Best Index Funds in Canada – A Step-By-Step Guide

If you are looking for a simple, passive investment strategy that offers steady returns, then index funds are probably your best bet.

Index funds don’t only require a lot of work, but they don’t also have high management expenses.

Investing in index funds provides the opportunity to invest in an enormous, diversified portfolio of stocks or bonds at a meagre cost.

Studies have shown that for over 15years, about 90% of active investors underperform the market.

This means that the average investor loses money in the long run after paying commissions. Index funds reduce this risk by allowing you to invest low at lower fees and outperform the market.

By eliminating the cost of actively managing a portfolio of individual investments, an Index fund can provide investors with better value than most actively managed mutual funds.

Whether you are new to investing or have already invested in index funds, you can’t afford to undergo the best index funds in Canada when investing in index funds.

As you continue reading, you will learn about the best Canadian index funds, why they are the best, and how to invest them.

Table of Contents

What is an Index Fund?

What is an index fund

An index fund is a form of a  mutual fund or exchange-traded fund (ETF) designed to track a market index return.

In contrast to actively managed funds, index funds are passive by design. They do not involve actively selecting stocks or bonds to buy or sell.

Instead, they hold all the securities in their target index according to their weighting in the index.

An index fund aims for the same return as its target market with much lower fees by constructing a portfolio like this.

Because it’s a form of passive investment, most investors use index funds primarily to diversify their portfolios.

Investing in an index fund gives you a wider exposure to a group of companies than buying stock in a single company.

If any stock price falls suddenly, an index fund’s basket of underlying securities will shield you from significant losses.

Fees for index funds are usually lower compared with actively managed mutual funds.

Because index funds track a broader index, they require minor to zero trading activity, whereas actively managed funds constantly add/remove securities from their portfolios.

11 Common Types of Index Funds for Canadians

What are the types of index funds
  • Broad Market Index Fund

A broad market index fund attempts to capture a significant portion of a market that can be invested in. This is true of stocks, bonds, and every other form of security.

Vanguard index funds are one of the examples of broad market indexes.

Expense ratios for broad market index funds are usually among the lowest.

Furthermore, asset turnover in broad index funds is extremely low, making them extremely tax-efficient.

A broad market index fund is for you if you want to invest in the diverse basket of stocks or bonds at once.

However, you should be mindful that your holdings in your broad market index fund will overlap if you intend to invest in other index funds.

  • International Index Fund

International index funds will provide you with some outside exposure to the world of investment.

Most broad market index funds concentrate on the United States, but many companies in Europe, North America, South America, Asia, and Africa.

International index funds are not only divided into geographic securities, but you may also invest in funds that are frontier or track emerging markets that aren’t tied to a particular geographic area.

Examples of international index funds include TD International Index Fund, Schwab Emerging Markets Equity ETF and iShares Core MSCI Pacific ETF.

  • Market Capitalization Index Fund

Market-cap index funds provide you with information on a broad range of companies, both big and small.

With a capitalization-weighted index, you can calculate the impact of security on the overall index performance.

Since most broad market index funds are rated by market capitalization, you will not have much exposure to small and mid-cap companies.

Smaller companies have the potential to outperform big companies, although with higher volatility.

This is because growing earnings or sales from a small company is much easier than growing earnings or sales from a large base.

However, a smaller, less well-established business, on the other hand, faces a greater risk of failure.

If you have a long time horizon, you can benefit from the exposure of small and mid-sized companies. Market capitalization-based index funds will help you achieve that.

Examples of market capitalization index funds include S&P 500 Index Fund, Fidelity Mid Cap Index Fund and iShares Morningstar Small-Cap ETF.

  • Term-Based Bonds

Bond terms may be an integral part of a fixed-income investor’s asset allocation.

Investing in a mixture of short-, intermediate, and long-term bond maturities will ensure consistent bond income over several years. Using bond index funds simplifies the process.

When interest rates decline, long-term bonds can provide relatively strong returns, while short-term bonds can offer consistent returns. Intermediate-term bonds are in the center of the spectrum.

Examples of term-based include Vanguard Long-Term Bond Index Fund and Fidelity Short-Term Bond Index Fund.

  • Municipal Bonds

Municipal bonds appeal to investors seeking tax-free income from bonds.

