The Top Low-Cost Index Funds in Canada in December 2024
Low-cost index funds are catching on in a big way. For one, it has been brought to many investors’ attention how high-fee mutual funds and exchange-traded funds can deteriorate one’s portfolio, often by staggering amounts when those fees are paid over decades.
Secondly, many investors have figured out they are uncomfortable buying individual stocks and instead want to hold broad market ETFs that track major market indexes. In most instances, the broader we get in terms of exchange-traded funds, the cheaper the fees will be.
For example, ETFs that focus mainly on Canadian dividend stocks will often have higher fees than those that target the entire Toronto Stock Exchange.
For this reason, more and more funds are coming out that we would deem low-cost here in Canada, and in this article, we’re going to go over some of the best.
What are the top low-cost index funds in Canada right now?
- BMO S&P 500 ETF (TSE:ZSP)
- Horizons S&P/TSX 60 Index ETF (TSE:HXT)
- BMO S&P/TSX Capped Composite ETF (TSE:ZCN)
- Vanguard FTSE Canada All Cap ETF (VCN.TO)
- BMO Aggregate Bond ETF (TSE:ZAG)
BMO S&P 500 ETF (TSE:ZSP)
If you’re looking for low-fee exposure to the United States, the BMO S&P 500 ETF (TSE:ZSP) will be one of the funds you’ll want to have a peek at. As Canadians, especially regarding our investments, we tend to get a bit of home country bias.
We own too many Canadian stocks and not enough international stocks. ZSP aims to fix this, giving investors low-fee exposure to the 500 largest companies in the United States. The fund has management fees of 0.09%, meaning you’ll be charged only 90 cents a year for every $1000 you have in the fund.
With $12.2B in AUM, it’s one of the largest ETFs in Canada and is certainly the top way for Canadians to get US exposure. In terms of top holdings, we see many of the major technology companies like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), NVIDIA (NVDA), and Alphabet (GOOG).
However, it’s not just tech exposure. Companies like JPMorgan Chase (JPM), Berkshire Hathaway (BRK.A), and Exxon Mobil (XOM) are also in the top ten.
The fund pays a dividend of around 1.3% at the time of writing. It’s important to note that fees get a bit higher when you consider that you’ll pay withholding tax on a small portion of that distribution even if you tax shelter it. This is due to complex tax laws regarding Canadian domiciled ETFs owning underlying US stocks.
Overall, it is still one of the best low-fee funds to get exposure to stocks outside of Canada, eliminate your home-country bias, or continue to stock up on your US positions.
Horizons S&P/TSX 60 Index ETF (TSE:HXT)
The Horizon’s TSX 60 ETF (TSE:HXT) aims to do one thing: track the overall returns of the TSX 60.
What is the TSX 60? It’s the largest 60 companies on the Toronto Stock Exchange. This methodology is very similar to the S&P 500, which aims to track the 500 largest companies in the United States.
However, we do not have a big enough economy nor enough companies to justify an index fund that tracks the 500 largest companies in Canada.
60 is appropriate, and over the years, tracking these 60 has often outperformed a broad-based Canadian index fund. That is because there is simply too much cyclical exposure on the TSX.
When we isolate it to the 60 largest companies, we tend to get the best of the best and filter out the smaller players that may have increased volatility.
When we look at a fund like ZCN, one we’ll talk about next, the Horizons fund has outperformed it by about 10% over the last decade. Not world-beating, but enough to pay attention to.
One key thing about this fund is it doesn’t pay a dividend. This makes it attractive from a tax perspective, as distributions are taxed in the year you receive them. However, it also makes it unattractive from an income perspective. It is undoubtedly not a fund you’d want to own if you want a passive income stream in retirement.
It has the lowest fees on this list at 0.04%, meaning you’ll pay just $0.40 yearly for every $1000 invested.
Overall, this will be one of the better low-fee options if you want to build a Canadian equity portfolio but don’t want to purchase individual stocks.
BMO S&P/TSX Capped Composite ETF (TSE:ZCN)
Unlike XIU, which is a TSX 60 ETF, the BMO TSX Capped Composite ETF (TSE:ZCN) is an ETF that aims to track the total Toronto Stock Exchange rather than the top 60 companies. As a result, we get a fund with 231 holdings and significant exposure to the financial and energy sectors. But more on that later.
In terms of fees, they come in at 0.06%, meaning you’ll pay just 60 cents a year for every $1000 you have invested. The fact the fund gives you exposure to over 230 holdings for this price is outstanding.
The fund started in 2009 and has assets under management of $7.2B at the time of writing, making it another large-scale fund in Canada.
The TSX is filled with material, energy, and financial companies. As such, this ETF is also heavily concentrated in those three sectors, with nearly 60% of the ETF being allocated to one of these three sectors, with financials making up the most at 31%.
We also do not have many options regarding small-cap exposure here in Canada, so the bulk of the fund, around 75%, is allocated to large-cap stocks.
The top 5 holdings at the time of writing are Royal Bank of Canada (TSE:RY), Toronto-Dominion Bank (TSE:TD), Shopify (TSE:SHOP), Canadian Pacific Kansas City (TSE:CP), and Enbridge (TSE:ENB).
