Are you looking to kick the new year off right with your new investing goals? We’ve got the 5 best ETFs for January 2023 for Canadian investors. Before that, let’s cover some of the basics when it comes to ETF investing in 2023!
What are ETFs?
ETFs or Exchange Traded Funds are organized and managed funds that trade directly on the market like stocks. You can buy shares of the ETF, trade options on them, and even day trade them if you like. ETFs trade exactly like stocks except you gain exposure to a basket of stocks rather than just investing in one specific company.
There are multiple different types of ETFs that you can invest in. Some will track entire indices or sectors, while others will track a certain trend. As with stocks, it can often be a benefit to diversify your ETF holdings. One thing to watch out for: many ETFs have similar holdings so make sure to look at which stocks or assets each ETF holds before buying!
Is Buying ETFs a Good Investment?
Here at SavvyCanadianFinance, we like to preach that any investment is better than no investment at all. You do not have to be a day trader to have exposure to the stock market. In fact, for most people, you are much better off buying a diversified portfolio of stocks and ETFs and then leaving them forever. Over time, investing in good companies is the best way to outperform the Toronto Stock Exchange or any other market.
So is buying ETFs a good investment? No matter what kind of investor or trader you are, every portfolio has room for ETFs. This is especially true if you do not want to log in to trade stocks every day, or if you just want to let time and compound growth work their magic.
Now, here is the kicker when it comes to buying ETFs: the gains might not be as much as if you buy individual stocks. But as I already mentioned, ETFs allow you to defend your portfolio against risk to the downside. You can even buy different types of ETFs to hedge your portfolio against volatility. Some people might think they are boring, but ETFs can provide you with a surprising amount of flexibility!
The 5 Best ETFs for January 2023Â
Alright, time to get to the heart of the article! At SavvyCanadianFinance.com we are always looking to diversify our portfolios with new ETFs. It has certainly helped during 2022 when the markets were volatile, to say the least. As we head into 2023, the markets are continuing to look like we could be in for a rocky ride.
When we write a ‘Best ETFs’ article, we try to analyze the big picture and you should too. What is your financial situation like in January? Many people overspend during the holidays so they don’t have as much to invest in the new year. That’s okay! As the calendar flips over to 2023, let’s all make a resolution to add to our investments each month. Here are our picks for the 5 Best ETFs in Canada for January!
- Vanguard FTSE Canada All Cap Index ETF (VCN)
- BMO S&P 500 Index ETF (ZSP)
- iShares Canada Core Balanced ETF Portfolio (XBAL)
- Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)
- BMO Covered Call Canadian Banks ETF (ZWB)
| Vanguard FTSE All Cap Index ETF Key Facts | |
| Ticker Symbol | TSX: VCN |
| Inception Date | August 2, 2013 |
| Assets Under Management | $4.996 Billion |
| Number of Holdings | 185 |
| Management Expense Ratio (MER) | 0.05% |
| Distribution Yield | 2.84% |
| Distribution Frequency | Quarterly |
| 1-Year Performance | -0.95% |
We start our list with the quintessential Canadian ETF. This fund tracks a broad selection of 185 large-cap Canadian stocks. This Vanguard fund has been offered since 2013 and has nearly $5 billion in assets under management.
The top five holdings in VCN are familiar stocks for many Canadian investors. They include Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Enbridge Inc. (ENB), Canadian National Railway Co. (CNR), and Canadian Pacific Railway (CP).
Why We Like It
As far as Canadian ETFs go VCN is the total package. With an enticingly low MER of just 0.05% and a quarterly dividend yield of 2.84%, long-term investment in VCN offers the opportunity for plenty of growth. This ETF even outperformed all of the major averages in 2022 so expect it to continue to add stability to your portfolio in 2023!
| BMO S&P 500 Index ETF Key Facts | |
| Ticker Symbol | TSX: ZSP |
| Inception Date | November 14, 2012 |
| Assets Under Management | $9.35 Billion |
| Number of Holdings | 505 |
| Management Expense Ratio (MER) | 0.09% |
| Distribution Yield | 1.38% |
| Distribution Frequency | Quarterly |
| 1-Year Performance | -4.70% |
For Canadians, investing in American stocks can often be a challenge. You are typically charged foreign exchange fees for buying these assets in American dollars. With BMO’s S&P 500 Index ETF you get exposure to 500 of the biggest companies in the United States with a Canadian dollar investment.
The S&P 500 is considered the benchmark index for global equities. Since its inception in 1957, the S&P 500 index has had an average annual return of just below 10%. Sure 2022 wasn’t a great year for the market, but over the long term, the returns from this fund will balance out.