However, purchasing individual issues takes time and is risky. But pressure and taxes can be kept at bay with a municipal bond index fund.

If an investor lives in the same state where the bond is sold, they may be exempt from federal, state and local tax with municipal bonds.

Investors in states without an income tax can buy national municipal bonds, but if you live in a state with high local income taxes, you should consider muni bonds that track indexes in your state.

Examples of municipal bonds include Dominion Bond Rating Service Ltd and Munis.

  • Earning-Based Index Funds

Growth and value indexes are two types of indexes made up of companies based on their earnings.

Companies with growth indexes are supposed to increase their profits speedily compared to the overall economy.

Value indexes are made up of stocks that trade for a low price about a company’s earnings.

Growth stocks are more volatile than value stocks, increasing in value during bull markets but decreasing in bear markets.

As the market rises, value stocks lag, but they don’t fall nearly as much when the market falls because their values are already so low.

Vanguard Growth Index Fund is one of the examples of earning-based index funds.

  • Dividend-Focused Index Funds

Dividend-focused index funds are available to index investors seeking dividends from their portfolios.

Dividend indexes are divided into two categories: growth and yield.

The dividend growth index includes companies that regularly increase their dividends and consistently do so.

Stocks with relatively high dividend yields are included in dividend yield indexes.

If you’re looking for a consistent income from your portfolio, you should consider dividend index funds.

Vanguard High Dividend Yield Index Fund and SPDR S&P Dividend ETF are typical examples of dividend-focused index funds.

  • Sector Index Funds

If you’re looking to invest in a particular business sector, such as energy or real estate, sector index funds are the way to go.

Sector funds are the most diverse type of fund since any industry can create an index.

Sectors may be wide, such as technology, or narrow, such as cloud computing.

Investors who want to bet on an industry trend but aren’t sure which horse to back will benefit from investing in a sector fund.

Examples of sector index funds include Vanguard Consumer Discretionary Index Fund, Utilities Select Sector SPDR Fund and First Trust Cloud Computing ETF.

  • Socially Responsible Index Funds

Socially responsible index funds refer to securities that abide by governmental, social, environmental, religious and moral beliefs.

A socially conscious index fund is what you need if you have an objection to investing in things like alcohol or cigarettes but still want the wide diversification of a broad market index fund.

There is mounting evidence that investing in companies with high environmental, governmental and social standards will give you long-term benefits.

Examples of socially responsible index funds include Vanguard ESG International Stock and Fidelity Sustainability Bond Index Fund.

  • Leveraged Index Funds

Regularly, leveraged index funds aim to return a multiple of the index they track.

To achieve their objectives, they employ financial instruments such as options and debt.

Although it may sound appealing to get two or three times the returns of a broad stock market such as the S&P 500, it’s far from reality.

Since these index funds reset daily, they are more likely to engage in a downturn than an upturn.

If you are a long-term buy-and-hold investor, you should avoid leveraged index funds since they are better used as short-term protection against broad market swings.

Examples of socially responsible index funds include ProShares Ultra S&P500 and Direxion Daily Financial Bull 3x.

Top 5 Benefits of Index Funds

Top 5 Benefits of Index Funds - Best Index Funds in Canada

Index funds offer several advantages that make them worth considering. Here are just a few of them:

  • Low Costs

Index funds have lower fees, particularly when compared to traditional mutual funds.

With no active management, annual fees are lower, and trading commissions are minimal or non-existent.

Maintaining an index fund portfolio would typically cost you 0.05% to 0.25% per year, while actively managed funds will cost you between 1% to 2% per year.

  • Simplicity

The investment goals of index funds are simple to comprehend.

You will easily decide which securities an index fund will hold once you know the index fund’s target index.

It could be as simple as rebalancing index fund holdings every six months or once a year to keep track of them.

  • Lower Turnover

The investment manager’s sale and purchasing of shares are referred to as turnover.

In some jurisdictions, selling securities may lead to capital gains tax. This is often given to fund investors.

Turnover had implicit and explicit fees, which minimize returns on a dollar-for-dollar ground even without taxes.

Index funds have a lower turnover than actively managed funds because they are passive investments.

  • No Style Drift

When actively managed mutual funds deviate from their stated style to maximize returns, this is known as style drift.

