10 Best Canadian ETFs

In this article, we discuss the 10 best Canadian ETFs. If you want to skip our discussion on the Canadian economy, you can go directly to the 5 Best Canadian ETFs.

The increase in the Canadian population has attracted attention from across the globe. The country experienced its population growth at a pace of 2.7% or 1.05 million during 2022 to surpass the 40 million milestone. This was the highest population growth rate for the North American country since 1957. The country anticipates its population rising to 47.7 million by 2041. The increase in population resulted in a fresh induction into the Canadian workforce, which resulted in a favorable Q1 2023 GDP growth of 3.1%. However, the Canadian economy faced a setback in the second quarter of 2023, as it contracted by 0.2% on an annualized basis. This unexpected decline contrasts with expectations from analysts and the Bank of Canada, which had predicted annualized growth rates of 1.2% and 1.5%, respectively, for the same period. Many economists believe that the Canadian economy has possibly entered into a period of recession, and this could result in the central bank putting a pause on any further interest rate hikes. A decline in housing investment, along with a reduction in exports and domestic household spending, has been attributed as the primary reasons for the contraction in the Canadian economy.

The Canadian central bank has responded to these challenges by raising benchmark interest rates on ten occasions since March 2022, taking it to a 22-year high of 5% in July 2023. This series of rate hikes aimed to address various economic concerns, including rising inflation. The country saw its inflation rate rise to 8.1% in June 2022, well above the central bank’s target of 2%. Inflation has remained above the central bank’s target for the past 27 months. Since April 2023, the Canadian economy has been on the back foot as 155,000 federal employees went on strike from April 19 to May 1. Around 120,000 federal workers ended their strike after the Canadian government agreed to increase wages by 12.6% in the next four years. Experts believe that this action would result in significant challenges for the central bank in achieving its 2% inflation growth target. Additionally, a strike by workers at British Colombia port in July 2023 resulted in an $11 billion disruption in trade. Experts see a 14% probability of a further interest rate hike when the Canadian central bank reconvenes in late October. Furthermore, they believe that the cost of borrowing could either stay at the current level or increase further until March 2024. This outlook suggests that the Canadian economy is likely to continue facing tough economic circumstances in the foreseeable future.

Investor Response to Rising Inflation and Interest Rates

In light of these circumstances, Canadian households should prepare themselves for a higher interest rate environment. A significant portion of mortgages, around 47%, are expected to be refinanced at higher interest rates by the end of 2023, with this number projected to rise to 65% by the end of 2024. While households may be able to reduce their principal repayment amounts, the prospect of higher interest rates is likely to influence their decisions regarding major expenditures such as new cars or homes. Canadian households already have an aggregate debt service ratio (DSR) of 14.79% as of the second quarter of 2023. Although this figure declined slightly from 14.90% in the first quarter, it still represents a relatively high level of debt burden. To combat rising prices, the Canadian government announced a one-time grocery rebate in July 2023 after grocery prices saw a YoY increase of 9.1% in June 2023. According to the Canadian Revenue Agency (CRA), this rebate is expected to reach 11 million Canadians who either have an individual annual income of $32,000 or less or a collective household annual income of $38,000 or less. This initiative is expected to provide a targeted relief of C$2.5 billion.

The rising inflation and benchmark interest rates have encouraged investors to increase their exposure to the best Canadian ETFs for the long term. According to Bank of Montreal (BMO) ETFs, the asset under management (AUM) of Canadian ETFs stood at C$387 billion as of August 2023. The Canadian ETF market has experienced an inflow of $73 billion during the year. If the trend continues, it will be the third time in history that the AUM of Canadian ETFs will close above the C$300 billion level. In terms of AUMs, RBC iShares is the biggest ETF provider, with an estimated AUM of C$106.85 billion. Meanwhile, BMO is in the second position with an AUM of C$94.47 billion. ETFs are particularly attractive during periods of economic uncertainty or slowdown due to their ability to offer diverse portfolio exposure. Investors keen on navigating the current macroeconomic landscape are turning to the best Canadian ETFs that provide broad market exposure, such as the Horizons S&P 500 Index ETF (HXS.TO), as well as those with sector-specific focus, like the iShares S&P/TSX Capped Information Technology Index ETF (XIT.TO). Furthermore, investors are also turning their attention towards the best Canadian dividend stocks, such as  Royal Bank of Canada (NYSE:RY), Enbridge Inc. (NYSE:ENB), and Agnico Eagle Mines Limited (NYSE:AEM).

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Our Methodology

We have shortlisted the best Canadian ETFs to buy and hold based on their 5-year performance as of September 21. Some of these choices are also amongst the best Canadian ETFs for TFSA (Tax-Free Savings Account), and they have garnered approval from the Reddit community as well. Notably, the Vanguard S&P 500 Index ETF (VFV.TO) has secured its place among the best Vanguard ETFs in Canada. The ETFs have been ranked in ascending order of their 5-year performance.

