Index Funds in Canada: A Plain-English Beginner's Guide

An index fund is a fund that buys every company in a market index — for example the S&P/TSX Composite in Canada or the S&P 500 in the US — instead of trying to pick winners. You get the market's return, minus a small fee.

Why index funds are popular in Canada

• Low fees. Canadian index ETFs commonly charge management expense ratios (MERs) around 0.05%–0.25% a year. Many actively managed mutual funds charge 1.5%–2.5%.
• Diversification. One fund can hold hundreds or thousands of companies.
• Simplicity. No research into individual stocks, and nothing to rebalance if you choose an all-in-one fund.

What a fee difference costs

On a $50,000 portfolio, a 2% fee is $1,000 a year; a 0.2% fee is $100. Over 25 years, with growth compounding on the money you didn't pay out in fees, the gap can reach tens of thousands of dollars. Use our savings calculator to try your own numbers.

Index mutual funds vs index ETFs

| | Index ETF | Index mutual fund | |---|---|---| | How you buy | Through a brokerage, like a stock | Through your bank or fund company | | Typical fee | Lowest | Low to moderate (bank "e-series" style funds) | | Minimum | Price of one unit (or fractions at some brokers) | Often $0–$500 | | Automatic monthly buys | Depends on the broker | Usually easy |

Which account to use

1. TFSA — growth and withdrawals are tax-free. Good first stop for most people. See TFSA vs RRSP.
2. RRSP — contributions are tax-deductible; best when your income (and tax rate) is high today.
3. FHSA — if you're saving for a first home, contributions are deductible and qualifying withdrawals are tax-free. Read what the FHSA is.

Try the TFSA calculator and RRSP calculator to compare.

All-in-one ETFs

Several Canadian fund companies sell "asset allocation" ETFs that hold a fixed mix of stocks and bonds (for example 80/20 or 60/40) and rebalance automatically. For a beginner, one of these is often the whole portfolio.

Common mistakes

• Investing money you need within 3–5 years. Stock markets can fall 30% or more in a bad year. Short-term money belongs in a high-interest savings account or GIC.
• Investing while carrying credit card debt. Paying off a card at 20%+ is a guaranteed return no index fund matches. Use the debt payoff planner first.
• Selling in a downturn. Index investing works by staying invested.

Should you borrow to invest?

Borrowing to buy index funds (leverage) magnifies losses as well as gains. If a market drop would force you to sell, don't do it. Interest on money borrowed to earn investment income in a non-registered account may be tax-deductible — ask a tax professional before relying on that.

This article is general information, not investment advice. Check fund documents for current fees.