Portfolios constructed with diversification as a top priority suffer from such drift. Drifting into other styles can limit the portfolio’s overall diversity, which consequently increases risk.

However, with an index fund, this drift is eliminated, and portfolio diversification is improved.

  • Easy Diversification

Index funds may be a good place to start for new investors who aren’t sure how to diversify their portfolios.

Since index funds mirror the proportion of represented companies in the market, your portfolio will automatically include various companies and industries.

If you’re mirroring a wide market like the S&P 500, that is more likely. And, as you might know, there are few things investors like more than a diversified portfolio.

What are the Risks of Index Funds?

What are the Risks of Associated to Index Funds - 4 Risk Factors Canadians Should Be Aware Of

Index funds, like any other investment, have some risk. An index fund would be exposed to the same risks as the securities that make up the index it monitors. Other risks to which the fund could be exposed include:

  • Tracking Error

Tracking error is a statistical measure of how closely an investment portfolio follows the benchmark or reference index. It can vary considerably depending on the asset class and type of fund.

It’s possible that an index fund won’t exactly track its index. This could undermine the whole reason for investing in a fund.

  • Underperformance

An index fund may underperform its index because of fees and expenses, trading costs, and tracking errors.

An index fund may sometimes lag behind the index it is trying to follow. The possible reasons for this include tracking error, tracking costs, and fees and expenses.

You should carefully consider the investment objectives, risks, charges, and expenses before investing.

  • Low Flexibility

What makes index funds so attractive to passive investors can be challenging for investors who want more leverage over which companies make it into their portfolio and which don’t.

Being tied to an index may be restrictive to an investor who wants to invest in a new sector like cryptocurrency.

Similarly, there isn’t anything you can do if there are companies in the index whose market practices you disagree with.

  • No Quick Liquidity

Index funds are best used as part of a long-term financial plan.

If you’re aiming for fast returns after five years or thereabout, your returns may not be able to withstand inflation, and you won’t be safe from market downturns in the short term.

A high-interest savings account is a better alternative if you need quick access to interest-generating funds.

What are the Best Index Funds in Canada?

What are the best index funds in Canada

With plenty of index funds to choose from, choosing the best one can be difficult with their varying performance records and management fees.

But worry no more.

Here are the best index funds in Canada for diversified and growth portfolios:

  • S&P 500 Index Fund Canada

Expense Ratio0.03%
Return Ratio13.6%
Dividend Yield1.47%

Note that these figures are subject to change.

The Standard & Poor’s 500 Index (S&P 500 Index) is a market capitalization form of index owned by the United States 500 largest public companies.

For many investors, the S&P 500 is a must-have stock. It’s made up of 500 of America’s largest companies and has provided high returns to long-term investors for over a century.

Exchange-traded funds are by far the most convenient and cost-effective way to invest in the S&P 500. (ETFs).

ETFs, unlike mutual funds, can be exchanged at any time of day and are traded on stock markets such as the TSX.

Most notably, ETFs have lower charges compared to mutual funds. It is not strange to see fees as low as 0.10% annually or around $1 per $1,000 invested.

How to buy S&P 500 Index Fund Canada

You can invest in S&P 500 Index Fund through:

  • Brokerage
  • Discount brokerage
  • Financial advisor
  • Robo advisor
  • Vanguard Index Funds Canada

Expense Ratio0.08%
Return Ratio5.03%
Dividend Yield1.31%

Note that these figures are subject to change.

Vanguard has earned a reputation for strict index monitoring, stringent risk controls, and low costs since launching the first index fund in 1976.

Vanguard’s high-quality index investments are trusted by millions of investors around the world.

They have a wide range of market-capitalization-weighted index ETFs available in Canada, the US, and global investment-grade bonds.

Benchmark construction best practices and management experience have position Vanguard at the forefront of the global indexing industry.

How to buy Vanguard Index Funds in Canada

You can invest in the Vanguard index Funds through:

  • Financial advisor
  • Online brokerage account
  • S&P/TSX Composite Index

Expense Ratio0.05%
Return Ratio7.38%
Dividend Yield2.91%

Note that these figures are subject to change.

The S&P/TSX Composite Index, located in Toronto, is one of the leading indicators of the Canadian economy’s resilience.

It tracks the stock performance of Canada’s largest companies on the Toronto Stock Exchange (TSX) listing.

