The Top Canadian Index Funds to Buy for December 2024

ByMathieu Litalien Published On:

If you’re attempting to understand how to purchase stocks in Canada and either lack the time for thorough due diligence or prefer an uninvolved investment approach, then index investing could be your best bet.

What are the top Canadian index funds to buy right now?

  • BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN)
  • iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC)
  • iShares S&P/TSX 60 Index ETF (TSX:XIU)
  • S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)
  • iShares S&P/TSX Capped Info Tech ETF (TSX:XIT)
  • iShares Core S&P US Total Market Index ETF (TSX:XUU)

BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN) & iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC)

Let’s start with the ETFs that cover the broadest collection of Canadian stocks, the S&P/TSX Capped Composite Index.

I’ve listed two – the BMO and iShares versions. In essence, both are identical when it comes to tracking the Canadian market and have very similar compositions.

Both track the performance of the S&P/TSX Composite Index, which covers approximately 95% of the Canadian equities market and has been the primary benchmark index for Canadian-based, Toronto Stock Exchange-listed companies since 1977.

The ETFs have identical management expense ratios (0.06%) and have virtually identical holdings. The iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) fund is larger, with $8.65B in assets, compared to the $6.76B held by the BMO S&P/TSX Capped Composite Index ETF (TSX:ZCN) fund.

Since this capped Index represents the broader TSX, the sector weightings largely align with the broader market.

Financials, energy, industrials, and basic materials dominate the portfolio holdings. A 2021 surge in tech had Shopify sitting as the top holding of this fund. But unfortunately, it has witnessed a significant drawdown. It has dropped to the low teens in terms of the largest positions.

The Top 10 of each ETF accounts for approximately 35% of the assets and features several big banks, including…

  • Royal Bank of Canada (TSX: RY)
  • Toronto-Dominion Bank (TSX: TD)
  • Bank of Nova Scotia (TSX:BNS)
  • Bank of Montreal (TSX:BMO)

Other notable names include…

  • Enbridge (TSX:ENB)
  • Canadian Pacific Railway (TSE: CP)
  • Canadian National Railway (TSX:CNR)

If you want to track the TSX Index closely, these two ETFs are your best options. However, if you’re looking for an ETF laser-focused on the banks, check out our post on Canadian banking ETFs.

iShares S&P/TSX 60 Index ETF (TSX:XIU)

The iShares S&P/TSX 60 Index ETF (TSX:XIU) tracks the 60 biggest stocks on the TSX Index.

These are the biggest in terms of market cap and are considered the most liquid stocks on the Index. This is why you see the emergence of Brookfield Corporation and Shopify in this index fund, as they’ve become some of the biggest companies in the country.

This ETF is one of the largest in the country, with net assets of $10.7B and pays out a quarterly distribution that currently yields in the low 3% range. XIU has a moderate risk profile and a low management expense ratio of 0.18%.

The iShares Index ETF has done exceptionally well over the past years. It has outperformed the Canadian Equity fund category over the past one, three, five, and ten-year periods.

In other words, it has consistently outperformed the broader TSX Index. This makes sense, as even though the fund has cyclical exposure, it only has exposure to the largest, most reliable companies in those sectors.

The top 10 stocks account for approximately 44% of the portfolio. The industry weightings closely match the index weightings, as financials and energy dominate the portfolio.

In 2021, the material and tech sectors emerged as some of the largest sectors in this index fund. This is primarily due to the demand for tech and the rising price of gold during the pandemic. These allocations took a step back in 2022 as both markets sold off, but tech enjoyed a nice rebound in 2023. 

In terms of top holdings, if you look closely, they are identical to the two previous ETFs that tracked the S&P/TSX Capped Composite Index. The difference is that the top 10 accounts for a more significant percentage of assets as there are fewer stocks.

Simply put, XIU is the best blue-chip ETF on the Canadian market.

S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)

There is only one ETF that currently tracks Canada’s Dividend Aristocrats. In comparison, almost a dozen funds south of the border track US dividend growth companies.

Aristocrats are stocks that have raised dividends for at least five consecutive years.

The index fund seeks to replicate the S&P/TSX Canadian Dividend Aristocrats Index (TSX:CDZ) investment. To be included in the Index, stocks must have a market cap of at least $300 million.

There are currently 90 stocks in the portfolio. It is one of the simplest ways to implement a dividend growth strategy.

The fund has MER fees of 0.66% and pays out a monthly dividend that currently yields in the low 4% range. From 2014 to 2022, the company raised eligible dividends from $0.76101 to $1.09 per share. This is equal to an average of 5.29% annually.

Many companies cut their dividends during the pandemic, especially in 2020 as uncertainty gripped the market. But those fears have subsided and dividend cuts were only temporary. 

Over the last ten years, this index fund has kept a reasonable pace with the TSX Index. However, in a post-pandemic environment, it has lagged significantly, primarily due to the significant increases in energy and material stocks to which this ETF doesn’t have significant exposure.

It has also struggled lately as investors are more enticed by higher GIC rates, which has exerted selling pressure on former dividend favourites. 

The Aristocrat index fund is a well-balanced ETF, with most sectors accounting for no more than 20% of holdings. The lone exception is the financial sector which is the top sector, weighing 29%.

The top 10 holdings are exciting and outside of the norm. They account for only 22%~ of holdings, and no stock accounts for more than 2.8%. At the time of writing, 2 of the top 5 holdings are Aecon Group and Fiera Capital Corp.

