5 Best Index Funds for Canadians (June 2024)

Checking index funds on tablet

Index funds track the performance of the broader market or specific industries and are a convenient alternative to active stock-picking.

These funds trade on the stock exchange like regular stocks but offer exposure to a basket of different underlying holdings.

Here are 5 of the best index funds for Canadian investors:

1. iShares Core S&P/TSX Capped Composite Index (TSX:XIC)
2. iShares S&P/TSX 6 Index (TSX:XIU)
3. BMO S&P 500 Index CAD (TSX:ZSP)
4. iShares S&P/TSX Capped Energy Index(TSX:XEG)
5. iShares S&P/TSX Canadian Dividend Aristocrats Index (TSX:CDZ)

Ticker Company Description Net Assets Fees (MER) Return Since Inception
XIC BlackRock Offers exposure to the entire Canadian stock market. $11.71 bn 0.06% 6.94%
XIU BlackRock Offers exposure to the 60 most valuable companies in Canada. $12.54 bn 0.18% 7.49%
ZSP BMO Offers exposure to the S&P 500. $13.43 bn 0.09% 17.21%
XEG BlackRock Offers exposure to the Canadian oil and gas industry. $1.74 bn 0.60% 6.32%
CDZ BlackRock Offers exposure to companies that have consistently raised dividend payouts for several years. $0.895 bn 0.66% 6.72%

Net Assets & Return as of March 2024, dividend yields below as of 2024-06-18 10:20:02

1. iShares Core S&P/TSX Capped Composite Index Fund (XIC)

There are over 1,500 stocks listed on the Toronto Stock Exchange.

Canada’s economy is relatively well-diversified between financial services, energy, commodities and technology.

The iShares Core S&P/TSX Capped Composite Index Fund (TSX:XIC) tends to capture it all in a single fund. 

The fund tracks the S&P / TSX Composite Index – which is Canada’s headline index that represents between 200 to 250 of the largest companies in the country.

XIC’s largest holdings include Royal Bank of Canada, Toronto Dominion Bank and Shopify. 

XIC tends to be heavily exposed to energy and finance.

These two sectors contribute close to 50% of the total portfolio.

In other words, half the Canadian economy is based on banking and energy.

These sectors aren’t high-growth, but they’re excellent for dividend income.

XIC currently offers a 2.83% dividend yield.

If you’re bullish on the Canadian economy given the stability of our banking sector and the demand for energy over the long term, this is an excellent index fund for you.

2. iShares S&P/TSX 60™ Index Fund (XIU)

The iShares S&P/TSX 60™ Index Fund (TSX:XIU) is a more concentrated version of the fund mentioned above.

Instead of holding hundreds of companies, this fund focuses on the 60 most valuable companies on the market.

The performance of these larger companies tends to be better over time.

XIU has delivered 7.49% in compounded annual growth since its inception as of February 29, 2024.

The largest holdings in both XIU and XIC have significant overlap.

XIU’s largest holdings are also Royal Bank of Canada, Toronto Dominion Bank and Shopify.

Over 50% of the portfolio is dedicated to financials and energy.

Meanwhile, the dividend yield is 3.09%. 

XIU is also more expensive than its broader peer with a management expense ratio of 0.18%, which could reduce the difference in performance between the two funds.

Nevertheless, XIU is an excellent fund for investors who are optimistic about Canada’s energy exports and domestic lending. 

3. BMO S&P 500 Index Fund CAD (ZSP)

As aforementioned, Canada’s economy is overexposed to the financial and energy sectors.

Meanwhile, Canadian investors are overexposed to the domestic stock market.

Our nation accounts for just 3% of global stock market wealth, yet Canadians rarely invest in foreign stocks.

Overcoming this home bias could help you diversify your portfolio and bolster long-term performance.

Betting on America’s largest companies could be an excellent way to do this. 

The BMO S&P 500 Index Fund (TSX:ZSP) tracks the performance of the flagship S&P 500 index.

This index attracts capital from across the world and is the most valuable index right now. 

Unlike the Canadian economy, the US is heavily exposed to high-growth tech stocks.