It contains around 250 stocks, which account for roughly 70% of the Toronto Stock Exchange’s market capitalization.

Standard and Poor’s (S&P) is used to calculate the S&P/TSX Composite Index, which includes around 250 major Canadian companies.

It is Canada’s version of the United States S&P 500 market index, and as such, Canadian investors keep a close eye on it.

How to buy S&P/TSX Composite Index

You can invest in S&P/TSX Composite Index through:

  • Online brokers
  • Robo advisors
  • Financial advisors
  • Banks
  • Scotia Canadian Bond Index Fund

Expense Ratio0.85%
Return Ratio21.23%
Dividend Yield1.87%

Note that these figures are subject to change.

By monitoring the performance of a widely known Canadian bond index, (the FTSE Canada Universe Bond Index), Scotia Canadian Bond aims to offer moderate capital gains and a high level of regular interest.

Scotia mainly invests in Canadian federal, provincial, and local government treasury bills bonds and Canadian companies.

It also invests in money market instruments provided by Canadian companies.

Scotia Canadian Bond provides complete invested exposure to the fixed income market in Canada at a low cost.

How to buy Scotia Canadian Bond Index Fund

You can invest in Scotia Canadian Bond by:

  • Calling Scotia agent on +18002689269
  • Visiting in-person to your local Scotiabank branch
  • Visiting Scotia website
  • CIBC Canadian Index Fund

Expense Ratio1.14%
Return Ratio1.14%
Dividend Yield1.83%

Note that these figures are subject to change.

The objective of the CIBC Canadian Index Fund is to offer long-term growth through capital appreciation.

The Fund is managed to produce a return that is similar to the S&P/TSX Composite Index.

Remember, the S&P/TSX Composite Index is a stock market index of the largest companies listed on TSX. It is designed to reflect the equity market in Canada.

CIBC Canadian Index Fund may be suitable for:

  • The Canadian equity part of a diversified investment portfolio.
  • Those searching for a widely diversified Canadian equity fund with the same return as S&P/TSX Composite Index.
  • Medium to long-term investors.

How to buy CIBC Canadian Index Fund

  • You can invest in CIBC Canadian Index Fund through:
  • CIBC Online banking
  • Visit in-person to your CIBC branch
  •  Financial advisors
  • TD International Index Fund

Expense Ratio0.49%
Return Ratio5.75%
Dividend Yield1.89%

Note that these figures are subject to change.

The fund’s primary investment objective of the TD International Index Fund is to enable long-term capital growth.

The index measures international equity performance of medium and big capitalization companies in Asia, Europe, and the East region.

Besides its low MER and active investment style, TD International Index Fund also provides greater exposure to large and well-established foreign companies.

How to Buy TD International Index Fund

  • Call TD representative on +18003863757
  • Financial advisor
  • Visit your local TD branch
  • Online brokers
  • TD e-Series Index Funds

Expense Ratio0.36% to 0.41%
Return Ratio5.77%
Dividend YieldAutomatically reinvested

Note that these figures are subject to change.

For several years, TD e-Series Index Funds have been popular among amateur investors.

Even with the popularity of ETFs investing and Robo advisors, TD E-Series Index Funds remain a strong choice for passive income generation.

TD e-Series funds are known to be low-cost and low-maintenance mutual funds that track the performance of the market.

The market they measure is determined by the e-Series fund you buy. The Canadian Bond Index e-Series fund, for example, monitors the investment-grade bond market in Canada.

TD e-Series funds can be used to construct a well-diversified investment portfolio.

One of the benefits of TD e-Series funds over ETFs is the ease with which they can be bought and sold.

Unlike ETFs, you don’t have to think about buying TD e-series funds at a certain time or on a specific day of the week.

How to buy TD e-Series Index Funds

You can invest in TD e-Series Index Funds through:

  • TD website
  • Discount brokerage account
  • Your local TD branch
  • Franklin Global Aggregate Bond Fund

Expense Ratio0.39%
Return RatioN/A
Dividend Yield2.35%

Note these figures are subject to change.

The Franklin Global Aggregate Bond Fund aims to optimize overall investment return by combining interest income with capital appreciation.

It mainly invests in grade fixed or floating-rate debt securities provided by governments and non-governmental entities.

