Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or subindex. They hold a more or less fixed selection of securities representing the holdings that go into calculating the index or sub-index.

Today, we look at two Canadian ETFs that hold many of the Canadian stocks we recommend for 2024 and beyond. iShares S&P/TSX 60 Index ETF and iShares Canada Select Dividend Index ETF mirror, respectively, sub-indexes holding the 60 most-heavily trades stocks and 30 of the highest-yielding dividend stocks on the Toronto exchange. Each of the Canadian ETFs represents a low-fee way of holding many of the country’s best stocks. If you’re looking for the Best ETF in Canada, these are two great options to consider.

If you need a primer on ETFs, download The ETF Investor’s Handbook (it’s free!). Our comprehensive handbook tells you why ETFs are so popular, which ETFs are best for investors (not investment firms) and how to use ETFs to increase your wealth and enrich your retirement.

ETF, including Canadian ETFs, trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.

Prices of Canadian ETFs are quoted online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most mutual funds.

As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains taxes generated by the yearly distributions to unit holders of most conventional mutual funds. These low fees are another reason why these could be considered the best ETF in Canada.

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Note that the best Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditionally, Canadian ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects. This passive approach is why many consider these the best ETF in Canada.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

In contrast, there are a lot of Canadian ETFs that have been created to tap into popular, but risky, themes and fads. So, you need to be very selective with your ETF holdings.

Theme investing has a natural appeal. It simplifies things. Investors like it because they feel it can put their investment returns into overdrive. Some also feel it adds fringe benefits to their investing, by letting them support social or environmental objectives. Brokers also like it because it gives them a rationale to recommend a variety of stocks.

When you focus on theme investing, however, it’s easy to overlook the fundamentals. To find the best ETF in Canada, focus on fundamentals, not fads.

Two Canadian ETFs that are a BUY

Below we update our advice on two Canadian ETFs—both of which we like—and both of which follow the traditional, passive style we recommend.

iSHARES S&P/TSX 60 INDEX ETF (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way for you to buy the top companies listed on the TSX. Specifically, the fund’s holdings represent the S&P/TSX 60 Index. It focuses on the 60 largest, most heavily traded stocks on the exchange.

The ETF began trading on September 28, 1999. Investors pay an MER of just 0.18%. The units give you a 3.0% yield.

The S&P/TSX 60 Index mostly consists of high-quality companies. However, it must ensure that all sectors are represented, so it holds a few companies we would not include.

The quality of the ETF’s holdings should drive your future gains: its top stocks are Royal Bank, 7.4%; TD Bank, 5.6%; Shopify, 5.0%; Canadian Natural, 4.4%; CPKC, 4.3%; Enbridge, 4.0%; CN Rail, 4.0%; Bank of Montreal, 3.7%; and Bank of Nova Scotia, 3.2%.

iShares S&P/TSX 60 Index ETF is a buy.

iSHARES CANADIAN SELECT DIVIDEND INDEX ETF (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) is a buy. The fund (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yield Canadian stocks. The ETF also considers dividend growth and payout ratios to make its selections.

The weight of any one stock is limited to 10% of the fund’s assets. Its MER is 0.55%. The ETF, which began trading on September 28, 1999, yields a high 4.2%.

Most market indexes are set up for investors so that the stocks in the index are those with the highest market capitalization and are also the most widely traded. However, the iShares Canadian Select Dividend Index ETF focuses on the 30 stocks that it sees as having the highest dividend yields; it also considers their prospects for dividend growth and the sustainability of their dividend payouts.

This ETF is more actively managed than the iShares S&P/TSX 60 Index ETF. As a result, it charges a higher MER.

The fund’s top holdings are Canadian Tire at 8.6%; Bank of Montreal, 8.4%; Royal Bank, 7.3%; National Bank, 5.8%; Bank of Nova Scotia, 5.7%; TD Bank, 5.3%; TC Energy, 5.0%; CIBC, 5.0%; and BCE, 4.6%.

iShares Canadian Select Dividend is a buy.

You may be surprised at how much you can get out of ETFs. They open up new investment opportunities for every kind of investing. Subscribe to our Best ETFs for Canadian Investors advisory, and you will get our recommendations on the best Canadian ETFs and the ETFs that give you the simplest way to benefit from the top U.S. stocks.

In summary, this article highlights two of the best ETFs in Canada for investors looking for low-cost, passive exposure to a diversified portfolio of Canadian stocks. The iShares S&P/TSX 60 Index ETF (XIU) tracks the 60 largest and most heavily traded stocks on the Toronto Stock Exchange, providing broad market exposure with a low 0.18% management expense ratio (MER). The iShares Canadian Select Dividend Index ETF (XDV) focuses on 30 high-yielding dividend stocks, considering factors like dividend growth and payout ratios, and offers a higher 4.2% yield with a slightly higher 0.55% MER.

The article emphasizes the benefits of passive ETF investing, including low fees, low turnover, and tax efficiency compared to actively managed mutual funds. It cautions against chasing trendy themed ETFs that may overlook fundamentals in favor of popular investment narratives. Overall, the iShares S&P/TSX 60 Index ETF and iShares Canadian Select Dividend Index ETF are presented as two of the best ETF options in Canada for investors seeking a simple, low-cost way to gain exposure to a diverse portfolio of high-quality Canadian stocks.

For a recent article on two foreign ETFs that can benefit Canadians, read Two international ETFs offer timely diversification for Canadian investors.

Do you think ETFs are a better investment than mutual funds?

This article was originally published in 2015 and is regularly updated.