When it comes to selecting Canadian exchange-traded funds (ETF) for your Tax-Free Savings Account (TFSA), there are a few key factors to consider to ensure your investments align with your goals. TFSAs are an excellent vehicle for growing wealth since all gains, dividends, and withdrawals are tax-free. Your choice of ETFs should reflect a balance of growth potential, dividend income, and risk tolerance while considering sector diversification and fees. So, let’s get into some of the best options out there.
VDY
One popular ETF for Canadian investors is Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY). This fund focuses on high-dividend-paying Canadian companies, primarily in the financial and energy sectors, which collectively make up over 85% of its portfolio. VDY is particularly attractive for income-seeking investors, offering a strong yield of 4.38%.
Its top holdings include Royal Bank of Canada and Toronto-Dominion Bank, both solid blue-chip stocks. With a year-to-date (YTD) total return of 2.04%, VDY demonstrates resilience in volatile markets, making it a great TFSA candidate.
ZAG
If you’re looking for a more conservative approach, BMO Aggregate Bond Index ETF (TSX:ZAG) is worth considering. This ETF provides exposure to a mix of government and corporate bonds, offering stability and a current yield of 3.45%.
ZAG’s bond allocation is heavily weighted toward government securities at over 74%. This lends a higher degree of safety to your portfolio. It’s particularly useful for balancing risk in a TFSA, especially for investors nearing retirement or those with a cautious risk profile.
CDZ
For investors focused on growing income over time, iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ) shines. This ETF invests in Canadian companies with a history of consistently increasing dividends. Ideal for long-term passive income.
CDZ boasts a diversified portfolio with significant exposure to financial services, utilities, and industrials. Its current yield stands at 3.70%. Its holdings, including Capital Power and Aecon Group, have robust growth potential, providing a steady stream of income and potential capital appreciation.
HDIF
For those seeking diversified income, Harvest Diversified Monthly Income ETF (TSX:HDIF) is a standout option. This fund combines exposure to several Harvest ETFs, providing a broad mix of financial services, technology, and healthcare. HDIF currently yields an impressive 10.12%, making it one of the highest-yielding ETFs on the TSX.
Its top holdings include Harvest Healthcare Leaders Income ETF and Harvest Canadian Equity Income Leaders ETF, offering exposure to stable, dividend-paying companies across various sectors. Despite its higher yield, the fund is diversified enough to reduce volatility risks.
Foolish takeaway
When evaluating these ETFs, recent performance and market trends can provide valuable insights. VDY has continued to perform well, with a slight uptick of 0.18% today, showcasing investor confidence in dividend-focused strategies. Meanwhile, ZAG saw a modest gain of 0.29%, reflecting stable bond market conditions as interest rate concerns ease. HDIF and CDZ have also shown steady performance, indicating their appeal to income-seeking investors.
Future outlooks for these ETFs remain positive. With Canada’s inflation rate slipping to 1.8% in December, there’s potential for stable or declining interest rates. This could benefit both equity and bond markets. VDY’s focus on financials and energy could continue to deliver strong dividends as these sectors recover. Similarly, HDIF’s diversified exposure makes it a strong choice for weathering economic uncertainties while maintaining high income.
When selecting ETFs for your TFSA, always factor in fees, yield sustainability, and your investment horizon. While VDY and CDZ provide excellent income with growth potential, ZAG offers stability, and HDIF delivers unmatched yields. Together, these can form a well-rounded, diversified TFSA portfolio tailored to various financial goals. Always consult a financial advisor to ensure these ETFs align with your specific needs.
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