29.62% of the fund’s portfolio is focused on Information Technology companies.

The three largest holdings in ZSP are Microsoft, Apple and NVIDIA Corp.

However, there is also exposure to non-tech blue chip stocks like Berkshire Hathaway and UnitedHealth Group. 

Since inception, ZSP has delivered 17.21% CAGR as of February 29, 2024.

ZSP currently offers a 0% dividend yield.

4. iShares S&P/TSX Capped Energy Index Fund (XEG)

The price of oil and natural gas was subdued for several years after the 2015 crash.

Oil producers stopped investing in equipment and wells, which lowered production.

After a global pandemic and an unexpected crisis in Eastern Europe plunged the world into an energy supply shock, oil producers are expected to generate more cash flow than they have in recent history. 

Investors can bet on this theme with the iShares S&P/TSX Capped Energy Index Fund (TSX:XEG).

Over the past three years, this index fund has delivered a 37.75% total return.

This year, the fund’s underlying oil and gas companies could boost dividend payments and buybacks.

That accelerates the total return of the fund. 

The largest holdings in the fund are Canadian Natural Resources, Suncor and Cenovus.

All holdings are expected to see substantial cash flows and profits this year.

If oil prices remain elevated for several years, this fund could be a top performer.

Investors may want to consider a little exposure to this sector to capitalize on macro movements.

XEG currently offers a 1.05% dividend yield.

5. iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)

Some companies grow rapidly while others offer high dividends.

However, a small group of high-quality companies can achieve a balance of both.

They can deliver steadily rising dividends over several decades.

These dividend growth companies are excellent for long-term investors. 

The iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ) tracks an index of companies that have boosted dividends every year for a minimum of five consecutive years.

The fund holds 93 stocks that meet this basic criteria as of March 29, 2024.

At the moment, the fund offers a 4.1% dividend yield that is paid out on a monthly basis.

This dividend payout should steadily rise over time if the underlying companies can sustain their growth momentum.

Overall, CDZ should deliver better total returns than the rest of the stock market. 

Since inception, CDZ has delivered a total return of 6.72% CAGR.

If that pace continues, any dollar invested today should be worth more than two dollars by the end of the decade.

Investors seeking steady growth and monthly payouts should keep an eye on this fund. 

Checking index funds on tablet

Key Criteria to Consider When Investing in Index Funds

Adding index funds to your portfolio is usually an excellent strategy.

However, you may need to consider the theme of the underlying index, the expense ratios, dividend payouts and weightage policy.

An index fund that invests in a speculative and volatile industry (such as biotech) may not be suitable for everyone.

Similarly, an index fund that offers negligible dividends may not be ideal for income-seeking investors. 

Fees are another critical aspect of these funds.

An expensive fund with high management fees could erode your long-term performance.

Investors might also need to consider if the fund they pick is equal-weighted or market-cap weighted to ensure proper diversification.

If you’d like to learn more about investing in index funds, you can check out our guide explaining how to invest in index funds.

Frequently Asked Questions

  • How do I buy an S&P 500 index fund in Canada?
  • How are index funds taxed in Canada?
  • Which index fund is best in Canada?

DISCLAIMER: This is not investment advice. Recommendations are for educational purposes only, presented as a path for you to further research. Please seek independent financial advice before making any financial decisions. PiggyBank is not liable for any investment decisions you make based on the information presented on this website.

Vishesh Raisinghani

Vishesh Raisinghani is the founder of Sharpe Ascension - a financial content marketing agency based in Toronto. Born in Mumbai, India and graduated from the Manchester Metropolitan University, he has been investing in and writing about stocks since 2011.

His investments and research are focused on tech stocks, growth opportunities, cryptocurrencies, emerging markets, and real estate. His clients include hedge funds, family offices, publicly-traded companies and tech startups trying to reach their investors through online communications.

When he's not writing, he's usually cycling around Toronto, paddleboarding on Lake Ontario, reading a book on the beach, slurping beer on a patio or relentlessly tweeting random thoughts. Website | Follow Vishesh on Twitter.