3 Great Canadian ETFs for 2023 - And Beyond

The best options for investors right now are diversified funds that manage knowable risks and stand to outperform in the long run, irrespective of what comes next.

Bryan Armour 24 January, 2023 | 2:35AM
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Bryan Armour: Investors continue to face several headwinds in 2023. The bad news is that inflation remains high, the Bank of Canada continues to signal higher interest rates and geopolitical concerns continue to grab headlines. The good news is that inflation appears to be slowing, interest rate hikes are becoming less aggressive, and China has begun to reopen, giving a much-needed boost to the global economy.

What comes next is anyone's guess. There are realistic reasons to expect a market rebound or continued decline or anything in between. Therefore, the best option for investors are broadly diversified funds that manage knowable risks and stand to outperform in the long run, regardless of what happens next. ETFs are one of the best things to come out of Canada since Jonathan Toews. So, it only makes sense for investors to consider ETFs for the core building blocks of their portfolio. Today, I'll cover three ETFs that are great options for 2023 and beyond.

The first ETF on my list is Gold-rated Vanguard FTSE Canada All Cap ETF, ticker VCN. This strategy aims to capture the Canadian equity market rather than beat it. It counters uncertain markets in 2023 by effectively diversifying risk and controlling costs. This fund holds 180 stocks as of the end of 2022, therefore risks inherent to any one company should not have a big impact on performance alone. While it's one of the most diversified Canadian equity funds on the market, it inherits the sector biases of the Canadian economy. Compared to global market, it overweights financial, energy and basic material stocks, which add up to roughly 60% of its portfolio. This fund also comes with rock bottom costs. It supports an ultra-low MER of just 5 basis points, and market cap weighting keeps turnover to minimum. This should be a tough Canadian equity fund to beat in the long run.

The second ETF on my list is TD International Equity Index ETF, ticker TPE. This strategy can help level out exposure to Canada and the U.S. in portfolios by targeting stocks in global developed markets excluding North America. With so much up in the air regarding global interest rates, now is a good time to hedge against home bias by investing in foreign stocks. And this ETF follows the same principles of diversification and low cost as my first recommendation. It collects nearly 1,000 stocks from foreign developed markets, harnessing the market's collective wisdom through market cap weighting. Sector weights are more balanced than Canadian markets, which should also prevent overexposure to risks inherent to banks and energy companies. This fund sports a low MER of just 19 basis points, and it pairs it with low turnover. It would be an excellent addition to portfolios heavy in North American stocks.

The third ETF on my list is iShares Core Canadian Universe Bond ETF, ticker XBB. This Silver-rated strategy offers broad exposure to investment grade Canadian bond market. Market value weighting parks the majority of the fund's assets with the largest issuers, namely, Canadian federal and provincial governments. This gives it a tilt towards higher-quality bonds compared with peers. It also tends to carry less interest rate risk than the category average, making it a more defensive strategy than its average peer. Bonds had a tough go last year, but this fund could be a great hedge for stocks given its low credit risk and the market's higher interest rates. Its quality tilt and low MER of 10 basis points should give it a great chance to outperform its average peer over the long run.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
iShares Core Canadian Universe Bond ETF27.76 CAD0.07Rating
TD International Equity Index ETF22.68 CAD0.69Rating
Vanguard FTSE Canada All Cap ETF46.02 CAD0.32Rating

About Author

Bryan Armour  Bryan Armour is director of passive strategies research for North America at Morningstar

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