Exchange-traded funds (ETFs) have become highly popular with Canadian investors as they offer instant diversification and lower fees than traditional mutual funds. By investing in ETFs, you can gain exposure to various market segments, industries, and asset classes within a single investment.

But is there a simple and cost-efficient way to buy ETFs? After all, you can’t purchase them through the mutual fund representative at your local bank or credit union. This article covers everything you need to know about how and where to buy ETFs in Canada.

How Do ETFs Work?

Exchange-traded funds, or simply ETFs, are a type of investment fund that allows you to diversify your portfolio by spreading your money across a range of underlying assets, such as stocks, bonds, or commodities. They work by pooling investors’ funds and using them to buy a collection of assets designed to track a specific market index or meet particular investment objectives.

When you invest in an ETF, your funds are used to purchase a proportionate share of the underlying holdings, including individual stocks, bonds, or other securities.

Throughout the trading day, the price of an ETF fluctuates based on the market value of its underlying assets. This means that, unlike mutual funds, ETFs trade at market prices rather than being priced once per day at the close of the market.

The most popular ETF providers in Canada include names like Vanguard, iShares, Horizons, BMO, and TD.

Why Buy ETFs?

ETFs have much lower fees than actively managed mutual funds. This is because most ETFs are passively managed, meaning they simply track a market index instead of attempting to outperform it.

As a result, they generally have lower management expense ratios (MERs) – the fees charged for managing your investment. ETFs can also be bought and sold throughout the trading day, just like individual stocks. Mutual funds, on the other hand, are only traded once a day.

How To Invest In ETFs In Canada

You can purchase ETFs by following these four easy steps:

1. Open an Online Broker Account

The first thing you need to do is open an online brokerage account, which is the same type of account you would use to trade stocks. There are several online brokers in Canada to choose from, and most support various account types, like non-registered, Registered Retirement Savings Plans (RRSPs), Tax-Free Savings Accounts (TFSAs), Registered Education Savings Plans (RESPs), etc.

For ETFs, I’m a big fan of Questrade because they offer commission-free ETF purchases on over a thousand funds. Weathsimple Trade also offers free ETFs, and QTrade offers a limited number as well.

2. Choose Your ETF Strategy

Before you invest, it’s crucial that you develop the right strategy. Even though most ETFs offer plenty of diversification, if you don’t have the right mix, it can increase your portfolio risk and impact your long-term performance.

The simplest approach is to purchase a single all-in-one ETF, or asset allocation exchange-traded fund, consisting of several underlying ETFs. The fund is regularly rebalanced and offers exposure to Canadian, US, and international markets.

Another option is to handpick a few broad market index ETFs to cover the Canadian, US, and international markets. You can fine-tune your strategy using ETFs focusing on a specific sector, like energy, high-tech, or small-cap stocks.

Consider factors such as your risk tolerance, your investment timeframe, and your overall investment objective. As part of your strategy, also consider the sectors and regions you want to invest in. ETFs provide exposure to various markets and industries, allowing you to diversify your portfolio and reduce risk.

3. Purchase One or More ETFs

Regardless of the strategy you choose, look for ETFs with low fees, a strong performance history, and a focus on sectors or regions that interest you. After identifying the ETFs you want to purchase, simply log into your online brokerage account and execute the trade through the trading platform.

4. Set up a Frequent Purchase Plan

If you can, consider setting up a frequent purchase plan for your ETFs. This practice, known as dollar-cost averaging, involves investing a fixed amount regularly, regardless of market conditions. By doing so, you’re taking advantage of market fluctuations and lowering the average investment cost over time.

You’re also likelier to stick to your investment strategy and avoid making emotional decisions during market volatility.

ETF Pros and Cons

While I’m a strong proponent of ETF investing, I realize that no investment vehicle is perfect and ETFs are not for everyone. Here’s my list of ETF pros and cons:

Pros

• Lower fees compared to mutual funds
• You can achieve a fully diversified portfolio with a single purchase
• Many ETFs pay dividends
• There is an ETF available for almost every investment goal
• Some online brokers offer commission-free ETFs

Cons

• Actively managed funds can sometimes outperform ETFs
• While ETF MERs are low, there are no management fees on individual stocks
• Not everyone wants to follow a passive investment strategy (e.g., value, growth investors)

Remember that with any market investment, past performance does not indicate future results. When choosing an ETF, you cannot rely solely on past performance. Market trends and economic conditions change, and what worked well in the past may not necessarily translate to success in the future.

It’s also worth mentioning that because ETFs are usually purchased in a self-directed account, many investors are not getting access to personalized investment advice from a professional financial advisor or financial planner.

Always consider consulting an advisor if you need guidance in choosing the right investments for your situation.

Final Thoughts On Buying ETFs In Canada

By following the steps I’ve highlighted above, you can easily build your own ETF portfolio. Just remember that ETFs are traded like stocks, and they will fluctuate in value. Therefore, they are not considered safe investments and are unsuitable for short-term savings, like an emergency fund.

And while you can hold ETFs with any online broker, if you plan to make regular ETF purchases, I recommend looking closely at the offerings from Questrade and Wealthsimple Trade, as you will save money.

My last piece of advice is to be consistent with your investment approach and don’t forget to regularly review and rebalance your portfolio to ensure it stays aligned with your goals.

Learn more about Questrade

FAQs

Do Canadian banks have their own ETFs?

Some Canadian banks offer their own ETF products. For example, BMO has a full ETF lineup, which includes the BMO S&P/TSX Capped Composite Index ETF (ZCN), which has an MER of only 0.06% and over $7 billion in net assets.

TD also has its own lineup of ETFs. One notable fund is the TD International Equity Index ETF (TPE), which tracks the performance of an international equities index that comprises mid and large-cap companies in developed markets in Europe, Asia, and the Far East.

What fees are associated with ETFs in Canada?

Just like mutual funds, ETFs charge a management expense ratio (MER), which covers the operating expenses of the fund, such as management and administrative costs. ETF MERs are typically much lower than mutual fund MERs, especially those of the actively managed variety. Some ETF MERs can be as low as 0.04%.

Remember that trading platforms may also charge transaction fees when buying or selling ETFs, though some platforms, like Questrade and Wealthsimple Trade, offer commission-free ETF trades.

How can I purchase an S&P 500 ETF on a Canadian exchange?

You would follow the same process to purchase an S&P 500 ETF as you would any other ETF in Canada. You’ll need to open a brokerage account with a Canadian discount brokerage. Once you’ve funded your account, you can use the platform to identify S&P 500 ETFs that trade on the Canadian exchange.

Some popular options include the iShares Core S&P 500 Index ETF (CAD-Hedged) (XSP.TO) or the Vanguard S&P 500 Index ETF (VFV.TO).

When you’re ready, you can purchase your desired number of shares using a limit, market, or other applicable order type.