Index Investing in Canada [2024] | Beginner’s Guide

Summary: By passively tracking their benchmark index, index funds offer an affordable way to achieve a diversified portfolio, making them an excellent choice for long-term investors. To invest in index funds in Canada, you can sign up with a regulated online broker such as 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*

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What is an index fund?

“Indexing” is a form of passive fund management. Accordingly, instead of having a fund portfolio manager actively select stocks and decide on the optimal times to buy or sell them, the manager constructs a portfolio that reflects the components of a specific index. In short, the goal here is to mirror the index, not to “beat the market” or identify individual winners.

How to buy index funds in Canada: Step-by-step 

To begin investing in index funds in Canada, follow the steps outlined below. 

Step 1: Choose a broker and open an account

If you haven’t done so already, you’ll need to open an account with a stock broker to invest in index funds in Canada.

To securely buy index funds in Canada, we recommend Interactive Brokers (IBKR), which offers: 

• Commission-free stock and ETF trading;
• Trade stocks on 90+ market centers;
• Fractional stock trading;
• Earn extra income on fully paid shares;
• Lowest financing rates for margin accounts in the industry;
• No account minimum. 

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*

Get Started

How to choose an online broker?

When assessing brokers, try to take into account the following factors:

• Cost and fee structure: Understand all fees associated with trading, including commissions, spreads, inactivity fees, account maintenance, and any hidden charges. Fortunately, most online brokers nowadays offer commission-free ETF and stock trading;
• Regulation and security: Make sure the broker is fully regulated by the relevant financial authorities in Canada and that they have put measures in place to protect your funds and data, such as account insurance and data encryption;
• Trading platform: If you’re new to investing in the stock market, a user-friendly platform with an easy-to-navigate interface is advisable. A section with investing tips and tricks might also come in handy. And if you like to keep an eye on your investments at all times, look for a platform that offers a mobile solution; 
• Fractional shares: Fractional share trading allows investors to buy equities based on the cash amount (rather than by the number of shares) and is particularly useful for investors on a budget who want to build a diversified portfolio or set up a dollar-cost averaging strategy. 

Step 2: Decide on an index fund

Luckily, there’s an index fund for nearly every financial appetite, so you can choose one that aligns with your investment strategy. For example, if you want extensive and diversified exposure to the Canadian market, an index fund anchored to the S&P/TSX Composite Index might be up your alley. Alternatively, if ethical considerations drive your investing style, you might want to opt for index funds honed in on environmental, social, and governance (ESG) parameters. 

Note that several broad Canadian index funds may not line up with ESG criteria, such as those in the banking or mining industries. Therefore, based on your investment principles, it’s crucial to examine the composition of your chosen index fund. Understand what sectors or types of businesses it includes and excludes, ensuring it aligns with your personal values or desired investment strategy.

Upon setting your sights on a particular index, there’s often a range of ETFs tracking it. Given the rich mosaic of choices available to you, here are some key elements to weigh when choosing ETFs:

• Holdings: Examine the underlying asset category of the index fund. For diversification purposes, investing in a fund based on a broad, popular index may be better than a small, niche one;
• Trading volume: High trading volume indicates better liquidity and tighter bid-ask spreads, essential for when you’re ready to sell;
• Tracking error: It’s not uncommon for ETFs to veer from their target indexes. Lean towards those with minimal tracking errors;
• Operational costs: The expense ratio represents the portion of your investment earmarked for administrative expenses. Indeed, even though two funds may aim to track the same index, their management costs can differ enormously. And though a slight increase in the percentage of fees might not seem significant at first, it can eat into your returns over the long term. Typically, bigger funds tend to have lower fees;
• Historical performance: Funds with a solid track record may be a safer option. That said, remember that past performance shouldn’t be used to predict future returns. 

Step 3: Place your order

Execute your order by following these five steps:

• Step 1: Fund your account;
• Step 2: Search for your desired index funds by their ticker symbol;
• Step 3: Choose between a market order (filled immediately) or a limit order (fulfilled at your predetermined price point);
• Step 4: Decide how much you want to invest, whether by the dollar amount or by the number of shares;
• Step 5: Before finalizing the purchase, double-check all the details to ensure accuracy.

Step 4: Manage your portfolio

Here are a few steps to help you manage your index fund portfolio effectively:

• Regular contributions: Consider setting up automatic contributions to take advantage of dollar-cost averaging. A disciplined approach will not only help in growing your investment but also instills a savings habit, ensuring that you’re continually working towards your financial goals, irrespective of market conditions;
• Periodic rebalancing:  Periodically (annually or semi-annually) rebalance your portfolio to return to your desired asset allocation. This might mean selling portions of some funds and buying more of others;
• Maximise returns: Supercharge your investment returns by reinvesting any distributions received from your index funds. Reinvesting dividends and interest payments back into the fund can enhance your potential for compounding growth over time. 

Pros and cons of investing in index funds in Canada

Pros

• Diversification: Index funds spread your investment across a wide range of stocks or bonds. This diversification can reduce the impact of any single security’s poor performance on your entire portfolio;
• Low costs: Since index funds passively track an index, they usually have lower management fees compared to actively managed funds;
• Transparency: Since they aim to replicate a particular index, an investor can easily see which assets are included in that index at any given time;
• Tax efficiency: Index funds generally have lower portfolio turnover (buying and selling securities) compared to actively managed funds. Lower turnover can lead to fewer capital gains distributions, potentially making them more tax-efficient;
• Consistent returns: While they typically won’t significantly outperform the market, index funds also tend not to drastically underperform it. They offer a way for investors to achieve market returns consistently. 

Cons

• Lower potential returns: By design, index funds won’t outperform the market and might deliver lower returns compared to their active counterparts;
• No downside protection: In a declining market, the fund is likely to mirror the index’s decline. Actively managed funds, in contrast, might employ strategies to protect against downturns;
• Limited control: While index funds offer diversification, investors have limited control over the specific assets held within the fund;
• Possible overexposure: Some market-cap-weighted index funds might result in overexposure to certain sectors. 

For additional investment options in Canada, delve into our comprehensive guides:

• How to Buy Stocks in Canada
• ESG Investing Canada
• ETF Investing Canada
• Where to Invest Money in Canada
• Passive Investing in Canada

In conclusion 

In short, to buy index funds in Canada, follow these four steps:

1. Register with a stockbroker;
2. Research and decide on the right index funds for you;
3. Buy shares of your desired index funds;
4. Keep making contributions. Periodically monitor and adjust your portfolio. 

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 index funds in Canada