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How to invest in index funds in Canada
Diversify your portfolio and reduce your overall risk by investing in index funds in Canada.
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Index funds are a type of mutual fund that holds a pool of investments from a specific index on the stock market. They are a low-risk investment that lets you share risk across an entire index rather than focusing on a handful of stocks. Learn more about how to buy index funds in Canada or invest in ETFs if you want to track indices online.
How to buy index funds in Canada
If you already understand what index funds are and want to start investing, you can do so through a fund manager, a full service broker or an online share trading platform. One of the easiest and cheapest ways to access index funds online is via exchange traded funds (ETFs) which are traded on the Toronto Stock Exchange (TSX).
Before you do so, you should know that not all ETFs are index funds and some funds are riskier than others – you can read more about this below. Ready to invest? The following table shows some of the share trading platforms you can use to access index funds in Canada.
Index funds are designed to let you invest in stocks that are held in a specific stock market index. For example, the S&P 500 is a stock market index that measures the stock performance of 500 large companies in the United States. An index fund that mirrors the S&P will buy shares in all of these companies.
The average investor can’t afford to buy stocks in every S&P 500 company. But when you invest in an index fund, your money gets pooled with funds from other investors so that you can collectively purchase shares. The stocks won’t be in your name, but you’ll get a portion of the profits (or losses) that the index fund generates.
A market index is a collection of stocks that are listed on a stock exchange under a specific category. There are hundreds of different indices you can invest in, which include international, industry-specific, large company and aggregate bonds indices.
Canada’s most well-known index is the S&P/TSX, which consists of 231 of Canada’s largest companies by market capitalization. As mentioned above, the Wall Street alternative is the S&P 500 index, which tracks 500 large US companies.
Index funds aren’t actively managed in the sense that the fund manager isn’t trying to play the market. Instead, the fund manager simply buys all of the stocks in the index and then leaves the investments alone in the long term. If a company leaves an index, the fund manager sells its shares and replaces them with new stocks from the index.
This “passive” approach to investing means index funds come with a relatively low-risk profile, and they are fairly inexpensive to invest in. Despite being fairly easy to manage, index funds are usually reserved for long-term investors. You may want to consider ETFs if you’re interested in online trading or day trading with index funds in Canada.
How to invest in index funds in Canada
You can invest in index funds using your bank, financial adviser or brokerage. If you’d rather trade index funds online, you may be better off looking into ETFs. These can be purchased and traded on the stock exchange just like regular stocks (whereas index funds usually require a third-party intermediary).
How to buy index funds in Canada
1. Choose an index
There are hundreds of different indices you can invest in. These include international, industry-specific, large company and aggregate bonds indices. Choose the index that’s most in line with your investment strategy or investment values.
2. Choose the right fund for your index
Once you’ve chosen an index, you’ll need to find a provider that tracks it. Some indices are tracked by dozens of different providers using various index funds in Canada. This is why it pays to look into each one to find the best fit for your personal situation.
For example, CIBC and TD might both offer an S&P 500 index fund, but one might come with higher fees and more restrictions. That’s why it makes sense to compare three to four index funds for the index you want to track before you sign on with a specific provider.
3. Sign up with the provider of your choice
You’ll usually need to do some paperwork to sign up for the provider of your choice. This involves supplying personal information such as your name, address, phone number and photo identification.
4. Pay for the index fund you want
Once you’ve signed up with your provider, you’ll need to choose how much you want to invest in your index fund. You may also be able to set up an automatic payment plan with your broker so that money gets pulled from your account to invest every month.
How to invest in index funds online in Canada?
If you want to invest in a stock market index using an online fund, you can look into exchange traded funds (ETFs). These are online index funds that can be traded more flexibly using online brokers such as Wealthsimple Trade or Questrade.
You may want to consider an ETF if you don’t have much money to invest and you’d rather pay lower fees. You could be better off with an index fund if you would rather invest through your bank or you want a completely hands-off way to manage your money.
Index funds vs ETFs
Index funds and ETFs are very similar but they do have a few key differences.
|Typical purchase method||Bank or brokerage||Online trading platform|
|Market hours||Once at market close||All day|
|Fees||Higher commissions and management fees||Often free to trade|
|Minimum investment requirements||Typically higher ($5,000 or more)||Typically lower (can be less than $100)|
|Taxes||Less tax efficient due to capital gains tax||More tax efficient|
For more information about ETFs, make sure to check out our extensive guide.
There are a number of benefits to investing in index funds in Canada:
- Lower cost. Index funds in Canada typically come with lower fees than actively managed funds.
- Higher returns. Indices have been proven to frequently beat the average returns achieved by fund managers over many years.
- Portfolio diversification. Investing in an index fund offers access to a range of companies from various sectors.
- Lower risk. Index funds are usually a safer alternative to direct stock market investing because indices are generally less volatile than individual stocks.
Keep the following risks in mind when investing in index funds in Canada.
- Potential to lose money. You risk losing money if the investments across your index fund don’t perform well simultaneously.
- Long-term strategy. Investing in index funds in Canada can take time to generate a profit, so you shouldn’t expect to make a large return quickly.
- Not all assets are safe. Some index funds track volatile global markets such as the oil sector, so you could lose money even with a diversified portfolio.
Index funds are well-diversified and low-cost investments that let you invest in a full stock market index at one time. You can usually buy index funds in Canada through your financial adviser or your bank. You can also choose to invest in ETFs, which are very similar to index funds except you can trade them online and they’re often less expensive.
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