How to build a portfolio with ETFs 

Canadians have a long history of inventing great products: ginger ale, peanut butter, Walkie-Talkies, basketball – the list goes on. One of the most influential investment products was created here, too – the exchange-traded fund (ETF) – back in 1990.

Since then, but particularly over the past 15 years, Canada’s ETF market has exploded. Today, Canadian investors hold more than $565 billion in ETFs, up from $35 billion in 2010. Yet, as much as the market has expanded, not everyone is familiar with these products. That’s, in part, because mutual funds are still the more dominant fund type in the country, with more than $2.2 trillion in assets under management (AUM) as of May 2025.¹

Read on for more information about how ETFs work and how to incorporate them into a portfolio.

What is an ETF?

Let’s start with the basics. An exchange-traded fund is an investment product that is similar to a mutual fund in that it holds a basket of securities, which can include stocks, bonds, cryptocurrency and commodities, among other things. Because ETFs trade on stock exchanges, you can buy and sell them any time the market’s open, and the price can fluctuate throughout the day, just like a stock. Mutual funds, on the other hand, are priced one day after market close, even though you can place an order at any time during the day. If the order is after trading hours then you will receive the next business day's closing price.

ETFs are often thought of as passive investments because most track an index (or benchmark) which is essentially a list of selected companies that represent a portion of the market. For example, the S&P 500 tracks 500 of the largest companies in the U.S. while the S&P/TSX 60 tracks the largest 60 companies in the Canadian market. Passive ETFs can also track other assets like bonds and commodities. For these traditional ETFs, whatever’s in the index is also reflected in the fund. That means if the companies in the index go up in value, the ETF typically does too, and if they go down, the ETF can lose value. There are also active options where a manager chooses what goes into the fund instead of just following an index.

Pros and Cons of ETFs

Pros

Interest in ETFs has soared for good reason. There are numerous advantages to these products. Here are a few:

Diversification

Rather than a single stock or bond, ETFs may offer exposure to many – often hundreds – of underlying investments. This kind of diversification can potentially help you lower the risk of your portfolio being impacted by a single holding that runs into trouble.

Lower costs

Many of the largest ETFs are index funds that passively track a stock or bond index, which can contribute to them having lower fees. Even the many actively managed funds available today tend to have lower management fees and expenses than comparable mutual funds.

Transparency

Investors can see the portfolio composition of an ETF in a timely manner since holdings are disclosed daily. And because many ETFs mirror established indices, you can easily see what’s in a fund, which makes them extremely transparent. You can also see a fund’s fee structure and fundamental attributes, such as its price-to-earnings ratio or assets under management, as well as how the fund has performed over time. This makes them easy to research and compare with one another.  

Liquidity

You can buy and sell ETFs in seconds at any time during the trading day. Trades take one business day to settle but will show up in your portfolio as soon as you make the purchase. If you sell, it’ll take one business day for the proceeds to be deposited back into your investment account, although you can use these funds to trade another investment with a one-day settlement period.

Eligible for registered accounts

Canadians can hold ETFs in tax-advantaged registered accounts, such as Registered Retirement Savings Plans and Tax-Free Savings Accounts. This can be an efficient way to manage short- and long-term savings goals.

Cons

Every investment comes with some risks, and ETFs are no exception. Here are some to watch for:

Choice overload

While this can also be an advantage, depending on how you look at it, there are nearly 1,300² Canadian and 10,000 global funds available.³ With so much to choose from, it may be challenging for investors to find the funds most suitable for their risk tolerance and investment objectives. Think carefully about your preferences before you hit the buy button. For additional information, check out There’s an ETF for That!, which explains some of the many available fund types.

Underlying asset risk
ETF investors are exposed to any risk associated with the underlying basket of investments. For example, a bond ETF is exposed to credit, default and interest rate risks. Look for the risk section of an ETF's prospectus for a detailed explanation of risks associated with that fund.

Complex options

As the market has grown, there are now ETFs that hold complex instruments, such as derivatives and options. Certain funds use leverage, which can help amplify returns by delivering multiples of the daily performance of a specific index or asset. Some of these ETFs also offer inverse strategies that are designed to make money when markets decline. While these ETFs can increase returns, they can also exaggerate losses if the markets don’t react the way you expect. Make sure you’re comfortable with and aware of what’s in a fund before investing. There can also be increased costs associated with leveraged ETFs that come from being rolled over from contract to contract which can raise operating costs in leveraged ETFs.