In terms of distribution, this one typically yields over 3% and will often yield more than an S&P 500 ETF. This is because the larger companies in Canada are often slower-growing, more mature companies that pay higher dividends.
Overall, this is a great low-fee fund that aims to give investors exposure to the entire country. It has marginally underperformed the TSX 60 ETF over the years, however, there is no guarantee this underperformance will continue.
Vanguard FTSE Canada All Cap ETF (VCN.TO)
Vanguard is the king of low-fee funds. And the Vanguard All Cap ETF (VCN.TO) is no different. It’s the lowest fee fund on this list and aims to track the broader TSX market.
The fund’s management fee of 0.05% means you’ll pay only $0.50 a year for every $1000 you have invested, and with assets under management of $5.6B, it’s also large enough that liquidity should never be an issue.
I won’t speak on the fund from a holding for allocation perspective as it is nearly identical to ZCN in every way. At this point, the decision between the two funds is simply what type of fund manager you want to own moving forward or potentially which fund your brokerage allows you to purchase commission-free, if any.
Vanguard’s fund has outperformed BMOs over the last decade because it has a 0.01% lower management fee. Still, the difference in returns is almost negligible.
The underlying holdings, distributions, and overall allocations are virtually the same. If you want to buy one of these funds, just pick your brand and roll with it.
BMO Aggregate Bond ETF (TSE:ZAG)
You may be spotting a trend on this list, and that’s the fact that almost every low-fee fund on this list is from the Bank of Montreal. The company has emerged as a real player in the ETF space. It offers many solid funds and products for Canadians, the BMO Aggregate Bond ETF (TSE:ZAG) being one of them.
Bonds are a personal preference, and depending on your risk tolerance, you may decide to own them, or you may decide to avoid them. But with a management fee of only 0.09%, meaning you’ll pay just $0.90 per year for every $1000 you have invested, BMO makes it easy to own a diverse bond portfolio.
Before these bond ETFs, bonds were a pain to purchase. Individual bonds would expose an investor to concentration risk, require large amounts of capital to purchase, and generally make buying and selling a pain.
With a bond fund, a single click gets you exposure to thousands of bonds, around 1500 to be exact, with ZAG, and allows you to be much more diversified regarding a fixed income portfolio.
ZAG is around 75% government bonds and 25% corporate bonds. So, it is one of the more conservative bond funds out there. Suppose you’re looking for more of a corporate bond fund, which will ultimately have higher yields but higher volatility. In that case, you’ll need to look elsewhere.
In terms of yield, the fund typically has a distribution in the high 3% range. However, as more and more bonds mature in the portfolio and are replaced by higher-yielding ones, we should continue to see the yield increase.
Overall, the discussion of whether or not bonds are suitable for your portfolio is one for another article. If you’re looking for a low-fee and fixed-income fund, however, ZAG is on the top of many lists.
How to invest in a low-cost index fund in Canada?
Investing in a low-cost index fund requires nothing more than access to a brokerage account. Whether it be a platform like Qtrade or a commission-free platform like Wealthsimple Trade, it doesn’t take more than a brokerage account and a hundred dollars to start investing in ultra-low fee ETFs.
What is considered a low-cost index fund?
The term “low fee” has constantly changed over the years. Even 10-15 years ago, paying even 0.5% would be considered a low fee.
Now, as competition has risen and funds are becoming cheaper to operate due to higher assets, if we’re speaking in terms of low-fee funds, I’d be looking anywhere from 0.05%-0.15%, or anywhere from $0.50-$1.50 per every $1000 you have invested annually.
What is the largest index fund in Canada?
Canada’s largest index fund is one of the oldest index funds ever created, the iShares S&P/TSX 60 ETF (XIU.TO). At the time of writing, the fund has just under $12B in assets under management and aims to track the top 60 companies on the TSX.
The fund currently has fees of 0.18%, so although I wouldn’t call it low-fee, it certainly isn’t high-fee either.
Why aren’t there more options for low-fee index funds in Canada?
Typically, the larger the assets under management, the less a fund charges to operate. This makes sense, as the larger the pool of capital, the less it can charge to theoretically earn the same amount of money it needs to operate the fund.
We have a much smaller market in Canada than in the United States. This is why you’ll find much more low-fee funds south of the border and not much when tracking the TSX Composite Index.
However, the fees are still ultra-low on a few of the country’s best index funds, which hold some of the biggest stocks in Canada. In this article, we’ll go over some of the best. Lets get started.
Overall, these five funds are solid options for those looking to save money on fees
There are more funds in Canada with smaller management expense ratios. However, many of them are Canadian-domiciled funds that hold US securities, meaning that there are often hidden costs in the form of withholding taxes that ultimately increase fees overall.
With these 5, you’ll pay next to nothing to own them annually. The fact these funds can operate with these low management fees shows how far we’ve come regarding self-directed investing.
Even just 15-20 years ago, single commissions to buy stocks or ETFs on trading platforms could range from $30-$50 a trade. Now, we can often buy them commission-free and pay just pennies to own them annually.
This is a perfect situation for a beginner investor looking to get exposure to the stock market and is likely only going to get easier as we move forward.