This article shares general ideas about finding an Exchange-Traded Fund (ETF) that fits your investment plan in Canada. It's not personal financial advice.
Let’s be honest. Investing in an ETF feels simple. You click “Buy,” and suddenly you own a piece of a basket of stocks. Great!
But choosing the right ETF? That’s where many investors trip up. A small mistake here—like choosing the wrong currency or ignoring a high fee—can cost you thousands over a decade.
If you’re managing your own portfolio in a TFSA (Tax-Free Savings Account) or RRSP (Registered Retirement Savings Plan), you need a proper screen.
Here are the 7 essential questions to ask yourself before you hit the buy button.
Question 1: How Much is This ETF Really Costing Me?
This is the most critical question. You need to look at the MER (Management Expense Ratio).
The MER is the annual fee you pay, expressed as a percentage of your investment. It’s the fund manager’s cut for running the show. Since you don’t get a bill, many people ignore it. Don’t.
- Good Range: A simple, broad-market index ETF should cost you less than 0.20% (or 20 basis points).
- The Problem: If you buy a complex ETF with an MER of 0.50% instead of a simple one at 0.05%, that 0.45% difference compounds. Over 30 years, it can easily devour 20% or more of your total returns.
- Action Step: Always check the MER first. Lower is almost always better, especially for core holdings.
Question 2: Is the ETF a Good Fit for My Goal and Risk Tolerance?
What does the ETF actually hold? Don’t just read the name.
If you want stability, buying an ETF that tracks the entire Canadian stock market (like the TSX) is likely a good fit. If you buy a leveraged ETF, a niche sector fund (like Artificial Intelligence, Defense or biotech), or one focused on volatile emerging markets, your risk is much higher.
- Read the Prospectus: Quickly check the top 10 holdings and the sector breakdown. Does it match your idea of a diversified, long-term investment?
- Action Step: Ensure the ETF’s stated objective—growth, income, or capital preservation—matches your personal objective.
Question 3: Is This ETF Tax Efficient in My Account? (RRSP vs. TFSA)
Where you hold an ETF matters massively for Canadian tax rules.
For example, ETFs that hold foreign assets (like US stocks) pay foreign dividends. The US government typically withholds a 15% tax on those dividends.
- Holding US ETFs (e.g., VOO or VTI):
- In a TFSA: The 15% dividend withholding tax applies. You lose it forever.
- In an RRSP: The RRSP is covered by a tax treaty, meaning the 15% is usually waived. It is tax-efficient.
- Holding Canadian-listed ETFs (e.g., VFV):
- Canadian-listed ETFs that hold US stocks still have the US withholding tax, but it’s hidden inside the fund.
This is a complex area, but the simple takeaway is: Look for ETFs designed to be tax-efficient in your specific registered account. Many Canadian providers offer “swap-based” or “corporate class” ETFs that help with this, often at a slightly higher MER. You must weigh the small MER increase against the tax savings.
Question 4: Am I Taking on Unnecessary Currency Risk? (CAD vs. USD)
When you buy US stocks (like Apple or Tesla), you are buying them in USD.
When you buy a CAD-Hedged ETF, the fund manager uses contracts to try and neutralize the effect of the CAD/USD exchange rate. This adds cost (a higher MER) and often fails to provide better returns.
- Avoid Hedging for Long-Term: For most long-term investors buying broad US/International markets, avoid the CAD-hedged version. You are investing for decades, and over that time, the hedging cost is rarely worth the benefit.
- Action Step: Unless you have a specific short-term need, stick to the unhedged version of global ETFs to keep costs low and align with long-term strategy.
Question 5: Does the ETF Actually Trade? (Liquidity)
Liquidity refers to how easily you can buy or sell the ETF without the price changing dramatically. This is a big concern for niche or new ETFs.
- Look for Volume: Check the average daily volume. If an ETF is only trading a few hundred shares a day, it’s illiquid. When you go to sell, you might have to accept a lower price.
- Action Step: Stick to large, well-known, and widely-held ETFs (like those offered by iShares, Vanguard, or BMO) that trade tens of thousands of shares daily.
Question 6: Is the Fund Provider Reputable?
While ETFs are legally separate from the company that sells them (meaning if the company goes bust, your assets are safe), a reliable provider makes a difference.
- Trust and Scale: Large fund providers like Vanguard, BlackRock (iShares), and BMO InvestorLine offer security, scale, and tend to have the lowest MERs due to massive assets under management. They are less likely to suddenly close down a fund.
- Action Step: Focus on the “Big Three” ETF providers to ensure longevity and minimal costs.
Question 7: Is the Strategy a Permanent Solution or a Passing Trend?
Is this ETF something you can hold for 10 or 20 years, or is it a flash-in-the-pan fund designed to capture a current trend (e.g., “Precious Metals ETF” or “Semiconductors Fund”)?
Successful long-term investing means resisting the urge to chase the hot sector. A small allocation to a trendy ETF is fine, but the core of your portfolio—especially inside your TFSA and RRSP—should be simple, globally diversified, and built to last.
- Action Step: Build your core with simple, low-cost, global index ETFs. You can always add small, tactical “satellite” positions later.
The Reader Takeaway
The best ETF isn’t the one with the highest returns last year. The best ETF is the one that fits your financial plan, is extremely low-cost, and is tax-efficient in your registered accounts. Master these 7 questions, and you’ll be on the path to becoming a smarter, more successful investor.
Next Step: Want to see how to properly calculate your personal risk tolerance? Read our article: How to Calculate Your True Investment Risk (Beyond the Quiz).
Full Disclaimer
This article is for informational and educational purposes only and does not constitute financial advice. The information is not intended to be a complete description of all investment considerations. Investing involves risk, including the possible loss of principal. Please consult with a qualified financial, tax, and legal professional before making any investment decisions.
