Forgotten Tax Shelter Boosts Canadian ETF Returns

Let's get straight to it. The investment world, particularly Exchange Traded Funds (ETFs), presents a complex picture. Too often, advice comes loaded with hype about the "next big thing" rather than sound strategy.

Real wealth isn't built chasing fads. It requires understanding the field, selecting appropriate tools, and executing a clear plan.

Today, we focus on Canadian growth ETFs – specifically, funds listed on the Toronto Stock Exchange (TSX) and priced in Canadian dollars. This simplifies things, avoiding immediate concerns about foreign exchange costs.

We're concentrating on equity ETFs – funds holding stocks. We'll set aside bond ETFs, commodity ETFs, and crypto assets for now. The objective here is growth potential through company ownership.

I've examined the field and identified five contenders worth your attention. Consider this your intelligence briefing – gathering data before committing resources. And stay tuned, because we'll cover a tax strategy often missed that can significantly impact your bottom line over time.

Insights

• Canadian vs. Global Exposure: ETFs like VCN offer pure Canadian market access, while XEQT provides broad global diversification in one package.
• US Market Focus: XUU (total US market) and VFV (S&P 500) provide different levels of exposure to the dominant US economy, with historically strong performance.
• Tech Concentration Risk/Reward: ZNQ targets the NASDAQ 100, offering high growth potential primarily from tech but with increased volatility.
• Low Costs Matter: Passively managed index ETFs generally have very low Management Expense Ratios (MERs), preserving more of your returns compared to actively managed funds.
• Tax Sheltering is Key: Using TFSAs (contribution limit $7,000 for 2025) and RRSPs shields investment growth and dividends from taxes, dramatically boosting long-term wealth accumulation.

The Home Turf Play: VCN (Vanguard FTSE Canada All Cap)

First is VCN. This Vanguard fund tracks the FTSE Canada All Cap Domestic Index. All Cap means it holds a mix of Canadian companies – large, medium, and small.

You get 100% Canadian stock exposure, spread across approximately 180 companies as of May 2025.

Looking inside, you'll find names like Royal Bank (RBC), often weighted around 7%, alongside other major Canadian players. The exact composition changes, but the goal is diversification within Canada.

Why consider an ETF like this? It removes the difficulty, and potential financial setbacks, of trying to pick individual Canadian stocks. Frankly, unless you dedicate substantial time to research, stock picking is a high-stakes endeavor where one poor choice can severely damage returns.

VCN provides a piece of the broad Canadian market. If one company falters, others may perform well, helping to smooth the investment journey. Naturally, if the entire Canadian economy faces headwinds, VCN will reflect that – market risk is unavoidable.

How has it performed? Historically, it delivered respectable results. As of May 2025, the 5-year average annual return was approximately 8.5%. Since its launch in 2013, the total return reached approximately 110% as of May 2025. Solid, reflecting the Canadian market's typical pace.

Remember, past performance indicates history, not future guarantees. Use these figures, alongside your own assessment of Canada's economic prospects, to inform your view.

Now, fees. The Management Expense Ratio (MER) is a critical factor. It quietly erodes returns year after year. VCN performs well here with an MER of just 0.05% (as of May 2025). That's remarkably low – five dollars annually for every $10,000 invested.

An added benefit: the dividend yield. As of May 2025, the trailing 12-month yield was approximately 2.8%. For a growth-oriented ETF, this provides a modest income stream.

Who might find VCN suitable? Investors seeking straightforward, low-cost exposure to the broad Canadian equity market. Keep in mind, the TSX has significant weight in financials and energy. That concentration defines this investment.

Going Global (Sort Of): XEQT (iShares Core Equity ETF Portfolio)

Next, let's widen the scope with XEQT from BlackRock's iShares. This fund operates differently – it's an ETF composed of other ETFs, known as a fund of funds.

It holds five underlying iShares ETFs, granting indirect ownership in over 9,000 companies across the globe as of May 2025.

Where does the investment flow? Primarily to the US and Canada, but also includes Japan, parts of Europe, Australia, and emerging markets like China, Taiwan, and South Korea (think exposure to giants like Alibaba or Samsung through its underlying holdings).

Examine its top holdings, and you'll find ETFs like ITOT (covering the total US stock market – Apple, Nvidia, etc.) and XEF (covering developed markets outside North America – SAP, Nestle, Shell).

XEQT acts as a single-purchase solution for instant global diversification, bypassing the need to select individual country ETFs. Want US exposure? Included. Canada? Yes. Europe? Asia? Covered.

Performance data shows it has slightly outperformed the purely Canadian VCN in recent years, largely due to the strength of US markets. As of May 2025, the 5-year average annual return was approximately 10.2%, and since its 2019 inception, it averaged about 11.5% annually.

In uncertain economic times, spreading investments globally can offer a degree of stability. XEQT provides that broad exposure to high-performing companies worldwide.

The MER stands at 0.20% (as of May 2025). This remains very low, particularly given the complexity of managing multiple underlying ETFs and providing global reach. That's twenty dollars per year for every $10,000 invested.

