, AMD, TSMC, and major cloud providers. These companies supply the essential computing power and data environments needed for AI development.

AI Adopters

Adopters are companies integrating AI into their businesses to improve efficiency or enhance products. Major examples include Microsoft and Alphabet, both of which embed AI across cloud services, productivity tools, and consumer platforms.

Robotics & Semiconductors

A third category includes automation and manufacturing technology firms, such as ABB and ASML, that produce industrial robots or semiconductor fabrication equipment. Their technologies are critical to scaling AI hardware globally.

Why the Mix Matters

Investors in AI ETFs often blend exposure to enablers, adopters, and robotics/semiconductor players to achieve diversification within the broader AI theme. Since each ETF defines “AI exposure” differently, reviewing holdings transparency on issuer websites is essential.

Active vs. Index AI ETF Approaches in Canada

Index-Based AI ETFs

Index AI ETFs, such as Invesco Morningstar Global Next Gen AI Index ETF - CAD (INAI), track predefined benchmarks created by firms such as Solactive or Indxx. Benefits include:

• Lower MERs
• Transparent, rules-based methodologies
• Generally lower turnover

Active AI ETFs

Active funds, such as Evolve Artificial Intelligence Fund (ARTI), use portfolio managers to identify AI leaders and emerging innovators based on research and forecasts. Benefits include agility and potential upside. However, drawbacks may include:

• Higher MERs
• Greater turnover
• More manager-driven outcomes

What Investors Should Compare

Before purchasing an AI ETF, investors should examine:

• Methodology (pure-play vs. broad exposure)
• Fund expenses, e.g. expense ratio (MER) and management fee
• Turnover and liquidity
• Underlying index or research approach

Understanding these structural differences helps investors align the ETF with their preferred AI product or trading strategy and risk profile.

The Canadian Market: ESG & AI ETFs & What to Look For

Canada’s ETF landscape offers a diverse mix of ESG and AI/thematic products, each with different methodologies, fee structures, and risk profiles. Breaking down the market by category helps investors understand what’s available on the TSX and how to compare funds effectively.

Examples of ESG ETFs Available on the TSX

iShares ESG Aware MSCI Canada Index ETF (XESG)

• Focus: Broad ESG-screened global equity exposure
• Style: Index-based (MSCI methodology)
• MER Range: Typically low to mid-range for ESG index ETFs
• AUM: Moderate and growing
• Distribution: Quarterly

BMO Balanced ESG ETF (ZESG)

• Focus: Canadian, U.S., and global equities using exclusions, plus best-in-class scoring
• Style: Index-based with proprietary ESG integration
• MER Range: Low to moderate
• Distribution: Quarterly or semi-annual

Vanguard ESG Global All Cap UCITS ETF (V3AM)

• Focus: Global equities with negative screening
• Style: Index-based (FTSE ESG methodology)
• MER Range: Low
• Distribution: Annual

These ETFs vary widely in their screening frameworks, so reviewing fact sheets and index rules is essential.

Examples of Artificial Intelligence & Thematic Technology ETFs on the TSX

Evolve Artificial Intelligence Fund (ARTI)

• Focus: Global AI developers, enablers, and adopters
• Style: Active management
• MER: Higher than index peers (reflecting active research)
• AUM: Moderate
• Distribution: Annual

Invesco Morningstar Global Next Gen AI Index ETF - CAD (INAI)

• Focus: Global AI innovators
• Style: Index-tracking (rules-based)
• MER: Generally lower than active AI ETFs
• AUM: Growing
• Distribution: Annual

Horizons Global X Robotics & AI Index ETF (RBOT)

• Focus: Robotics, automation, industrial tech
• Style: Index-based exposure
• MER: Moderate
• AUM: Well-established
• Distribution: Semi-annual

Since Canada has fewer domestic AI pure-play companies, these ETFs hold primarily U.S., European, and Asian equities.

What to Look For When Evaluating Canadian ETFs

1. Management Style: Index vs. Active

• Index ETFs: Lower MERs, transparent rules, lower turnover.
• Active ETFs: Dynamic stock selection, higher MERs, greater variability in performance.

2. Management Expense Ratio, Trading Costs & Liquidity

• Fund fees, like MER and management fees, directly impact net returns.
• ETFs with lower AUM may experience wider bid-ask spreads, increasing trading costs.

3. Index Methodology or Security Selection Criteria

Look for:

• ESG screen types (positive, negative, best-in-class)
• AI exposure definitions (enablers vs. adopters vs. robotics)
• Sector and geographic weightings

4. Transparency and Reporting

Always review:

• ETF fact sheets
• Index rulebooks
• Monthly/quarterly portfolio holdings

These documents provide clarity on what the fund owns, how it selects companies, and how it manages risk, which is all critical for making informed, comparison-based decisions.

Reading the Fine Print: Disclosures, Names & Greenwashing

As ESG investing has grown in popularity, so has greenwashing, a practice where fund names, marketing language, or promotional materials exaggerate a fund’s sustainability credentials. For Canadian investors evaluating ESG or thematic ETFs, it’s essential to look beyond labels such as “sustainable,” “responsible,” or “low carbon,” and instead verify how the fund actually incorporates ESG criteria.

A key part of due diligence is reviewing the ETF prospectus, fund factsheet, and index methodology. These documents outline the fund’s investment objectives, screening rules, portfolio holdings, and voting or stewardship policies. If these details are vague or inconsistent with the fund’s marketing claims, that may be a red flag.

