4 Types of ETFs Canadians Should Know Before Investing

Confused by the hundreds of ETFs in Canada? This guide breaks down the 4 main types—stock, bond, target-date, and income ETFs—to help you invest smarter.

INVESTING FOR BEGINNERSEXCHANGE TRADED FUNDSETFS

6/17/202515 min read

Introduction

In our last blog post here we discussed what are ETF’s, and what factors make them a perfect option for all Canadians interested in a passive approach to growing their wealth. This is particularly true for beginner investors looking to get started immediately.

However, one major barrier to getting started is that there is an overwhelming variety of ETFs on the market. In fact, a 2024 recap report by TD securities stated that there are now 1542 different Canadian ETFs to choose from. This is an increase of 231 from the prior year. Add to this that most Canadians have the option to also buy some US listed ETFs as well. Many of which are virtually the same, and only differ in subtle ways- like fees, taxes, or currency exposure.

Although on the surface this may appear as a good thing, it actually just makes the selection process more challenging. As Barry Schwartz argues in his book The Paradox of Choice too many choices can lead to anxiety, and paralysis. As he stated“with so many options to choose from, people find it difficulty to choose at all”. Instead of empowering investors, this abundance of options can overwhelm them and cause decision fatigue, leading to inaction.

Our goal here today is not to recommend any particular ETF. Instead we aim to help you navigate the selection process by narrowing the options based on your goals. With this in mind there are four categories of ETFs which we will discuss:

1. Stock ETFs (Growth Focused)

The first type of ETF you should be aware of is a stock ETF. A stock is simply a percentage share ownership in a company. By purchasing 1 share in xyz company you now own a piece of xyz company, albeit generally a very small percentage. As we discussed in our previous post, a stock ETF acts like a basket that invests in several different companies. In fact, there could be thousands of underlying holdings. By purchasing shares in a stock ETF you have the ability to own all of the underlying holdings with one purchase.

Historically, stocks have outperformed all other asset classes. Thus, Stock ETFs are aimed at investors seeking a long term growth oriented approach. However, it is important to note that investing in stocks isn’t for the faint of heart. It comes with increased volatility (ie. higher highs, and lower lows). Also, depending on the level of diversification and risk in the ETF, there is a possibility of total loss of capital. In order to reduce (note: I did not say eliminate) these risk factors it is generally recommended you invest in a well diversified index, or asset allocation ETF.

Popular Choices

  • VFV- S&P 500 Index

    • What it tracks: The 500 largest US-listed companies

    • Historical Performance: 16.6% /year since November 2012 (note: The S&P500 has an average annual return of >10% since inception in 1957)

    • MER: 0.09% (incredibly low)

    • Best for: Investors with a growth focus that would like to follow a historically proven index in the S&P 500. However, you have to be willing to give up some global diversification in favour of increased U.S. exposure.

  • XEQT- Global All-Equity (Alternatives: VEQT or ZEQT)

    • What it tracks: Global stock markets (U.S., Canada, Europe, Other Developed Emerging Markets)

    • Historical Performance: 12.08%/year since August 2019

    • MER: 0.20%

    • Best for: Investors with a growth focus that would like global diversification.

  • VGRO

    • What it tracks: 80% global stocks, 20% bonds

    • Historical Performance: 8.1%/year since January 2018

    • MER: 0.24%

    • Best for: Investors that have a more conservative approach to growth. They are willing to give up some upside growth for the potential stability provided by a moderate allocation to bonds.

2. Bond ETFs (For Stability)

A bond is a loan contract between you and a company or government. You can think of it as an IOU, except the company or the government is the one owing you. In exchange for your hard earned money they agree to pay you regular interest payments over time. At the end of the term they return you the money you lent them. Bond ETF’s simply bundle hundreds of these IOU’s together, and you can get access to them all at once.

Although not always true Bonds are often viewed as providing stability to a portfolio. Although they have historically produced lower returns relative to stocks they tend to be less volatile. There are a few different types of investors that view Bonds as a favourable asset class though:

  • During or Approaching Retirement: You need more predictable returns and the regular interest payments provide cash flow.

  • Lower Risk Tolerance: Investors that have a lower risk tolerance may no be able to tolerate the volatility of stocks. The addition of bonds may provide some “peace of mind”.

  • Value Investors: An allocation to bonds is often thought of as “dry powder” amongst value investors. It provides them with a place to park cash while they wait for an investment opportunity to arrive. Warren Buffet currently owns ~5% of the short term T-Bill market.

