In this article, we will take a look at the 10 Best Canadian ETFs to Buy.
The State of the Canadian Stock Market
After a slow start in 2024, the Canadian stock market saw a strong third quarter, fueled by domestic rate cuts and a recovery in global markets. Year-over-year headline inflation has cooled to align with the Bank of Canada’s target rate of 2%. As a result, policymakers have implemented four consecutive rate cuts, with an additional 50 basis point reduction anticipated in December. With the central bank expected to keep cutting interest rates to support the economy, stock market strategists are cautiously optimistic that the rally will continue. In this context, Brent Joyce, chief investment strategist at BMO, shared the following:
“The environment is very attractive for equities. It’s been this trifecta of better global growth, interest-rate-sensitive companies themselves, and the interest rate sensitivity of dividends. These were headwinds for the two years that rates were going up, [but they] have flipped into tailwinds for the Canadian stock market now that rates are falling.”
While most stocks are influenced by global factors, many companies on the Toronto Stock Exchange are also cyclically driven, meaning their performance is closely tied to the economy and the business cycle. Given the strong connection between the US and Canadian economies, stable growth in the US has provided a boost to Canadian equities. On that front, Tim Hayes, chief global investment strategist at Ned Davis Research, advises clients to allocate 5% of their equity portfolio to Canadian stocks, making it the second-largest weighting after the 69% recommended for US stocks. The S&P/TSX Composite Index is on track to have its best year since 2009, having set new records 42 times this year and risen 21.09% year-to-date, closely following the S&P 500’s 27.58% gain. Hayes highlighted the broad rally and noted that the market is largely driven by energy and financial stocks, which offer the highest trailing and forward earnings yields, contrasting with the tech sector’s lower yields.
On the other hand, U.S. President-elect Donald Trump rattled the markets earlier in November with a proposal to impose a 25% tariff on imports from Canada and Mexico, aimed at addressing drug trafficking and border issues, along with a 10% tariff on imports from China. This decision had an immediate impact on Canada’s energy sector, which experienced a 2.2% decline amid concerns that rising US crude production would meet domestic demand. At the same time, the Canadian dollar dropped to its lowest level against the US dollar since May 2020, sparking worries about potential inflationary pressures on imports.
Canadian ETFs: Strong Performers in 2024
While the future remains uncertain, the Canadian ETF industry, which began with the world’s first ETF launched in Canada in 1990, has shown notable resilience over the past 30+ years, and continued growth is expected in the years to come. Despite the market volatility this year, Canadian ETFs have managed to navigate the challenges effectively and are well-positioned for another strong year. With only a couple of weeks remaining in the year, the industry is on track to surpass the previous annual record of $58 billion set in 2021. Moreover, following recent data from IFIC showing Canadian ETF sales reached their third-best month ever in October, a new report from research firm ETFGI highlights additional gains in November, along with impressive year-to-date figures. The firm reported net inflows of US$7.5 billion in November, slightly down from the C$8.2 billion reported in IFIC’s October report, but still a strong performance that contributes to the 29th consecutive month of net inflows.
Our Methodology
We have selected the top Canadian ETFs to buy and hold based on their 5-year performance as of December 10, listed in ascending order for clarity. Additionally, we’ve highlighted the top holdings of each ETF to provide valuable insights for potential investors.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10. FTSE Canadian High Dividend Yield Index ETF (TSX:VDY)
5-year Share Price Performance as of December 9, 2024: 43.79%
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) is designed to closely follow the FTSE Canada High Dividend Yield Index, focusing primarily on dividend-paying Canadian stocks. Its portfolio leans heavily toward the financial sector, particularly Canada’s Big 5 banks. The ETF stands out for its cost-effectiveness, featuring a low management expense ratio (MER) of just 0.22%. It also offers an attractive yield exceeding 4% and boasts significant scale with $3.32 billion in assets under management. In terms of performance, the fund has consistently outpaced the TSX index over 1-, 3-, and 5-year periods.
Royal Bank of Canada (NYSE:RY), the largest holding in the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY), is Canada’s biggest bank and continues to deliver impressive results. RBC surpassed quarterly profit expectations, driven by its acquisition of HSBC’s Canadian operations and strong performance in its wealth management division. The $10 billion acquisition contributed C$86 million to RBC’s earnings, bringing in approximately 780,000 clients and expanding its mortgage and corporate loan portfolios. Moreover, CEO Dave McKay highlighted that the bank added over 600,000 new clients to its Canadian banking business. The wealth management arm, which includes U.S. subsidiary City National, saw a threefold income increase to C$969 million, supported by higher fees and a C$25 million recovery in loan loss provisions.
Following these results, BMO Capital Markets revised its price target for RBC shares slightly, from $195 to $193, while maintaining an Outperform rating. Additionally, RBC announced a 4% dividend increase, raising the payout to $1.48 per share and continuing its 52-year streak of consecutive dividend payments, with a current yield of 3.27%.
9. Fidelity Canadian High Quality ETF (TSX:FCCQ)
5-year Share Price Performance as of December 9, 2024: 45.75%
The Fidelity Canadian High Quality ETF (TSX:FCCQ) aims to mirror the performance of the Fidelity Canada Canadian High Quality Index. As of December 9, it holds net assets of $214.4 million and has a management expense ratio of 0.39%. This ETF focuses on equity securities from large- and mid-cap Canadian companies, emphasizing higher-quality profiles compared to the broader Canadian equity market.
Shopify Inc. (NYSE:SHOP) holds the largest position in this Fidelity ETF. On December 4, Loop Capital upgraded the company’s stock from Hold to Buy, citing its innovative use of artificial intelligence to enhance merchant tools and optimize internal operations. The brokerage also raised its price target to $140, representing a 23% potential upside. Loop Capital emphasized that these AI-driven advancements are enabling Shopify Inc. (NYSE:SHOP) to grow revenue faster than expenses, improving operating and free cash flow margins. With consistent annual sales growth exceeding 20%, the company is well-positioned to enhance profitability and valuation further.
Additionally, Shopify Inc. (NYSE:SHOP) reported record-breaking Black Friday Cyber Monday (BFCM) sales of $11.5 billion, a 24% increase from the previous year. This robust performance suggests the company is on track to meet or surpass consensus expectations for fourth-quarter Gross Merchandise Volume (GMV) growth, currently forecasted at 23.5%.
Rowan Street Capital, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
Shopify Inc. (NYSE:SHOP) has been an incredibly rewarding investment for those lucky enough to get in early after the company’s initial public offering (IPO) in 2015. The shares have delivered a return of 2,600% or 42% annual. Its revenues have grown at 49% per annum since the end of 2014 from $105 million to estimated $8.6 billion in 2024. The massive e-commerce market is a huge opportunity, as the company’s growth indicates. As you tell from the chart below, revenues are forecasted to grow above 20% for the next 3 years. Keep in mind, Shopify has been around for more than a decade — and it’s still growing at these high rates.
We have owned Shopify for only 2.5 years, establishing our position in the first quarter of 2022 at a cost basis of $60, after the stock collapsed from its highs of $169 in November 2021. In hindsight, our entry may have been a bit premature, as the stock continued to plunge, eventually reaching a low of $27 in October 2022. However, such market movements are inherently unpredictable, and we seized the opportunity to invest in a company we had long admired…” (Click here to read the full text)