Canadian Regulatory Oversight

In Canada, regulators have strengthened oversight to reduce ESG-related confusion. The Canadian Securities Administrators (CSA) publish guidance, such as CSA Staff Notice 81-334 (Revised), which explains how ESG funds should disclose their strategies, risks, and selection criteria.

The Ontario Securities Commission (OSC) and other CSA members emphasize that ESG labels must accurately reflect a fund’s methodology, while the Competition Bureau Canada monitors misleading environmental claims in financial products.

The key takeaway? Investors should look for clear, consistent definitions of ESG integration, exclusion screens, and stewardship practices. Checking official regulatory resources, like the CSA and OSC, can help verify whether disclosures meet Canadian standards and ensure the ETF’s sustainability claims are backed by transparent, measurable processes.

Portfolio Fit & Allocation Frameworks

ESG and AI ETFs are often used as satellite holdings within a diversified portfolio. In a core-satellite framework, the core typically consists of broad-market or index ETFs that provide stable, diversified exposure. ESG and AI ETFs can serve as satellites, often representing a smaller portion of the overall portfolio to manage risk, allowing investors to capture thematic growth or values alignment without overconcentration.

Investors should consider fee drag, as higher MERs in active or thematic ETFs can erode long-term returns compared with low-cost index funds.

ESG ETFs often play a defensive or values-based role, reducing exposure to controversial sectors while promoting sustainability. AI ETFs serve a growth-oriented, thematic purpose, focusing on high-potential innovation sectors.

Tax-Advantaged Accounts

For Canadian investors, Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) offer added benefits: Canadian-listed ETFs avoid foreign withholding taxes on domestic holdings, though investors should still consider overall tax implications.

Ultimately, portfolio fit depends on risk tolerance, investment horizon, and diversification goals, ensuring thematic ETFs complement rather than dominate core positions.

Due Diligence Checklist Before Investing in ESG & AI ETFs

When considering ESG or AI ETFs, a structured due diligence process is essential to ensure investments align with both financial goals and thematic objectives.

1. Fund Mandate and Objectives: Start by confirming the ETF’s investment mandate, objective, and target exposure. Clarity here helps distinguish between marketing claims and actual strategy.
2. Methodology or Selection Criteria: For ESG ETFs, examine the screening framework (e.g., negative exclusions, positive tilts, or best-in-class approaches). For AI or thematic ETFs, review stock selection criteria and index methodology to understand concentration and exposure.
3. Holdings Transparency: Always check the website of the fund’s index provider for up-to-date portfolio holdings. Knowing which companies the fund owns clarifies risk, sector exposure, and alignment with ESG or AI themes.
4. Fees and Costs: Evaluate the management expense ratio, trading costs, foreign currency exchange rates, and bid-ask spreads. Higher MERs in active or thematic funds can erode long-term returns.
5. Liquidity and AUM: Assess fund size, average daily volume, and trading liquidity to avoid execution challenges.
6. Risk Metrics: Consider beta, standard deviation, and sector/region concentration risks.
7. Stewardship & Voting Policies: ESG investors should confirm the fund’s engagement and proxy voting practices.

Always consult official issuer documents and cross-check multiple sources rather than relying on marketing claims. This ensures informed decisions and better portfolio integration.

Step-by-Step Guide to Comparing ESG & AI ETFs

Creating a structured approach to evaluating ESG and AI ETFs can help investors understand their characteristics and potential portfolio role.

Step 1: Defining Your Investment Objective and Risk Profile

Clarify whether the objective is growth, income, or values alignment, and assess your risk tolerance and investment horizon.

Step 2: Selecting Comparable ETFs

Choose ETFs with similar exposure for meaningful comparison, e.g., an ESG fund like iShares XESG versus a thematic AI ETF such as Evolve ARTI.

Step 3: Comparing Key Metrics

Look at MER, holdings count, yield, and sector weights side-by-side. Examine geographic allocation and top holdings to assess concentration risk.

Step 4: Reviewing Fact Sheets

Check index type, active vs. passive management, and liquidity metrics like AUM and average daily volume.

Step 5: Building a Sample Portfolio

A 60/40 framework might include:

• Core (80-90%): Broad market equities and fixed income ETFs for diversification.
• Satellite (10-20%): ESG and AI ETFs to capture thematic or values-based exposure.

Note: This example is illustrative, showing how thematic and ESG ETFs can complement a diversified portfolio, rather than serving as specific investment advice. Contact investment advisers for more information on choosing between funds.

Step 6: Setting Rebalancing Cadence

Annual or semi-annual rebalancing ensures the satellite allocation remains aligned with your overall trading strategy.

The Growing Role of ESG and AI ETFs

ESG and AI ETFs are becoming central themes in the Canadian market, offering investors a way to combine values-based investing with exposure to transformative technologies. Understanding their structure (index vs. active management, screening methodology, sector and geographic allocations, and costs) is critical for informed investing.

While ESG ETFs promote sustainability and responsible investing, they carry concentration and tracking risks. AI ETFs offer thematic growth potential but are often more volatile and cyclical. Evaluating MERs, holdings, liquidity, and regulatory disclosures helps investors distinguish genuine strategy from marketing claims, reducing exposure to greenwashing or inflated hype.

Ready to integrate thematic ETFs into your portfolio? Using ESG and AI ETFs as satellite allocations within a core-satellite portfolio allows investors to pursue thematic or values-driven goals without overconcentration.

Next Steps

• Apply a structured due diligence process
• Consulting official issuer document