Popular Choices

  • VAB- Canadian Bond Index (Alternatively: ZAG)

    • What it tracks: Canadian Aggregate Bond Index

    • Historical Performance: 2.29%/year since November 2011

    • MER: 0.09%

    • Current Yield: 3.53%

  • ZCS- Short-Term Corporate Bonds

    • What it tracks: Short Term Canadian Corporate Bond Index (Corporate Bonds with BBB rating or higher)

    • Historical Performance: 2.95%/year since October 2009

    • MER: 0.11%

    • Current Yield: 3.26%

Important note: Regardless of which bond ETF you choose the MER should be as low as possible. Since bonds historically produce lower returns than stocks, high fees have the potential to completely wipe out your gains. There are several good options under 0.25% MER.

3.Target-Date ETFs

Target-Date ETFs as the name suggests automatically adjust your portfolio allocation according to your planned retirement date.

Early in your life your objective is growing your wealth which results in the fund primarily focusing on more aggressive assets such as stocks. As you gradually move towards retirement your objective shifts towards conservation of wealth. The fund transitions to a more bond focused allocation over time. This approach is perfect if you would like to minimize your investment decisions, and automate the process. However, there are some obvious downsides:

  • Higher Fees relative to Index ETFs due to management involvement.

  • Can be too conservative early in your investment journey.

  • Virtually no options in Canada, most are priced in USD.

In fact, on the discount brokerage firms that we use (ie. Questrade or Wealthsimple) we could only find one option:

  • Ishares Lifepath Retirement ETF (ITDF or other variants)

    • What it tracks: Invests in a mix of stocks and bonds in an allocation geared towards a retirement in the year 2050 (or other dates)

    • Historical Performance: 7.08% last year

    • MER: 0.11% (Really Low)

    • Note: This fund is priced in USD which exposes you to currency risk, and fees of conversion.

Do to the limited options you could instead invest in both a stock index ETF (Ex. VFV), and a bond ETF (Ex.VAB). Then you would adjust the percentage of holdings accordingly over time. A common rule of thumb is to invest in your age in percentage of bonds. So for example:

  • 30 Years Old: 70% Stocks, 30% Bonds

  • 40 Years Old: 60% Stocks, 40% Bonds

  • 50 Years Old: 50% Stocks, 50% Bonds

  • 60 Years Old: 40% Stocks, 60% Bonds

4.Income Focused ETFs

In Canada, a common approach to investing is to focus on a companies dividend yield. Dividends are when a company distributes their profits to their shareholders in the form of a cash payment. This generally occurs on a regular interval (ie. quarterly, semi-annually, or annually).

Not all companies pay dividends to their shareholders. Instead they may opt to invest the money into other areas such as expansion and acquisitions, or research and development. Generally, but not always, a high dividend yield is a sign of a mature company. In other words, they may have limited options to use the funds, and instead decide to return it to shareholders.

This approach is liked among many investors, especially retirees, because of the regular income received. Also, Canadian specific dividends have unique tax advantages for taxable accounts, you can learn more about that here.

Popular Choices

  • VDY - Canadian Dividend Appreciation Index

    • What it tracks: Canadian companies that pay high dividends.

    • Historical Performance: 10.13%/year since November 2012

    • MER: 0.22%

    • Current Yield: 4.4%

    • Best for: Investors seeking Canadian dividend growth with tax advantages in non-registered accounts.

      • The potential downside is a lack of diversification because:

        • Limited # of holdings at only 61.

        • A majority of the holdings are in two specific sectors: Financials and Energy.

        • Concentrated only in Canada.

  • VYM - Vanguard High Dividend Yield (USD)

    • What it tracks: U.S. companies with high (ie. above average) dividend yields

    • Historical Performance: 8.52%/year since November 2006

    • MER: 0.06%

    • Current Yield: 2.83%

    • Best for: Investors wanting U.S. dividend exposure (note: subject to withholding tax in taxable accounts). Significantly, more diversified relative to a Canada Specific Dividend ETF.

  • XRE (Alternatively VRE or ZRE)- Ishares Canadian REIT Index ETF

    • What it tracks: The performance of a diversified basket of Canadian real estate equities.

    • Historical Performance: 7.87%/year since October 2002

    • MER: 0.60%

    • Current Yield: 5.23%

    • Best for: Income investors that would like access to the real estate market. This fund is well diversified across residential, retail, and industrial real estate.

Conclusion

Choosing the right ETF doesn't have to be overwhelming. By understanding these four main categories—growth-focused stock ETFs, stability-focused bond ETFs, target-date ETFs, and income-focused ETFs—you can narrow down your options based on your specific goals and risk tolerance.

Remember, there's no "perfect" ETF for everyone. A 25-year-old saving for retirement has different needs than a 60-year-old planning to retire in five years. The key is matching your ETF choice to your timeline, risk comfort level, and financial objectives.

Start simple. Many successful investors build their entire portfolio around just one or two well-diversified, low-cost ETFs like XEQT or VGRO. As you gain experience and confidence, you can always adjust your strategy.

The most important step is to start investing. Time in the market beats timing the market, and with ETFs offering diversification, low fees, and simplicity, you have everything you need to begin building long-term wealth today.