Some top reasons you should consider investing in Franklin Global Aggregate Bond Fund (FGABF) are:

  •  FGABF offers corporate bonds, government bonds and sovereign bonds as investment options.
  •  It used a Canadian-dollar currency hedge to diversify its exposure to investment-grade bonds around the world.
  • It can be used as a primary source of fixed income.

How to buy Franklin Global Aggregate Bond Fund

You can invest in Franklin Global Aggregate Bond Fund through:

  • Online brokers
  • Financial Advisors

A Step-By-Step Guide on How to Invest in Best Canadian Index Funds

Knowing about the best Canadian index funds is one thing. Knowing how to invest is also a different thing.

It doesn’t matter if you are a newbie or an expert. The more you know about index funds, the better equipped you will be to make important decisions about your personal finance.

So let’s look at the steps you need to take to invest in the best index funds in Canada.

Step 1: Set a Budget

One of the first steps to get started with index funds is to set a budget for how much you want to invest.

Consider both your emotional and financial pressure points when creating a budget.

Sticking to your budget will mean that you don’t take on too much risk and that you can stay in the game even if things go wrong.

Step 2: Decide What Index Funds to Buy

Once you have a set budget, the next step is to decide what index funds you can afford.

Depending on the type of index fund you want to find, we’ve done the hard part for you by identifying the best index funds in Canada you can invest in.

But don’t take it from us. Confirm that the above index funds meet your needs. To do this, you need to do research.

Step 3: Do Your Research

It takes a lot of time, research, and perseverance to become a consistently successful investor.

To understand the index fund’s future performance, look at how it has done in the past. After that, you should compare the performance of the index funds with other alternatives.

By so doing, you can make a personal investment strategy and the responsibility for the outcome of the index market.

Step 4: Choose a Broker/Trading Platform

After researching and settling to invest in index funds, the next step is to look for a broker or tracking platform.

Index funds can be purchased directly from the fund issuer, such as Fidelity or Vanguard.

However, this comes with a limitation in most cases. You only have the option of buying only the broker’s funds.

If you want to have more options, using an online broker is probably the simplest and cheapest way to go.

You must consider an online broker with $0 commission trading, which will help you save cost trading index funds.

Step 5: Make Your Trade

Once you choose a broker or trading platform, you are ready to make your trade.

When you first sign up for an online brokerage platform or a trading platform, you must connect your bank account to fund the account and begin investing.

After that, you choose the number of shares you want to purchase and press the “buy” or “trade” button. And there you have it!

Step 6: Start Gradually

Most investors make mistakes, and novice investors are no exception.

It is wise to start investing with a small sum of money to limit the harm caused by early mistakes.

When you gain experience and skills as an investor, you can always increase your investment.

Tips on Investing Index Funds Through an Online Broker

An online broker is a certificate trader that buys and sells shares on your behalf.

Since you’re more likely to use an online broker to help you ease the process of your investment, you must know what it takes to choose one.

Choosing the best online broker helps you minimize risk and maximize profit on your index fund investment.

Here are the three factors that determine the best online broker:

1. Value

You’ll want to know exactly the amount you’ll be paid by the trading site you decide to use.

For any security purchase, whether small or big, most online trading platforms charge a flat commission fee per trade that typically ranges from $0-$10.

Some providers will let you trade for a commission. A word of caution: depending on your trading style and account balance, fees may be higher or lower.

2. Features

Each trading platform has its own set of features. Others are easier to work with than others.

Some let you check the updated price of index funds and learn more about the ones you’re interested in.

The best online broker should have the essential features you need to execute your trade with ease.

3. Security

The most basic service an online broker can provide is peace of mind. No matter how your investing skills are, the best broker will not vanish with your money.

Also, the best online broker will almost certainly be a member of the Investment Industry Regulatory Organization of Canada (IIROC), which you can check on the IIROC website.

Take Away

Index funds offer diversification and low cost, which can help reduce risk, regardless of whether markets are rising or falling.

Investing in index funds can be intimidating. There are fears of being ripped off, losing money, or not keeping up with the stock market.

But not all index funds are the same, and once you choose an index fund, there are many ways to invest in it.

Hopefully, you are now familiar with the best Canadian index funds and how to go about buying them.

If you need further clarification or have any questions on the best index funds in Canada, please let us know in the comment section.

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