What about yield? As of May 2025, the trailing 12-month yield was approximately 2.04%. This is reasonable for a fund focused on growth.

XEQT is a strong candidate for those wanting maximum geographic diversification through a single holding. It functions as an "all-in-one" equity solution, but remember, it is entirely equity. It contains no bonds or other asset classes for balance.

The All-American Powerhouse: XUU (iShares Core S&P U.S. Total Market)

Interested in a significant allocation to the US market? XUU could be the instrument. Also from iShares, this ETF seeks to mirror the S&P Total Market Index.

This isn't limited to the 500 largest US companies; it encompasses the entire US stock market – large, mid, and small caps. You gain indirect ownership in approximately 3,500 American businesses as of May 2025.

Unlike XEQT, there's no geographic diversification beyond the US. It's 100% American exposure. However, you achieve broad sector diversification: information technology, financials, healthcare, industrials, consumer goods, energy, and more.

The performance reflects the US market's strength in recent history. As of May 2025, the 5-year average annual return was approximately 13.2%. Since its inception in 2015, it has averaged about 12.5% per year. These are strong figures.

Imagine investing $1,000 in XUU back in 2015. Based on average returns, that initial amount could have grown substantially by today. This illustrates the effect of compounding in a robust market.

XUU aligns with a belief that the US economy, across its diverse sectors and company sizes, will maintain its long-term growth pattern.

What about the MER? It's extremely low at 0.07% (as of May 2025). That translates to just $7 annually per $10,000 invested. Highly efficient.

The yield is lower, around 1.2% (trailing 12-month yield as of May 2025). This is typical for a broad US market fund prioritizing growth. Dividends are a minor component here.

Riding the Tech Wave: ZNQ (BMO NASDAQ 100 Equity Index ETF)

Now for a more targeted, potentially more aggressive option: ZNQ. Issued by BMO, this ETF tracks the NASDAQ 100 index.

Think technology. Primarily big tech. The NASDAQ 100 includes the 100 largest non-financial companies listed on the NASDAQ exchange. Apple, Microsoft, Amazon, Nvidia, Alphabet (Google), Meta (Facebook) – these giants dominate the index.

It isn't purely tech, however. You'll also find biotechnology firms like Vertex Pharmaceuticals or Gilead Sciences. Still, the overall character is overwhelmingly growth-oriented and tech-heavy innovation.

The historical performance numbers are significant. As of May 2025, the 5-year average annual return was approximately 18.5%. Since its 2019 inception, it averaged about 19% annually.

This ETF suits investors bullish on the continued leadership of major US technology and growth companies. If you believe that engine of innovation will persist, ZNQ offers direct exposure.

But understand the associated risk. This concentration leads to higher volatility. Tech stocks can climb rapidly, but they can also fall faster and further than the broader market. This represents a medium-to-high risk investment.

The MER reflects this specialized nature: 0.39% (as of May 2025). It's noticeably higher than the broad market ETFs, costing $39 per year per $10,000. Is the cost justified? Compare the 0.39% fee to the 18.5% average annual return (as of May 2025). Historically, the performance has compensated for the higher fee. Whether this trend continues is the key question.

Yield? It's minimal. The distribution yield is approximately 0.5% (as of May 2025). ZNQ is fundamentally a growth investment; dividends are almost incidental.

A similar alternative is TEC from TD, which tracks a comparable global technology leaders index. Performance and fees are generally in the same ballpark.

The US Large-Cap Standard: VFV (Vanguard S&P 500 Index ETF)

Finally, we examine VFV, often used as a benchmark for US equity performance. This Vanguard ETF tracks the S&P 500 Index.

Buying VFV gives you ownership in the 500 largest publicly traded companies in the United States. Apple, Microsoft, Nvidia, Amazon, Meta, Alphabet – the titans of American business are here.

It provides broad sector diversification among these large-cap leaders. It tends to be less volatile than the tech-focused NASDAQ 100 (ZNQ) but more concentrated than the total US market (XUU).

Like the other ETFs discussed, VFV is passively managed. It simply replicates the S&P 500 index. No highly paid managers attempt to outperform the market (a feat rarely achieved consistently, especially after accounting for their fees).

Decades of evidence suggest low-cost passive index funds generally outperform most active managers over the long term. Sticking with passive strategies is often the more prudent approach.

VFV's performance has been impressive. As of May 2025, the 5-year average annual return was approximately 14.5%. Since its inception in 2012, it has averaged close to 15.8% annually. This reflects consistent, strong growth from the largest players in the US economy.

This fund appeals to investors who believe the largest, most established US companies will continue to drive market returns. It forms a core holding in many portfolios for good reason.

Also, remember that indices like the S&P 500 are dynamic. Companies that decline are removed. Rising companies that meet the criteria are added. This provides a built-in mechanism to maintain exposure to successful firms.

The MER is exceptionally low at 0.09% (as of May 2025). That's nine dollars per year per $10,000 invested. Excellent value.