If you liked this post you may also like:

Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

Citations

Introduction

In our last blog post here we discussed what are ETF’s, and what factors make them a perfect option for all Canadians interested in a passive approach to growing their wealth. This is particularly true for beginner investors looking to get started immediately.

However, one major barrier to getting started is that there is an overwhelming variety of ETFs on the market. In fact, a 2024 recap report by TD securities stated that there are now 1542 different Canadian ETFs to choose from. This is an increase of 231 from the prior year. Add to this that most Canadians have the option to also buy some US listed ETFs as well. Many of which are virtually the same, and only differ in subtle ways- like fees, taxes, or currency exposure.

Although on the surface this may appear as a good thing, it actually just makes the selection process more challenging. As Barry Schwartz argues in his book The Paradox of Choice too many choices can lead to anxiety, and paralysis. As he stated“with so many options to choose from, people find it difficulty to choose at all”. Instead of empowering investors, this abundance of options can overwhelm them and cause decision fatigue, leading to inaction.

Our goal here today is not to recommend any particular ETF. Instead we aim to help you navigate the selection process by narrowing the options based on your goals. With this in mind there are four categories of ETFs which we will discuss:

1. Stock ETFs (Growth Focused)

The first type of ETF you should be aware of is a stock ETF. A stock is simply a percentage share ownership in a company. By purchasing 1 share in xyz company you now own a piece of xyz company, albeit generally a very small percentage. As we discussed in our previous post, a stock ETF acts like a basket that invests in several different companies. In fact, there could be thousands of underlying holdings. By purchasing shares in a stock ETF you have the ability to own all of the underlying holdings with one purchase.

Historically, stocks have outperformed all other asset classes. Thus, Stock ETFs are aimed at investors seeking a long term growth oriented approach. However, it is important to note that investing in stocks isn’t for the faint of heart. It comes with increased volatility (ie. higher highs, and lower lows). Also, depending on the level of diversification and risk in the ETF, there is a possibility of total loss of capital. In order to reduce (note: I did not say eliminate) these risk factors it is generally recommended you invest in a well diversified index, or asset allocation ETF.

Popular Choices

  • VFV- S&P 500 Index

    • What it tracks: The 500 largest US-listed companies

    • Historical Performance: 16.6% /year since November 2012 (note: The S&P500 has an average annual return of >10% since inception in 1957)

    • MER: 0.09% (incredibly low)

    • Best for: Investors with a growth focus that would like to follow a historically proven index in the S&P 500. However, you have to be willing to give up some global diversification in favour of increased U.S. exposure.

  • XEQT- Global All-Equity (Alternatives: VEQT or ZEQT)

    • What it tracks: Global stock markets (U.S., Canada, Europe, Other Developed Emerging Markets)

    • Historical Performance: 12.08%/year since August 2019

    • MER: 0.20%

    • Best for: Investors with a growth focus that would like global diversification.

  • VGRO

    • What it tracks: 80% global stocks, 20% bonds

    • Historical Performance: 8.1%/year since January 2018

    • MER: 0.24%

    • Best for: Investors that have a more conservative approach to growth. They are willing to give up some upside growth for the potential stability provided by a moderate allocation to bonds.

2. Bond ETFs (For Stability)

A bond is a loan contract between you and a company or government. You can think of it as an IOU, except the company or the government is the one owing you. In exchange for your hard earned money they agree to pay you regular interest payments over time. At the end of the term they return you the money you lent them. Bond ETF’s simply bundle hundreds of these IOU’s together, and you can get access to them all at once.

Although not always true Bonds are often viewed as providing stability to a portfolio. Although they have historically produced lower returns relative to stocks they tend to be less volatile. There are a few different types of investors that view Bonds as a favourable asset class though:

  • During or Approaching Retirement: You need more predictable returns and the regular interest payments provide cash flow.

  • Lower Risk Tolerance: Investors that have a lower risk tolerance may no be able to tolerate the volatility of stocks. The addition of bonds may provide some “peace of mind”.

  • Value Investors: An allocation to bonds is often thought of as “dry powder” amongst value investors. It provides them with a place to park cash while they wait for an investment opportunity to arrive. Warren Buffet currently owns ~5% of the short term T-Bill market.

Popular Choices

  • VAB- Canadian Bond Index (Alternatively: ZAG)

    • What it tracks: Canadian Aggregate Bond Index

    • Historical Performance: 2.29%/year since November 2011

    • MER: 0.09%

    • Current Yield: 3.53%

  • ZCS- Short-Term Corporate Bonds

    • What it tracks: Short Term Canadian Corporate Bond Index (Corporate Bonds with BBB rating or higher)

    • Historical Performance: 2.95%/year since October 2009

    • MER: 0.11%

    • Current Yield: 3.26%

Important note: Regardless of which bond ETF you choose the MER should be as low as possible. Since bonds historically produce lower returns than stocks, high fees have the potential to completely wipe out your gains. There are several good options under 0.25% MER.