Why We Like It
We like to buy low on valuable assets and the S&P 500 is the definition of that as we had into 2023. While the dividend yield isn’t high, the average annual returns are more than enough to justify having exposure to the S&P 500 in your portfolio. Even Warren Buffett loves holding S&P 500 index ETFs!
| iShares Core Balanced ETF Portfolio Key Facts | |
| Ticker Symbol | TSX: XBAL |
| Inception Date | June 21, 2007 |
| Assets Under Management | $867 Million |
| Number of Holdings | 8 |
| Management Expense Ratio (MER) | 0.20% |
| Distribution Yield | 1.81% |
| Distribution Frequency | Quarterly |
| 1-Year Performance | -6.45% |
The iShares Core Balanced ETF Portfolio is a different kind of ETF from the previous two. This is a portfolio ETF which means that it holds a basket of other iShares ETFs. It is a balanced approach to investing and it provides exposure to the iShares Core S&P Total U.S. Stock Market ETF (ITOT), the iShares Core MSCI EAFE IMI Index ETF (XEF), and the iShares Core Canadian Universal Bond Index ETF (XBB) as its top three holdings.
Holding both bonds and stocks in your portfolio is an excellent way to hedge against market volatility. Typically bonds and stocks move in inverse directions to each other, so when stocks are down bonds are up and vice versa.
Why We Like It
Even though it only holds 8 different assets, XBAL provides everything you need in your portfolio in one fund. You may not see a high dividend yield or capital growth, but you will certainly see stability and steady performance. This is a great ETF for beginners or for those who are more risk-averse.
| Vanguard FTSE Canadian High Dividend Yield Index ETF Portfolio Key Facts | |
| Ticker Symbol | TSX: VDY |
| Inception Date | November 2, 2012 |
| Assets Under Management | $1.86 Billion |
| Number of Holdings | 47 |
| Management Expense Ratio (MER) | 0.22% |
| Distribution Yield | 4.15% |
| Distribution Frequency | Monthly |
| 1-Year Performance | +9.60% |
Here at SavvyCanadianFinance.com we love our dividends. There aren’t many Canadian dividend ETFs better than the Vanguard FTSE High Dividend Yield Index ETF. This ETF holds some of the top blue-chip stocks in Canada including its five largest holdings in Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Enbridge Inc (ENB), Bank of Montreal (BMO), and Canadian Natural Resources (CNQ).
Dividend reinvestment is one of the best ways to create long-term growth in your portfolio. Luckily for you, VDY pays out a monthly dividend at an annualized yield of 4.15%! The MER is a bit higher than other ETFs but over the long run, your dividend accumulation should help offset this.
Why We Like It
High dividends every month and a market-beating performance for 2022. What else could you ask for in an ETF? We love having VDY as one of the foundational investments in our portfolio. You can collect dividends each month and re-invest them into VDY or reallocate them to other ETFs or stocks!
| BMO Covered Call Canadian Banks ETF Key Facts | |
| Ticker Symbol | TSX: ZWB |
| Inception Date | January 28, 2011 |
| Assets Under Management | $2.7 Billion |
| Number of Holdings | 38 |
| Management Expense Ratio (MER) | 0.71% |
| Distribution Yield | 7.32% |
| Distribution Frequency | Monthly |
| 1-Year Performance | -0.83% |
The last ETF on our list is a unique one. Covered calls are an options strategy used to generate income through collecting premiums. You’ll notice that this fund has both a high MER and a high distribution yield. Covered call ETFs are controversial, but we feel they are a great source of income generation.
We don’t recommend owning ZWB as your only holding as you won’t see much in the way of capital growth. But having this along with an ETF like VDY can provide an excellent revenue stream to your portfolio. Covered call ETFs are an incredible source of income each month but remember if these dividends are paid in a non-registered investment account you will need to report these capital gains on your income tax!
Why We Like It
What’s not to like about a high monthly income stream? As you can see, the gains you make from the fund aren’t spectacular but over time those dividends should quickly compound your initial investment. Just like VDY, it can provide a way to inject capital into your account without needing to lift a finger!
The Downside of Investing in ETFs
We would be remiss if we did not talk about any downside to investing in ETFs. The first downside is that you do have to pay fees on an annual basis to invest in these assets. While they may be minimal, it is still more than you would pay to own a basket of individual stocks.
Typically ETFs also provide less upside in terms of capital growth. Just because a stock that the ETF holds gains 100% in a year, it does not mean the ETF will do the same. When the market is on the upswing, ETFs will see less growth than individual stocks. But when the market is on a downswing, individual stocks see much larger losses.
Finally, in an ETF you don’t get to choose which companies you are invested in. Some investors refuse to invest in so-called sin stocks or even fossil fuel companies. This is a personal preference but unfortunately, you don’t get a say when you invest in an ETF. There are ESG or Environmental, Social, and Governance ETFs you can invest in if it is weighing on your conscience!
Conclusion: The 5 Best ETFs for January 2023
So there you have it! Our first official list of ETFs we are recommending for Canadian investors as we head into 2023. Remember that this is by no means to be used as financial advice. It is providing you with a foundation from which you can do your own financial research.
We feel that these five ETFs complement each other well. They provide a nice balance of growth, stability, and cash flow through high dividends. Remember our New Year’s Resolution: let’s try to contribute to our investments each month. The more you are able to do it, the more it will become second nature! Thanks for reading and best of luck in 2023! Stay Savvy!