These two relatively unknown companies are not contained in even the top 10 or 15 holdings of the other index funds on this list.

iShares S&P/TSX Capped Info Tech ETF (TSX:XIT)

Over the past decade, the TSX Index has underperformed the US markets significantly. The main reason? Exposure to technology. Information technology accounts for only 7.4% of the TSX Index.

Although this is up significantly from years past, it pales compared to the exposure south of the border. Information technology is the top-weighted sector accounting for 26.76% of the S&P 500.

As mentioned, Canada is starting to form an impressive collection of IT companies. XIT, to put it lightly, soared due to the COVID-19 market crash and the pandemic overall.

It has since had a significant drawdown due to the popularity of tech companies falling over the short term. However, this is still a great index fund for Canadians comfortable with a little more risk.

With management fees of 0.61%, owning this index fund is fairly expensive. However, despite a recent significant drawdown in 2022, this ETF has still posted excellent results. 

iShares S&P/TSX Capped Info Tech ETF (TSX:XIT) experienced a sizeable 40%+ drawdown in 2022, although tech stocks have come back into favour and outperformed in 2023. This outperformance becomes even larger over a 10-year timeframe.

Despite a sizeable 40%+ drawdown in 2022, the fund still outperforms the TSX Index by a whopping 11% annualized rate over the last half-decade. It becomes even larger over a 10-year timeframe, beating it by 11% annually.

To show you how drastic this is, just $10,000 invested in XIT over the last decade would have you sitting on total returns of approximately $55,000. The TSX? Just a hair over $21,000. 

Past performance is not indicative of future results. However, if you are bullish on the markets, expect XIT to outperform consistently.

Interestingly, the top four holdings account for 80.45% of the portfolio. These include

  • Constellation Software (TSX:CSU)
  • Shopify (TSX:SHOP)
  • CGI Inc (TSX:GIB.A)
  • Open Text (TSX:OTEX)

Combined, the top 10 account for over 95% of assets. This is a very concentrated ETF. 

Although this ETF contains other tech companies, purchasing XIT is a big bet on the abovementioned top four holdings. So, why so heavily weighted?

This lack of diversification is a reflection of a young industry. As mentioned, tech hasn’t had a significant presence on the TSX and has only recently begun to expand.

This highly concentrated ETF is appropriate for those with a higher risk appetite and investors looking to capture the best of the best TSX-listed technology companies.

iShares Core S&P US Total Market Index ETF (TSX:XUU)

One of the biggest mistakes made by Canadian investors is a lack of exposure to markets outside the country. The TSX Index is heavily weighted toward financials and is highly dependent on resources.

Considering this, investors should add exposure to equities south of the border.

The iShares Core S&P US Total Market Index ETF (TSX:XUU) is the best and most diversified way to accomplish this. It trades in Canadian dollars and aims to track the performance of the S&P.

It is a relatively young ETF, having only been introduced in 2015.

Outside of significantly increasing diversification, it has ultra-low MER fees of 0.07%. It is worth noting, however, that this is slightly misleading (more on that later).

The Top 10 securities account for around 25% of assets, and there are 3,350 stocks in the portfolio, a testament to its diversification. Not surprisingly, tech dominates the top 10, with Microsoft, Apple, Nvidia and Amazon leading the way. Berkshire Hathaway and Alphabet (Google) also crack the top 10.

There is no better way to increase your exposure to the stock markets south of the border. Keep in mind, though, that it achieves this diversification through holding underlying ETFs.

And as a result, the ETF is subject to withholding taxes. Since the XUU holds underlying ETFs, it faces a withholding tax regardless if it is held in an RRSP or TFSA. Investors must also consider income taxes inside of this fund, as the US dividends will be subject to withholding taxes.

This has the net effect of bumping its MER higher. Still cheap, but not as eye-catching as expenses of 0.07%.

What is index investing, and why should we buy Canadian index funds?

Simply put, index investing is a passive strategy that attempts to replicate the returns of a particular index.

This is done by purchasing Canadian exchange-traded funds (ETFs) or mutual funds built to track the underlying Index closely. It is also one of the most effective ways to diversify your holdings. They’re available on practically every trading platform and brokerage.

We will speak on Index ETFs only for this article, as they are more beneficial than mutual funds.

Index investing is one of the most straightforward investing strategies and one that financial gurus recommend.

Here is what some of the most well-respected gurus have had to say when it comes to index funds:

“By periodically investing in an index fund, for example, the know-nothing investor can outperform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” – Warren Buffett

“The word passive does a disservice to investors considering their options. Indexing provides an effective means of owning the market and allows investors to participate in the returns of a basket of stocks. The basket of stocks changes over time as stocks are added or removed based on its rules.” – Charles R. Schwab

Canadian index funds can remove emotions from investing

Research has shown that retail investors consistently underperform the markets. Most hedge funds do as well. At the heart of the issue for retail investors – is emotions.

Index funds are a passive investing approach that can take emotion out of the equation, as investors don’t get emotionally attached to any particular stock or company.

As values change in prices on individual stocks, it can cause stress and emotional panic selling. With an index fund, your concentration risk is reduced significantly because you own a basket of hundreds, sometimes thousands of companies.

With this in mind, let’s look at the top Canadian ETF Index funds providing investors with a low-cost, passive investment solution. We’ll include various index funds on this list so readers with different investment objectives can find something they like.