2 Canadian ETFs to Buy and Hold Forever in Your TFSA (2024)

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Holding quality ETFs such as the VSP in a TFSA can help you derive inflation-beating returns in 2024 and beyond.

The Tax-Free Savings Account, or TFSA, was introduced in 2009 and has since gained popularity among Canadian investors. This registered account allows you to hold a variety of asset classes, such as stocks, bonds, mutual funds, and exchange-traded funds. Moreover, any returns generated in the TFSA are sheltered from Canada Revenue Agency (CRA) taxes, which helps accelerate the wealth-building process.

The TFSA contribution room in 2024 has increased by $7,000, up from $6,500 in 2023. This means the maximum cumulative TFSA contribution limit stands at $95,000 in 2024. But how should investors allocate their TFSA contribution room right now?

Invest in exchange-traded funds

The primary aim of investing is to beat inflation and create a nest egg for retirement. So, you need to allocate your savings towards asset classes that have outpaced inflation over time. Historically, the stock market has consistently beaten inflation and created game-changing wealth for shareholders. However, investing in equities might seem risky, especially for new participants who don’t have the time or expertise to identify quality companies.

A low-cost way for Canadian investors to gain exposure to the stock market is through exchange-traded funds (ETFs). Basically, ETFs hold a basket of stocks across multiple sectors, offering diversification.

Investors should choose passive funds that track a particular index, such as the S&P 500, which offers exposure to some of the largest companies in the world. In the last six decades, the S&P 500 index has returned over 10% annually to shareholders in dividend-adjusted gains. Additionally, the fund’s top holdings include big-tech companies such as Microsoft, Apple, Alphabet, Nvidia, and Amazon.

Vanguard S&P 500 Index ETF (TSX:VSP) is a low-cost Canadian ETF that tracks the S&P 500 index. With more than $3 billion in assets under management, the VSP ETF is among the most popular funds in Canada. The ETF is hedged to the Canadian dollar, sheltering investors from fluctuations in foreign exchange rates.

The ETF has returned 13.3% annually in the last five years, which is exceptional. In addition to capital gains, the VSP ETF offers a forward yield of 1.1%.

Invest in the XDIV ETF

Income-seeking investors may consider holding ETFs such as iShares MSCI Canadian Quality Dividend Index ETF (TSX:XDIV) in their TFSA. The XDIV ETF is a portfolio of Canadian stocks with above-average dividend yields and steady or increasing payouts. It selects companies with strong financials and lower earnings volatility.

The XDIV ETF’s top holdings include high-dividend TSX stocks such as Suncor Energy, Pembina Pipeline, and Fortis, which account for roughly 30% of the fund. Additionally, the ETF pays shareholders a monthly dividend of $0.10 per share, translating to a forward yield of more than 4%.

While the VSP ETF is tech-heavy, the XDIV fund offers additional diversification. For instance, the financials sector accounts for 41.2% of the fund, followed by the energy sector at 24.3% and the utilities sector at 17.1%.

Canadian investors can identify other such ETFs to further diversify their TFSA portfolio in 2024.

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