The yield is modest, around 1.3% (trailing 12-month yield as of May 2025), similar to XUU. Again, the primary objective is capital appreciation, not income generation.

Analysis

We've reviewed five distinct Canadian-listed growth ETFs. Simply picking the one with the highest recent return isn't a strategy; it's speculation. Building a resilient portfolio requires thoughtful consideration of diversification and risk.

Holding only ZNQ, for example, leaves you highly exposed to downturns in the tech sector. Conversely, holding only VCN ties your investment fortunes entirely to the Canadian economy's performance, which historically lags the US and global markets, and carries concentration risk in financials and energy.

Ask yourself critical questions: What level of diversification aligns with my goals? Am I comfortable concentrating bets in specific sectors like technology, or do I prefer broader exposure across industries like healthcare, financials, energy, and consumer goods?

What geographical risks am I prepared to accept – purely North American, or should I include Europe, Asia, and emerging markets for potentially smoother long-term returns?

These ETFs are components, building blocks for your portfolio. How you combine them, or integrate others, depends entirely on your personal risk tolerance, investment time horizon, and outlook on various economies and sectors. Consider the rise of actively managed ETFs and even private asset ETFs, which are gaining traction in Canada, offering different risk/return profiles, though often with higher fees.

The Canadian ETF market continues to expand significantly. Assets under management (AUM) surpassed $565 billion as of late 2024, with projections aiming for $700 billion in the coming years.

Equity ETFs, particularly those tracking US indices, remain popular choices, indicating strong investor demand for these instruments. The TSX itself lists over 1,200 ETFs as of early 2025, offering a vast array of choices, with new products launching regularly.

Looking ahead, consensus estimates for Canadian TSX company earnings growth in 2025 hover around 8-10%. While respectable, this is expected to trail the US market.

Canada faces challenges like slower economic momentum and trade uncertainties relative to the US. Some analysts note the link between TSX performance and corporate profits, anticipating potential acceleration, but caution remains.

The US outlook appears cautiously optimistic, supported by consumer resilience, ongoing tech innovation, and the possibility of stabilizing interest rates. However, expect continued market volatility. The period of unusually strong, steady gains seen in recent years may not repeat in the near term.

Be aware of the inherent risks: Volatility is higher with growth stocks. Prepare mentally for price swings. Concentration risk exists in sector-specific (ZNQ) or country-specific (VCN) ETFs. Understand your exposures. Currency risk impacts returns from ETFs holding US or global stocks, even if the ETF trades in CAD.

Consider if currency-hedged versions (if available, often with slightly higher fees) fit your strategy. Political and trade risks are ever-present, particularly concerning Canada-US relations. Interest rate changes affect growth stock valuations; unexpected inflation or rate hikes could pressure prices.

Final Thoughts

Investing in growth ETFs is not about chasing short-term gains or perfectly timing market entries and exits. It's about leveraging the long-term power of compounding returns from successful companies and economies.

Select your tools carefully. Low MERs and passive management are generally advantageous starting points for core holdings. Understand the specific risks tied to each ETF choice – concentration, volatility, currency exposure.

Diversify according to your personal financial situation, goals, and comfort level with risk. A mix might involve a core holding like XEQT or VFV, perhaps supplemented by a Canadian allocation (VCN) or a specific sector bet (ZNQ), depending on your convictions.

Most importantly, use the tax shelters provided by the Canadian government. This is a tactical advantage many underutilize. When investments grow outside registered accounts, capital gains tax applies upon selling, and dividends are typically taxed annually.

The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are your primary shields. Inside a TFSA (with a $7,000 contribution limit for 2025, subject to your available room), investments grow entirely tax-free. No capital gains tax, no dividend tax. Ever.

Inside an RRSP, investments grow tax-deferred. You receive a tax deduction for contributions (subject to limits), and growth isn't taxed annually. Tax is paid only upon withdrawal, ideally during retirement at a potentially lower tax rate.

Prioritizing contributions to these accounts before investing heavily in non-registered accounts is strategically sound. Holding high-growth ETFs like ZNQ or VFV within a TFSA or RRSP means potential gains are protected from taxation. Ignoring this is like leaving money on the table.

Over decades, the impact on after-tax returns can be substantial, potentially meaning tens or even hundreds of thousands of dollars difference in your final wealth, depending on investment amounts and time horizons.

The market will inevitably experience ups and downs. Periods of fear will alternate with periods of exuberance. Your task is to establish a sound plan, adhere to it, and resist making decisions based on emotion.

Build your portfolio with intention. Understand what you own and the rationale behind it. Focus on the long game. That's how you effectively manage the investment process and work towards your financial objectives.

Did You Know?

As of early 2025, Canadian investors have access to over 1,200 different Exchange Traded Funds listed on the Toronto Stock Exchange, covering a vast range of asset classes, geographies, sectors, and strategies.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell any specific securities. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Consult with a qualified financial advisor before making any investment decisions. The author's opinions are their own and may not reflect the views of any affiliated organization. Information is believed to be accurate as of the publication date but may become outdated.