What Are Index Funds?
An index fund tracks a market index (like the S&P 500 or the total stock market) and gives you broad diversification in a single purchase.
| Feature | Index Fund (ETF) | Actively Managed Mutual Fund |
|---|---|---|
| Management | Passive (follows an index) | Active (fund manager picks stocks) |
| MER (fees) | 0.05–0.25% | 1.0–2.5% |
| Performance | Matches the index | Usually underperforms the index long-term |
| Minimum investment | $1 (fractional shares on Wealthsimple) | $500–$5,000 |
| Trading | Buy/sell like stocks during market hours | Priced once per day at close |
| Tax efficiency | Generally higher | Generally lower |
Best Index Funds (ETFs) in Canada
All-in-One Index ETFs (Single Fund Portfolios)
| ETF | Provider | Allocation | MER | Holdings | Best For |
|---|---|---|---|---|---|
| XEQT | iShares (BlackRock) | 100% stocks (global) | 0.20% | ~9,000 stocks | Growth investors (long horizon) |
| VEQT | Vanguard | 100% stocks (global) | 0.24% | ~13,000 stocks | Growth investors (long horizon) |
| XGRO | iShares | 80% stocks / 20% bonds | 0.20% | Stocks + bonds | Moderate-aggressive |
| VGRO | Vanguard | 80% stocks / 20% bonds | 0.24% | Stocks + bonds | Moderate-aggressive |
| XBAL | iShares | 60% stocks / 40% bonds | 0.20% | Stocks + bonds | Balanced |
| VBAL | Vanguard | 60% stocks / 40% bonds | 0.24% | Stocks + bonds | Balanced |
| VCNS | Vanguard | 40% stocks / 60% bonds | 0.24% | Stocks + bonds | Conservative |
| XINC | iShares | 20% stocks / 80% bonds | 0.20% | Stocks + bonds | Very conservative |
Specific Market Index ETFs
| ETF | Index Tracked | MER | Best For |
|---|---|---|---|
| VFV | S&P 500 (USD hedged) | 0.09% | US large-cap exposure |
| XUS | S&P 500 (CAD) | 0.10% | US large-cap exposure |
| XIC | S&P/TSX Composite | 0.06% | Canadian stock market |
| VCN | FTSE Canada All Cap | 0.05% | Canadian stock market |
| XEF | MSCI EAFE | 0.22% | International developed markets |
| VIU | FTSE Dev ex NA | 0.22% | International developed markets |
| XEC | MSCI Emerging Markets | 0.25% | Emerging markets |
| ZAG | Bloomberg Canada Aggregate Bond | 0.09% | Canadian bonds |
How to Buy Index Funds: Step-by-Step
Step 1: Choose a Brokerage
| Brokerage | ETF Buy Commission | Best For |
|---|---|---|
| Wealthsimple | $0 | Beginners, simple investing |
| Questrade | $0 (ETF buys) | ETF investors wanting more tools |
| Interactive Brokers | $0.01/share | Advanced investors |
| TD Direct | $9.99/trade | TD bank clients |
| BMO InvestorLine | $9.95/trade | BMO bank clients |
Step 2: Open an Account
| Account Type | Best For | Tax Treatment |
|---|---|---|
| TFSA | Most Canadians (especially under $70K income) | Gains are tax-free, withdrawals are tax-free |
| RRSP | Higher income earners ($70K+) | Tax-deductible contributions, taxed on withdrawal |
| FHSA | First-time home buyers | Tax-deductible contributions, tax-free withdrawal for home purchase |
| RESP | Saving for child’s education | 20% government grant (CESG) on contributions |
| Non-registered | After maxing registered accounts | Capital gains and dividends are taxable |
Step 3: Fund Your Account
| Method | Speed | Fund |
|---|---|---|
| Instant deposit (Wealthsimple) | Instant (up to $1,500) | Fastest |
| e-Transfer | Same day | Free |
| Electronic funds transfer (EFT) | 1–3 business days | Free |
| Wire transfer | Same day | $15–$30 fee |
| Bill payment | 1–2 business days | Free |
Step 4: Buy Your Index Fund
| Action | How |
|---|---|
| Search for the ETF | Enter the ticker (e.g., XEQT, VEQT, VFV) |
| Choose order type | Market order (fastest) or limit order (set your price) |
| Enter quantity | Number of shares, or dollar amount (fractional shares on Wealthsimple) |
| Confirm and buy | Review and submit |
Step 5: Set Up Automatic Investing
| Feature | Wealthsimple | Questrade | Banks |
|---|---|---|---|
| Automatic deposits | ✅ (weekly, biweekly, monthly) | ✅ | ✅ |
| Automatic ETF purchases | ✅ (auto-invest feature) | ❌ (manual) | ❌ (manual) |
| Fractional shares | ✅ | ❌ | ❌ |
Sample Index Fund Portfolios
One-Fund Portfolio (Simplest)
| Risk Level | ETF | Allocation |
|---|---|---|
| Aggressive | XEQT or VEQT | 100% |
| Growth | XGRO or VGRO | 100% |
| Balanced | XBAL or VBAL | 100% |
| Conservative | VCNS or VCIP | 100% |
Three-Fund Portfolio (More Control)
| ETF | Allocation | Purpose |
|---|---|---|
| XIC or VCN | 25% | Canadian stocks |
| XUS or VFV | 50% | US stocks (S&P 500) |
| XEF or VIU | 25% | International stocks |
Four-Fund Portfolio (With Bonds)
| ETF | Allocation | Purpose |
|---|---|---|
| VCN | 20% | Canadian stocks |
| VFV | 35% | US stocks |
| VIU | 20% | International stocks |
| ZAG | 25% | Canadian bonds |
How Much Can Index Funds Grow?
Historical average returns of key indices (annualized, last 30 years):
| Index | Average Annual Return | $500/Month Over 25 Years |
|---|---|---|
| S&P 500 | ~10.5% | ~$696,000 |
| S&P/TSX Composite | ~8.5% | ~$522,000 |
| Global stocks (MSCI World) | ~9.5% | ~$600,000 |
| Canadian bonds | ~4.5% | ~$277,000 |
| Monthly Investment | 10 Years (7% Return) | 20 Years | 30 Years |
|---|---|---|---|
| $100 | $17,300 | $52,000 | $122,000 |
| $250 | $43,300 | $130,000 | $305,000 |
| $500 | $86,600 | $260,000 | $610,000 |
| $1,000 | $173,200 | $520,000 | $1,220,000 |
Common Mistakes to Avoid
| Mistake | Why It’s Wrong | What to Do Instead |
|---|---|---|
| Buying mutual fund versions instead of ETFs | MER is 5-10x higher | Buy the ETF version (e.g., VFV, not a mutual fund tracking S&P 500) |
| Trying to time the market | Even professionals can’t do this consistently | Invest regularly (dollar-cost averaging) |
| Checking portfolio daily | Causes emotional decisions | Check monthly or quarterly |
| Holding too many overlapping ETFs | Adds complexity without benefit | One or two all-in-one ETFs is sufficient |
| Ignoring foreign withholding tax | US dividends taxed 15% in TFSA | Hold US-heavy ETFs in RRSP when possible |