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How to Invest in ETFs in Canada [2023]

How to Invest in ETFs in Canada

Summary: Offering a diverse range of investment opportunities and advantages, Exchange-Traded Funds (ETFs) have become increasingly popular among investors worldwide, including in Canada. One of the most convenient ways of investing in ETFs in Canada is through reputable online brokers, one of which is Interactive Brokers

Best Platform for Worldwide Stock Trading & Investing

  • Highly trusted multi-asset broker with clients in over 200 countries

  • Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

  • Low commissions starting at $0 with no platform fees or account minimums

  • Easily fund your account and trade assets in 26 currencies

  • IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Understanding ETFs

An ETF is a type of investment fund that is traded on stock exchanges, much like individual stocks. However, unlike stocks, ETFs represent a diversified portfolio of assets such as stocks, bonds, commodities, or a mix of various investment instruments. This diversification offers investors exposure to a broader range of markets and lowers the risk compared to investing in a single stock.

One of the main benefits of ETFs is that they can be bought and sold throughout the trading day at market prices, making them highly liquid. Additionally, they often come with lower management fees compared to mutual funds, making them an attractive option for cost-conscious investors.

Who can invest in ETFs in Canada?

ETFs are accessible to a wide range of investors in Canada, including individual investors, institutional investors, and foreign investors. In fact, there are no restrictions based on age or income, making it possible for anyone with the required funds to start investing. Therefore, regardless of whether you’re just starting your investment journey or you’re looking to diversify your portfolio, ETFs offer a convenient and flexible option for all types of investors.

How to invest in ETFs in Canada—Step by step

Investing in ETFs isn’t rocket science. However, it does take certain preparatory steps before you can get into the actual nitty-gritty. As such, we’ve prepared a simple step-by-step guide to lead you through the whole process. Here’s what to know:

Step 1: Educate yourself and set clear goals

Before investing in ETFs, it’s essential to understand how they work, the risks involved, and their potential returns. You should, therefore, read everything on this topic to enhance your knowledge.

Once you familiarize yourself a bit, you can develop your investment goals, and determine risk tolerance, as well as time horizon. With these objectives clear, you’ll help yourself choose the most suitable ETFs for your portfolio.

Having said that, a dedicated website like ETFfb.com offers an excellent starting point to explore the variety of ETFs in the market. It provides comprehensive and up-to-date information on different funds, their performance, and underlying assets. With it, you’ll be able to make informed decisions and discover the vast range of ETF opportunities available.

This is a list of all Canada ETFs traded in the USA, which are currently tagged by ETFdb.com, accessed on July 21, 2023.

Step 2: Choose a brokerage service

To invest in ETFs, you’ll need a brokerage account on a regulated trading platform. Luckily, there are many of them out there. Still, it would be wise to research each of these that operate in Canada and select one that offers a user-friendly interface, low commissions, and a wide selection of ETFs.

When it comes to choosing a brokerage service, our go-to investing platform in Canada is Interactive Brokers. Besides being used by many worldwide, it’s a fully regulated and licensed brokerage platform with a plethora of benefits, including:

  • Low commissions and financing rates to maximize returns;
  • Global access to stocks, futures, cryptocurrencies, bonds, and funds;
  • Trading efficiency with high-end technology;
  • Secure trading experience.

Best Platform for Worldwide Stock Trading & Investing

  • Highly trusted multi-asset broker with clients in over 200 countries

  • Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

  • Low commissions starting at $0 with no platform fees or account minimums

  • Easily fund your account and trade assets in 26 currencies

  • IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

Step 3: Research ETFs and diversify your investments

With a registered account on a brokerage platform of your choice, you can delve into thorough research on the different types of ETFs available in Canada. The best way to go about it is to consider factors such as:

  • ETF’s expense ratio;
  • Underlying assets;
  • Historical performance;
  • The issuer’s reputation.

Aside from research, we’d recommend having diversification in mind, too, as this is a fundamental principle of any investing. The thing is—rather than investing all your funds in one ETF, consider spreading your investment across multiple ETFs to reduce risk.

