Exchange-traded funds (ETFs)
ETFs are investments that consist of a collection of securities, such as stocks or bonds, that can be traded like individual stocks, through a brokerage. They offer the flexibility of stocks in that they can be quickly and easily sold, along with the diversification of mutual funds.
ETFs are typically pegged to follow a particular market index and can be fairly hands-off compared to mutual funds, resulting in management fees—and more of the funds’ upside returns in your pocket. They are, however, more hands-on than savings accounts or GICs, and may require occasional recalibration, which may be more than some people want to manage.
Investing in ETFs within a TSFA is a good choice for a moderate return on investment with moderate risk. There are also so-called robo-advisors such as Wealthsimple Invest*, Questrade* and Modern Advisor, which will consider your goals and appetite for risk and align that to a computer algorithm that will manage your ETFs for very low fees.
ETFs do tend to track the stock market as a whole which means your investment could be subject to more volatile ups and downs than the more conservative investment options, like GICs. They do tend to pay a significantly higher return over the long term than savings accounts or GICs.
Compare the best robo-advisors in Canada
Stocks/equities and bonds
Investing in stocks and bonds within a TFSA is definitely a more advanced financial strategy that should be considered by those with some understanding of the stock market and a stomach for moderate-to-high risk. As a whole, the stock market grew by 7% between 1950 and 2009. There were people who made much more than that, and those who lost everything.
Still, for those who want the chance at a sizeable return on small investments, the stock market is their best shot. Since TFSAs contributions are capped at $6,000 a year (and if you are someone who thinks that is not a lot of money to invest), you may want to consider carefully investing in stocks and bonds that are traded on the open stock market. You can also hold foreign investments, but beware that these investments have different tax rules that may require you to pay some tax, even though you’re holding them inside your tax-sheltered TFSA. For example, if you purchase dividend-paying U.S. stocks inside your TFSA, the dividend income subject to 15% withholding tax.
Note that TFSAs are for personal long-term savings and are not intended to be used by businesses. If you are found to be actively trading stocks in and out of a TFSA, the Canada Revenue Agency (CRA) will be within their right to impose a stiff penalty. Instead, find a financial planner or use an online brokerage such as Wealthsimple or Questrade to invest.