The safest investment funds in Canada are Canadian funds like ETFs or mutual funds that aim to equal the performance of a Canadian market index.
Canadian funds, specifically, index funds, are among the better financial innovations to come along in the past few decades. The best Canadian funds do show better long-run performance than more than half of actively managed mutual funds or ETFs with long-term track records. We feel the safest investments in Canada are:
VANGUARD GROWTH ETF
VANGUARD FTSE EMERGING MARKETS ETF
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Two Vanguard ETFs that track a U.S. large-cap index and an emerging market index
Vanguard, which went into business in 1975, offers low-fee index mutual funds. Generally speaking, Canadians can’t buy units of mutual funds that are registered in the U.S., because they aren’t registered with provincial securities commissions. For that matter, some Canadian funds aren’t available in all provinces.
Canadians can, however, buy Vanguard exchange traded funds that trade on stock exchanges. We don’t recommend all of Vanguard’s ETFs, but here are two we do see as low-fee buys and some of the safest investments in Canada.
VANGUARD GROWTH ETF
The Vanguard Growth ETF (New York symbol VUG) is bought and sold through brokers and aims to track the Center for Research in Security Prices (CRSP) U.S. Large Cap Growth Index, a broadly diversified index that mainly consists of big U.S. companies. The fund’s MER is just 0.04%. We typically recommend this as a buy for aggressive investors.
This Growth ETF’s top holdings include Apple, Alphabet, Coca-Cola, Facebook, Visa, Home Depot, Comcast, Amazon.com, Gilead Sciences and Walt Disney Co.
VANGUARD FTSE EMERGING MARKETS ETF
The Vanguard FTSE Emerging Markets ETF (New York symbol VWO) is also bought and sold through brokers and aims to track the Financial Times Stock Exchange (FTSE) Emerging Index, which is made up of the common shares of companies in developing countries. The fund’s MER is just 0.10%.
The fund’s top holdings include Taiwan Semiconductor (Taiwan: computer chips), Tencent Holdings (China: Internet), China Mobile, China Construction Bank, Naspers Ltd. (South Africa: media), Industrial & Commercial Bank of China, Bank of China, Hon Hai Precision Industry (Taiwan: electronics), Infosys (India: information technology) and Housing Development Finance (India: banking).
Advantages of Canadian index funds
In our view, when looking at Canadian funds, it’s specifically index funds that can help you avoid the risk of a fund management style that virtually guarantees below-average long-term performance, that’s why we consider them the safest investments in Canada.
For example, mutual funds or ETFs that pursue a trading or sector-rotation approach belong in the sub-par category. Managers of these U.S. or Canadian funds try to outperform the market by betting on relatively short-term trends. This can work in any one year, say. But in any one decade, the top funds are generally run by conservative managers who focus on long-term growth in the economy.
Another advantage of index funds is that they can give investors with limited funds a low-cost way to get some stock-market exposure. They can also be a good starting point for a registered education savings plan (RESP), or an in-trust account. Many investors also consider them when they invest funds in their tax-free savings accounts (TFSAs).
If you want to invest in Canadian index funds, we routinely update subscribers to our Canadian Wealth Advisor newsletter on the best deals available. One example is the iShares S&P/TSX 60 Index ETF (Toronto symbol XIU). The fund’s units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies. You pay a commission to buy this fund (through a broker), but the fund’s yearly expenses are just 0.18% of assets.
Beware of buying vaguely described Canadian index funds
Canadian index funds generally follow a well-defined index, making them some of the safest investments in Canada. But be careful of investing in Canadian index mutual funds that show wide disparities between the fund’s portfolio and the investments that the sales literature describes
It’s often hard to find out much about who is making the decisions, what sort of record they have, and what sort of investing they prefer. We always take a close look at an index fund’s performance and investments to see if they differ from what the prospectus or sales literature would lead investors to expect.
Specific reasons why investors like ETFs for investing in index funds
The MERs (Management Expense Ratios) are generally much lower on ETFs than on conventional mutual funds—including mutual funds that hold indexes. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing clients’ investments, ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
ETFs practice this “passive” fund management, in contrast to the “active” management that conventional mutual funds—or even actively managed ETFs—provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poor’s). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks changes. They don’t attempt to pick and choose which stocks they think have the best prospects.
This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.
Are you holding these ETFs in your portfolio? How have they been performing? Do you agree they are the safest investments in Canada? Share your experience with us in the comments.
This article was originally published in 2018 and is regularly updated.
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