Currency risks

ETFs can hold international securities, even if the ETFs are listed on Canadian and U.S. markets. While that opens you up to more options, it also means that there could be currency risks when owning funds listed elsewhere. Fortunately, you can research Canadian-hedged options of U.S.-listed funds, which can help manage that risk.

To learn more about the advantages and risks on ETFs, read The Benefits and Risks of ETFs

Creating an ETF portfolio

Because of their flexibility, it’s easy to build a long-term portfolio with ETFs. What that portfolio might look like, though, will depend largely on your risk tolerance levels; time horizon to retirement or other goals; and your experience trading ETFs. Here are a few things to consider.

All-in-one basket

If you don’t want to spend time watching your investments, there are single ETF options that are designed to give you everything you need in one fund. All-in-one funds hold a mix of stocks and bonds. Target date funds (which come in options that correspond to a year like 2040, 2045 or 2048 for example) hold equities and fixed income but automatically change their asset mix to become more conservative as you get closer to the date you select. You can also buy a global fund that holds stocks from across the globe and in different sectors, though there are additional risks to consider when investing internationally.

Core and explore

One of the more popular ETF strategies is core and explore. It starts with owning ETFs that can act as the building blocks for your portfolio, that is, funds designed to capture exposures common to most diversified portfolios, such as U.S. equities, international equities and fixed income. Then, to augment those well-rounded holdings, you could “explore” other parts of the market that may carry more risk or allow you to express an investment idea. These ETFs, which are sometimes called satellite or peripheral ETFs, can be used to take advantage of specific opportunities or to further diversify your holdings. These could include ETFs that track gold, emerging markets or artificial intelligence stocks, for example.

Couch potato portfolio

Another common approach is called the Couch Potato Portfolio. Essentially, you buy a handful of core ETFs and hang on to them for the long term. You often see portfolios divided up between Canada, U.S. and international stocks along with a Canadian government bond ETF, but there are many ways you can divvy assets up. The point is to create something simple and low cost that you likely wouldn’t need to monitor constantly, but perhaps just rebalance periodically.

A tactical approach

Many people use ETFs to make tactical moves in a portfolio. Say, based on your research, that you anticipate U.S. financials will outperform the broader market in the coming weeks. You could purchase a U.S. financials-focused ETF and hold on to it for a short period of time to take advantage of your thesis. Given how many ETFs exist, it’s easier than ever before to invest based on where you might think sectors in the economy or markets will go.

Finding ETFs to buy

When buying ETFs, think about your financial goals and preferences including your risk tolerance. You may want to read media reports or explore the offerings on fund company websites – which have fact sheets about the ETFs they offer – to determine which funds could be a good fit for you.

You can also get data and independent research on RBC Direct Investing’s Detailed Quote page when you enter a fund’s name or ticker symbol. It can also be a good idea to review an ETF’s underlying holdings (which you can find under the “Holdings” tab on the Detailed Quote page) to make sure the ETF is diversified in a way that aligns with your investment strategy. This also lets you check that you’re not too heavily invested in any one sector, industry, country or even individual stock without realizing it.

Trading ETFs

Buying and selling an ETF is no different than buying or selling a stock. To trade an ETF, click “Buy” or “Sell” on the Detailed quote page after searching for a fund name or ticker symbol, fill out the Place an Order form, and hit “Place an Order.” To learn more about how to place a trade visit our Getting Started guide.

If you’re not ready to make a decision yet, add the ETFs you’re considering to your Watchlist or set up an RBC Direct Investing Practice Account to get a feel for how a fund or a whole portfolio performs over a few months. Then, you can dive into the real thing once you feel more confident.

Sources: 

¹ _{SIMA, "Mutual fund and exchange-traded fund (ETF) assets and sales", April 2025}

² _{CETFA, "CETFA Monthly Report ($ Billions)", April 2025}

³ _{JP Morgan, "ETF market guide: What are the trends and themes to watch?", October 2024}