Best Canadian ETFs

10. BMO Low Volatility Canadian Equity ETF (ZLB.TO)

5-Year Price Performance: 36.2%

Total Net Assets as of September 21, 2023: C$3.09 billion

Expense Ratio: 0.39%

Number of Holdings: 50

BMO Low Volatility Canadian Equity ETF (ZLB.TO) invests in a portfolio of low-volatility Canadian stocks. The ETF aims to provide returns similar to the MSCI Canada Minimum Volatility Index. The ETF was launched in October 2011 and is managed by BMO. The top 10 holdings of the ETF have a cumulative weight of 32.1% of total assets. BMO Low Volatility Canadian Equity ETF (ZLB.TO) makes quarterly distributions and has a yield of 2.70%.

9. iShares Core S&P 500 Index ETF (CAD-Hedged) (XSP.TO)

5-Year Price Performance: 38.1%

Total Net Assets as of September 21, 2023: C$8.4 billion

Expense Ratio: 0.09%

Number of Holdings: 1

iShares Core S&P 500 Index ETF (CAD-Hedged) (XSP.TO) attempts to imitate the performance of the S&P 500 Index while reducing foreign currency exposure for Canadian investors. The ETF has 99.91% of its assets invested in iShares Core S&P 500 ETF (IVV). It was launched in May 2001 and is managed by BlackRock Canada. The ETF has the third lowest management fee and the second-highest AUM amongst all the ETFs on our list of the best Canadian ETFs. The ETF has an average daily trading volume of 224,848 shares.

8. Horizons S&P/TSX 60 Index ETF (HXT.TO)

5-Year Price Performance: 50.8%

Total Net Assets as of September 21, 2023: C$3.40 billion

Expense Ratio: 0.08%

Number of Holdings: 60

Horizons S&P/TSX 60 Index ETF (HXT.TO) seeks to track the performance of the S&P/TSX 60 Index, which is comprised of 60 of the largest companies trading on the Toronto Stock Exchange (TSX). The ETF was established in September 2010 and is operated by Horizons ETFs Management Canada. The top 10 holdings of Horizons S&P/TSX 60 Index ETF (HXT.TO) represent 44.2% of the total assets. The financial sector holds the most significant allocation, accounting for 33.4% of the ETF’s assets.

7. iShares S&P/TSX Capped Materials Index ETF (XMA.TO)

5-Year Price Performance: 52.5%

Total Net Assets as of September 21, 2023: C$142.74 million

Expense Ratio: 0.60%

Number of Holdings: 51

iShares S&P/TSX Capped Materials Index ETF (XMA.TO) aims to duplicate the performance of the S&P/TSX Capped Materials Index, which is comprised of Canadian materials stocks. The ETF pays out dividends quarterly and offers a yield of 1.18%. The top 10 holdings of the ETF represent 72.02% of the total assets. Nutrien Ltd. (NYSE:NTR), Barrick Gold Corporation (NYSE:GOLD), Franco-Nevada Corporation (NYSE:FNV), and Agnico Eagle Mines Limited (NYSE:AEM) are the top four constituents of the ETF.

Here’s what Old West Management said about Agnico Eagle Mines Limited (NYSE:AEM) in its Q4 2022 investor letter:

“Agnico Eagle Mines Limited (NYSE:AEM) is the third largest gold miner in the world with mines in Canada, Australia, Finland, and Mexico. Although we have long respected the company, we became shareholders when they acquired our portfolio holding, Kirkland Lake Gold. Agnico chairman Sean Boyd is one of the most respected executives in the mining industry. He was appointed CEO in 1998 and was recently appointed Executive Chairman. Boyd is a large shareholder and perfectly fits our owner/manager role. This year the company is projected to make nearly $1 billion in net income on $5.8 billion in revenue with $758 million of free cash flow. Net income has been growing 15% per year for several years. Agnico has a fortress balance sheet with $1.3 billion of long term debt, which is only 2 times EBITDA, and $820 million cash in the bank. The stock trades at $55 per share, which is 26 times earnings with a 2.9% dividend yield.”

6. iShares Core S&P U.S. Total Market Index ETF (XUU.TO)

5-Year Price Performance: 52.6%

Total Net Assets as of September 21, 2023: C$2.29 billion

Expense Ratio: 0.07%

Number of Holdings: 117

iShares Core S&P U.S. Total Market Index ETF (XUU.TO) intends to mimic the performance of the S&P Total Market Index, which represents the broader US equity market, including micro, small, mid, large, and mega-cap stocks. The ETF is managed by BlackRock’s Canadian iShares division. iShares Core S&P U.S. Total Market Index ETF’s (XUU.TO) top 10 holdings represent 97.81% of the total assets. The ETF makes quarterly distributions and offers a yield of 1.26%. Overall, the ETF covers the investable world of the US equity market at a very low management fee.

In addition to ETFs, the best Canadian dividend stocks, such as  Royal Bank of Canada (NYSE:RY), Enbridge Inc. (NYSE:ENB), and Agnico Eagle Mines Limited (NYSE:AEM), are also attracting investment in the current macro-economic environment.