Step 5: Purchase ETFs

With your eyes set on one or more ETFs, you can select what you wish to invest in and place your buy order through your brokerage account. Depending on your broker of choice, this is usually a simple process, involving you finding the ETF of choice and then specifying the number of shares you want to purchase, before reviewing the order and confirming.

Step 6: Monitor your portfolio

Lastly, you should always review your ETF investments. By doing this, you ensure they align with your overall goals and predetermined risk tolerance. If something isn’t adding up, you can always rebalance your portfolio if necessary to maintain your desired asset allocation.

The pros and cons of investing in ETFs in Canada

Pros

Pros

  • Diversification: ETFs offer instant diversification by investing in a basket of assets, reducing the risk associated with individual stocks;
  • Lower costs: In general, ETFs have lower management fees compared to mutual funds, making them a cost-effective investment option;
  • Liquidity: Traded on stock exchanges, ETFs provide investors with the ability to buy or sell at market prices throughout the trading day;
  • Transparency: ETF holdings are disclosed daily, allowing investors to know precisely what assets they are holding;
  • Flexibility: Investors can trade ETFs throughout the day, taking advantage of market movements and adjusting their positions as needed.
Cons

Cons

  • Market fluctuations: ETF prices can be subject to market volatility, potentially leading to fluctuations in the value of your investment;
  • Brokerage commissions: While ETF expense ratios are generally low, investors may incur brokerage commissions with each trade, potentially impacting overall returns;
  • Tracking error: Some ETFs may not perfectly track their underlying index, leading to a tracking error that affects performance;
  • Overtrading: Frequent trading of ETFs can lead to higher transaction costs and may hinder long-term investment goals;
  • Tax implications: Depending on the type of ETF and account you hold it in, there could be tax implications on dividends and capital gains.

What to avoid when investing in ETFs in Canada

Investing in ETFs involves inherent risk, as does any form of investing. Nevertheless, that doesn’t mean that you must make common mistakes other newbie investors are making. You should, instead, focus on avoiding:

  • Chasing past performance: Avoid solely investing in an ETF based on its historical performance, as past performance is not indicative of future results, and it’s essential to consider other factors;
  • Ignoring expenses: While ETFs are generally low-cost investments, expenses can add up over time. Therefore, be mindful of the expense ratios and any additional brokerage fees;
  • Emotional investing: Avoid making impulsive decisions based on short-term market fluctuations by sticking to your investment strategy and long-term goals.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

FAQs about how to invest in ETFs in Canada

How much money do I need to start investing in ETFs in Canada?

The amount you need to start investing in ETFs can vary depending on the ETF and the brokerage account you choose. Some ETFs have low share prices, allowing you to start with a small investment. However, it’s typically recommended to have a diversified portfolio, so aim to invest a reasonable sum to achieve proper diversification.

Are ETFs safer than individual stocks?

ETFs are mainly considered safer than investing in individual stocks due to their diversification across multiple assets. When you invest in a single stock, your investment is entirely dependent on the performance of that company. In contrast, ETFs spread your investment across various assets, reducing the impact of a single company’s poor performance on your overall portfolio.

Can I hold ETFs in a Tax-Free Savings Account (TFSA)?

Yes, you can hold ETFs in a TFSA, making it a tax-efficient way to invest in ETFs. Any income or capital gains earned within a TFSA are not subject to taxation, allowing your investments to grow tax-free.

Are there any specific ETFs suitable for retirement planning?

Yes, there are ETFs designed for retirement planning, such as target-date ETFs. These ETFs automatically adjust their asset allocation to become more conservative as the target retirement date approaches, reducing risk as you near retirement.

How often should I review my ETF portfolio?

It’s a good practice to review your ETF portfolio regularly, at least once a year. However, avoid making frequent changes unless your investment goals or risk tolerance have significantly changed. A long-term perspective is crucial when investing in ETFs.

Best Platform for Worldwide Stock Trading & Investing

  • Highly trusted multi-asset broker with clients in over 200 countries

  • Trade on 150 markets globally from a single platform (stocks, ETFs, futures, currencies, crypto & more)

  • Low commissions starting at $0 with no platform fees or account minimums

  • Easily fund your account and trade assets in 26 currencies

  • IBKR pays up to 4.58% interest on cash balances of $10k or more

Up to 4.58% interest on balance*

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