Best Index Funds for Canadian Investors

Index investing is a suitable strategy for almost anyone; and it works well for all types of investors including both beginner investors and wealthy investors alike. To help you choose the best index funds for your own portfolio, this post provides a list of the best index funds for Canadian investors.

What is indexing?

Indexing is a passive investing strategy used to generate returns that match a desired average. By contrast, active investing means choosing specific investments to buy & sell with the goal of outperforming an average. Index investing is like following a model portfolio based on certain pre-determined criteria and it doesn’t require any ongoing decisions from investors.

What makes indexing so good?

Passive index investing is popular for several reasons:

Low Cost – when we pay a professional to manage our investments, their fees decrease our returns. Index investing dramatically reduces investment management fees.

Low Tax – typically, active investors are regularly buying & selling investments. In the process, they realize greater capital gains taxes. These additional taxes are a big drag on returns. A buy & hold passive indexing investment strategy that tracks the broad market will reduce the taxes incurred from capital gains.

Simple/Easy – life is complicated enough. So, one of the best parts about index investing is simplicity. Investors don’t need to make any ongoing investment decisions after they commit to an indexing strategy. Because of this, index investing brings greater peace of mind.

Emotionless – our emotions are a huge drag on investment returns. But, so long as an investor remains committed to their index investing strategy, they can dramatically reduce emotional friction on their portfolio.

Best index funds in Canada

Below is a table showing the cheapest index funds available to Canadian investors. This list was made by a survey of the biggest ETF providers including the big banks, iShares, Vanguard, and Horizons. The table below shows the cheapest ETFs that track Canadian companies and the cheapest ETFs that track American companies.

Name	Symbol	MER
TD Canadian Equity Index ETF	TTP	0.05%
BMO S&P/TSX Capped Composite Index ETF	ZCN	0.06%
CIBC Canadian Equity Index ETF	CCEI	0.05%
iShares Core S&P/TSX Capped Composite Index ETF	XIC	0.06%
Scotia Canadian Large Cap Equity Index Tracker ETF	SITC	0.05%
Horizons S&P/TSX 60 Index ETF	HXT	0.04%
Vanguard FTSE Canada All Cap Index ETF	VCN	0.05%
TD U.S. Equity Index ETF	TPU	0.07%
BMO S&P 500 Index ETF	ZSP	0.09%
CIBC U.S. Equity Index ETF	CUEI	0.06%
iShares Core S&P U.S. Total Market Index ETF	XUU	0.07%
Scotia US Equity Index Tracker ETF	SITU	0.06%
Horizons S&P 500 Index ETF	HXS	0.10%
Vanguard S&P 500 Index ETF	VFV	0.09%

When is Indexing unsuitable?

Although passive index investing works great for many investors, it might not be the best investment strategy for all investors. Here are some reasons why index investing might be unsuitable.

Specific Values – increasingly, many investors want their investment portfolio to reflect their personal values. This could mean support for so called “ESG” values such as environmental sustainability, gender diversity, cultural diversity, “fair” working conditions, and modern corporate governance. However, finding an index that will align with all of an investor’s specific values is almost impossible. Although there are many different index funds available, many of them include certain companies that many investors won’t support. In these cases, using a full-service investment advisor or constructing your own portfolio might be better.

Shareholder Activism – shareholders are becoming more vocal. Many pension funds, and large charitable foundations pressure the companies they invest in to make changes that support certain ESG goals. To facilitate this, groups such as SHARE Canada provide shareholder engagement services. Using index funds, shareholder activism is difficult since shareholders need to be directly registered as such to have a voice.

Income Requirements – many investors have income requirements. Retirees, charitable foundations, and many wealthy people need to generate income from their investment portfolio. In these cases, index funds might not serve their needs. Targeting certain indexes that provide higher yields might be a solution, but oftentimes, a custom portfolio may need to be constructed to achieve income objectives.

Taxes – indexing might be unsuitable for many legacy portfolios. For example, if a portfolio contained stocks purchased many decades ago, and those stocks have large unrealized capital gains. It might be costly to sell those stocks and re-balance to an index because large capital gains taxes would eat into the portfolio’s value. Other times, assets are not liquid and cannot be easily changed to an index portfolio. There are strategies that might mitigate these tax costs but should be determined with a professional advisor.

Small Investors – in Canada, our major brokerages still charge transaction fees. So, if you’re a small investor, be careful about using an indexing strategy. If you invest $100 at a time but must pay a $10 transaction fee each time you invest, you will have lost the cost savings that indexing provides. So, if you’re a small Canadian investor just starting out, look for transaction fee free brokerages such as Wealthsimple or TD Easy Trade. Many Canadian brokers (including from the big banks) also offer commission free ETF trading. This is especially true when trading a bank’s own ETFs on their own brokerage platform. Check the fee details on your brokerage platform before using an indexing strategy.

Our Family Office’s Approach to Index Investing

Our preferred investment strategies are simple, low cost, and passive. We subscribe to “buy & hold” investment strategies including indexing. We believe passive investing reduces costs, emotions, and provides greater peace of mind. If you want to become wealthy, you must be entrepreneurial. But, when you’re already wealthy, a passive approach to investing is often the best way to achieve success.