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What Is an ETF? ETFs and Index Funds in Canada (2026 Guide)

Updated

An ETF (exchange-traded fund) is a single investment that holds dozens to thousands of stocks or bonds and trades on a stock exchange. This page explains what ETFs and index funds are, what they cost, how they are taxed in Canada, and how the different kinds fit together. The second half is a directory of every ETF guide, fund list and single-fund review on the site.

What is an ETF?

An ETF pools investors’ money into one portfolio. When you buy one unit on the TSX, you own a small slice of every holding in that portfolio, and the unit price rises and falls with the value of those holdings. Most ETFs listed in Canada are index ETFs: they hold the securities in a published index, such as the S&P/TSX Composite or the S&P 500, in the same proportions, instead of relying on a manager to pick investments.

A few features set ETFs apart from other funds:

  • They trade during market hours. You buy and sell through a brokerage account at the current market price, the same way you trade a stock.
  • Holdings are published. Providers post each fund’s holdings, so you can see exactly what you own.
  • Costs are usually low. Index ETFs don’t pay managers to pick stocks, and most don’t pay sales commissions to advisors, so their MERs are generally a fraction of a typical actively managed mutual fund’s.
  • Supply adjusts to demand. Large dealers create new units or redeem existing ones by exchanging baskets of the underlying securities with the provider. That keeps the market price close to the value of the holdings and limits the taxable gains the fund has to pass on to unitholders.

A concrete example: XEQT, iShares’ all-equity portfolio, holds 5 underlying ETFs that together cover thousands of stocks in Canada, the US, other developed markets and emerging markets. One purchase gives you all of it, and the fund keeps its regional mix on target on its own. The XEQT review covers that fund in detail.

ETFs, index funds and mutual funds

“Index fund” describes a strategy (track an index); “ETF” and “mutual fund” describe how the fund is packaged and sold. An index fund can be an ETF or an index mutual fund, and the practical differences come down to how you buy it, the minimums and the fee. The index funds vs ETFs comparison works through those differences, including bank index mutual funds such as TD’s e-Series.

Most mutual funds sold in Canada are actively managed and include advisor compensation in their fees. The ETF vs mutual fund guide compares the two on cost, tax and flexibility, and how mutual funds work in Canada covers fund series, trailing commissions and sales charges.

Types of ETFs

TypeWhat it holdsWhere to compare them
All-in-one (asset allocation)Several index ETFs in a fixed stock/bond mix, rebalanced automaticallyAll-in-one ETFs compared
Broad market indexOne country or region’s stock marketIndex funds for Canadians, S&P 500 ETFs, international ETFs
Dividend and incomeStocks screened for dividend yield or dividend qualityCanadian dividend ETFs, covered call ETFs
BondGovernment and corporate bondsBond ETFs
Cash and money marketShort-term deposits and treasury billsMoney market ETFs
Sector and themeOne industry or theme, such as technology or energyDirectory below
Commodity and cryptoPhysical metals, futures, or bitcoin and etherGold ETFs, crypto ETFs

Broad, low-cost index ETFs and all-in-one portfolios are the building blocks most long-term portfolios start from. Sector, theme and commodity ETFs concentrate risk in one part of the market and usually charge a higher MER.

What ETFs cost

The MER. The management expense ratio is the fund’s annual cost as a percentage of assets: the management fee plus operating costs and sales tax. You never see a bill; it is deducted from the fund’s assets, so the returns a provider reports are already net of it. On $10,000 in XEQT, a 0.19% MER works out to about $19 a year. Because the fee comes off every year, small differences in MER grow into large dollar amounts over decades. The MER calculator projects that gap for your own balance and time frame.

Trading costs. Many Canadian brokerages now charge no commission to buy ETFs, and some charge none to sell. Every trade also crosses the bid-ask spread, which is usually small for large, heavily traded ETFs and wider for niche ones. How to buy ETFs in Canada explains order types and how to keep spreads from costing you.

Currency costs. Buying US-listed ETFs means converting Canadian dollars, which can cost more than the fund’s MER unless you use a low-cost conversion method. The US-listed vs Canadian-listed ETF comparison covers that trade-off.

How to buy an ETF

You need a brokerage account (a discount brokerage, a bank’s online brokerage, or an investing app), an account type such as a TFSA or RRSP opened inside it, and money transferred in. Then you search for the fund’s ticker and place an order. The full process, including market and limit orders, is in how to buy ETFs in Canada; if you’re starting with index mutual funds instead, see how to buy index funds in Canada. The online brokers guide compares the platforms, and TFSA vs RRSP for beginners covers which account to fill first.

How ETFs are taxed

  • Registered accounts. In a TFSA, RRSP, RRIF, FHSA or RESP, distributions and gains inside the account aren’t taxed each year. TFSA withdrawals are tax-free; RRSP and RRIF withdrawals are taxed as income.
  • Non-registered accounts. Each year you pay tax on the fund’s distributions, broken down on a T3 slip into Canadian dividends (which get the dividend tax credit), foreign income, interest, capital gains and return of capital. Return of capital isn’t taxed when paid but lowers your adjusted cost base. When you sell, the gain or loss is a capital gain or loss.
  • Foreign withholding tax. Dividends from US and international stocks can lose part of their value to foreign withholding tax, and how much depends on the account and whether the ETF holds the stocks directly or through another fund. Tax on US ETFs in Canada explains the layers, and the foreign dividend withholding tax guide lists the rates by country.
  • Selling at a loss. Selling an ETF at a loss and buying it back within 30 days can trigger the superficial loss rules, which deny the loss for that year.

Which holdings to keep in which account is covered in the asset location strategy guide.

Building a portfolio from ETFs

There are three common ways to put ETFs together:

  1. One fund. An all-in-one ETF picks the stock/bond mix and rebalances for you. The only decisions left are which mix and how much to add each month.
  2. Two funds. A global equity ETF plus a Canadian bond ETF, with the split set by your own target.
  3. Three or more funds. Separate Canadian, US and international equity ETFs, plus bonds, which gives more control over weights and account placement in exchange for rebalancing by hand. The Couch Potato portfolio guide walks through this approach.

Common mistakes with ETF portfolios include holding several funds that overlap heavily (two all-in-one ETFs, for example), switching funds after a bad year, and reacting to short-term price moves. Automatic contributions and a written target mix make it easier to avoid these. For a small monthly budget, see building an ETF portfolio on $100 a month.

ETF directory

Getting started

Portfolios and strategies

Fund lists by goal

Sector, commodity and crypto ETFs

Bonds and cash

Single-fund reviews and head-to-heads

ETF taxes

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Sources

The figures and rules on this page come from these sources, last checked against them on September 25, 2026. How we check facts.