3.Target-Date ETFs

Target-Date ETFs as the name suggests automatically adjust your portfolio allocation according to your planned retirement date.

Early in your life your objective is growing your wealth which results in the fund primarily focusing on more aggressive assets such as stocks. As you gradually move towards retirement your objective shifts towards conservation of wealth. The fund transitions to a more bond focused allocation over time. This approach is perfect if you would like to minimize your investment decisions, and automate the process. However, there are some obvious downsides:

  • Higher Fees relative to Index ETFs due to management involvement.

  • Can be too conservative early in your investment journey.

  • Virtually no options in Canada, most are priced in USD.

In fact, on the discount brokerage firms that we use (ie. Questrade or Wealthsimple) we could only find one option:

  • Ishares Lifepath Retirement ETF (ITDF or other variants)

    • What it tracks: Invests in a mix of stocks and bonds in an allocation geared towards a retirement in the year 2050 (or other dates)

    • Historical Performance: 7.08% last year

    • MER: 0.11% (Really Low)

    • Note: This fund is priced in USD which exposes you to currency risk, and fees of conversion.

Do to the limited options you could instead invest in both a stock index ETF (Ex. VFV), and a bond ETF (Ex.VAB). Then you would adjust the percentage of holdings accordingly over time. A common rule of thumb is to invest in your age in percentage of bonds. So for example:

  • 30 Years Old: 70% Stocks, 30% Bonds

  • 40 Years Old: 60% Stocks, 40% Bonds

  • 50 Years Old: 50% Stocks, 50% Bonds

  • 60 Years Old: 40% Stocks, 60% Bonds

4.Income Focused ETFs

In Canada, a common approach to investing is to focus on a companies dividend yield. Dividends are when a company distributes their profits to their shareholders in the form of a cash payment. This generally occurs on a regular interval (ie. quarterly, semi-annually, or annually).

Not all companies pay dividends to their shareholders. Instead they may opt to invest the money into other areas such as expansion and acquisitions, or research and development. Generally, but not always, a high dividend yield is a sign of a mature company. In other words, they may have limited options to use the funds, and instead decide to return it to shareholders.

This approach is liked among many investors, especially retirees, because of the regular income received. Also, Canadian specific dividends have unique tax advantages for taxable accounts, you can learn more about that here.

Popular Choices

  • VDY - Canadian Dividend Appreciation Index

    • What it tracks: Canadian companies that pay high dividends.

    • Historical Performance: 10.13%/year since November 2012

    • MER: 0.22%

    • Current Yield: 4.4%

    • Best for: Investors seeking Canadian dividend growth with tax advantages in non-registered accounts.

      • The potential downside is a lack of diversification because:

        • Limited # of holdings at only 61.

        • A majority of the holdings are in two specific sectors: Financials and Energy.

        • Concentrated only in Canada.

  • VYM - Vanguard High Dividend Yield (USD)

    • What it tracks: U.S. companies with high (ie. above average) dividend yields

    • Historical Performance: 8.52%/year since November 2006

    • MER: 0.06%

    • Current Yield: 2.83%

    • Best for: Investors wanting U.S. dividend exposure (note: subject to withholding tax in taxable accounts). Significantly, more diversified relative to a Canada Specific Dividend ETF.

  • XRE (Alternatively VRE or ZRE)- Ishares Canadian REIT Index ETF

    • What it tracks: The performance of a diversified basket of Canadian real estate equities.

    • Historical Performance: 7.87%/year since October 2002

    • MER: 0.60%

    • Current Yield: 5.23%

    • Best for: Income investors that would like access to the real estate market. This fund is well diversified across residential, retail, and industrial real estate.

Conclusion

Choosing the right ETF doesn't have to be overwhelming. By understanding these four main categories—growth-focused stock ETFs, stability-focused bond ETFs, target-date ETFs, and income-focused ETFs—you can narrow down your options based on your specific goals and risk tolerance.

Remember, there's no "perfect" ETF for everyone. A 25-year-old saving for retirement has different needs than a 60-year-old planning to retire in five years. The key is matching your ETF choice to your timeline, risk comfort level, and financial objectives.

Start simple. Many successful investors build their entire portfolio around just one or two well-diversified, low-cost ETFs like XEQT or VGRO. As you gain experience and confidence, you can always adjust your strategy.

The most important step is to start investing. Time in the market beats timing the market, and with ETFs offering diversification, low fees, and simplicity, you have everything you need to begin building long-term wealth today.

If you liked this post you may also like:

Disclaimer: The information discussed in this blog is not financial advice, and is meant for educational purposes only. Please consult a personal financial expert before making any financial decisions.

Citations

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