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How to Invest in Index Funds for Canadians: An Ultimate Guide

Jake - Author/Founder

Hi. I'm Jake, a frugal Canadian Engineer. I believe you can build a great life through frugal living and index investing.

Do you want a simple investing approach that doesn’t consume your time and energy?

Total market index funds may be the solution.

With these guys, you can grow wealth calmly in the background while you focus your time and energy on the important things in life. 

After a few years of investing in individual stocks, I got tired of tracking 20+ individual companies.

I made the switch to a portfolio of index funds. Now, I have a hands-off portfolio that captures the returns of global businesses and Canadian bonds. 

This step-step guide breaks down DIY index investing for Canadians into 9 manageable steps. 

These steps are categorized into three phases:

  • Phase 1: Education. Learn About Index Funds and Investing Accounts.
  • Phase 2: Planning. Define your risk tolerance, and find your asset allocation (stock/bond mix).
  • Phase 3: Execution. Implement the plan. Setup a brokerage account, open a tax-sheltered account, and purchase index ETFs. 

Before reading this post, I recommend you check out the 9 Signs You Are Ready to Invest. It includes a “Readiness to Invest” checklist at the end if you are tight on time. 

This post isn’t exciting or entertaining. But it is necessary. Hold on and enjoy.

Finally, a financial advisor is recommended at various steps in this guide to provide an unbiased perspective. 

Let’s roll. 

Table of Contents

Invest in Index Funds Phase 1: Education

Do you want to be a successful long-term DIY investor? If yes, you must learn the fundamentals of index investing. 

Without this foundation, you are more likely to make mistakes that interrupt compounding and reduce your long-term wealth.

Do you like paying more tax than required? If so, skip the part on tax-sheltered accounts.

Understanding the TFSA and RRSP is critical to maximizing after-tax wealth. 

Analysis Paralysis

It’s important to devote time to learning. But if you spend all your time learning, you end up in a state of analysis paralysis – a form of procrastination.

At some point, have to DO.

This will involve making some small mistakes. And that’s okay, as long as you learn from them.

This is especially true when you are young, as you have more room for error. This is one of many benefits of investing while young. 

Step 1: Learn About How Index Funds Work

The first step of investing in anything is to understand your investment. 

I’ll cover the key information that gives an educational background on index funds. 

You can skip Step one by reading my post Everything You Need To Know About Stock Index Funds: A Simple Way to Invest. 

Step 1.1: Why Index Funds?

Index funds are awesome because of their simplicity and the higher expected returns relative to other investing approaches. 

Simplicity. You no longer have to research and track upwards of 30 individual stocks. This saves you time and energy to focus on the important things in life. There are many reasons why simple investing solutions help you grow wealth. 

Higher Risk-Adjusted Returns. Globally diversified total market index funds provide higher expected returns than individual stock selection. In addition, these funds can be expected to outperform professional mutual fund managers. Here are the reasons why expected returns from index funds provide higher expected returns:

  • High fund fees erode returns. Fees can skim off a portion of your return. The average mutual fund in Canada has fees of 1.7% (source), while the total market Index funds have tiny fees, ranging from 0.03% to 0.25%.
  • Skewness is high in stock markets. All of the global market’s net wealth creation are generated by 1.3% of global stocks.  When you own the entire market, you capture the returns of these stocks. It’s easy to identify the 1.3% of stocks in hindsight, but you can’t reliably find these stocks before they go to the moon.   
  • Risk. Total market index funds diversify away nearly all of the risk associated with individual companies and market sectors.  These are uncompensated risks, and removing such risks improves your risk-adjusted returns. 

Step 1.2: Learn About Basics Of Stocks And Bonds

the next step is to gain a basic understanding of a stock and a bond. After all, stocks and bonds are the underlying sources that grow your wealth.

I believe it’s critical for investors to be able to answer these questions to start. 

  1. What is a stock? Where do stock returns come from?
  2. What is a bond? Where do bond returns come from?

Stocks. A stock is a portion of a business. Long-run stock returns come from earnings growth and dividends from the underlying business. When you own an index fund, you share in the earnings growth and dividends of all businesses that make up the underlying index. More on this in my post This Is Where Stock Returns Come From. 

Bonds. A bond is a loan to a government or business. In exchange for loaning your money, you are paid interest. This is the opposite of a mortgage. Bond returns come in the form of interest payments to you. The amount of interest paid depends on the amount of risk associated with the loan (bond). More risk = more reward.

Step 1.3: Learn About Index Funds

What is an index?

An index is a standardized collection of stocks or bonds that represents a benchmark. Common indices include:

  • S&P 500, consisting of 500 large profitable US stocks;
  • S&P/TSX Composite Index, holding nearly all Canadian Stocks.
  • S&P Canada Aggregate Bond Index
  • MSCI EAFE Index, consisting of 100’s of stocks in developed countries outside of the US and Canada.
Everywhere in this post, “index funds” refer to Exchange Traded Funds (ETFs) or mutual funds that track an index of stocks or bonds. ETFs are by far the most popular way to invest in an index in Canada.
Another way to track an index is with an index mutual fund. This is far more common in the US than in Canada. The index mutual funds that I’m aware of in Canada are the TD E-Series mutual funds

Step 1.4: What is a Total Market Index Fund

A total market index fund holds all stocks in a stock market. Small, large, value, growth, Tech, Oil& Gas. Everything. This amounts to hundreds (or thousands) of stocks most stock markets.

The fund holds the stocks in the same proportion as they are represented in the index. For example, Apple made up a whopping 5.8% of the total US market in March 2022 (source).

To Many Indicies

Not all indices are the same. Therefore, not all index funds are the same.

There are thousands of indices, many of which focus on small sectors or perpetuate hyped-up industries.

When an index is made, a person has to pick the types of stocks that can be in the index. By picking the securities that make up the index based on a set of rules, we are now entering “active” investing. 

For this reason, it can be hard to discern an “active” versus “passive” investment strategy. 

Total market index funds solve this problem by holding all the stocks in the market. These guys ensure maximum diversity, which maximizes returns for a given amount of risk. Whenever I refer to an “index fund” I am referring to a total market index fund. 

Step 2: Learn About The TFSA and RRSP

Now for the boring part – taxes.

But you know what isn’t boring? Pulling thousands in tax-free income from your TFSA 20 years from now.

There are three main investing accounts that Canadian millennials will use:

  1. A Tax-Free Savings Account (TFSA)
  2. A Registered Retirement Savings Plan (RRSP)
  3. A taxable investing account. This is also called a non-registered account.

Note that the RRSP and TFSA were bestowed with terrible names. They are not “savings” accounts, they are “investment accounts”.

To understand the benefits of these accounts, it’s helpful to first understand how taxes apply to investment income.

In short, you pay tax on the following types of income produced by your investments:

  1. Capital gains income;
  2. Dividend Income; and
  3. Interest income.

Index funds will produce dividend income and capital gains income (when the fund increases in value).

This income will be tax-free for investments within the TFSA and RRSP. For the RRSP, you are only taxed when you remove money from the RRSP. 

As a rule of thumb, here is how one may prioritize the TFSA/RRSP: 

  • Invest in the TFSA if expected retirement income > today’s income.  
  • Invest in the RRSP if today’s income > expected retirement income. 

For more, you can see my TFSA vs. RRSP. vs. Taxable Account comparison calculator to see what option maximizes your future wealth. 

Step 3: Learn About Investment Risk, Find Your Risk Tolerance

You have a tolerance for investment risk that is unique to you. I’ll show through examples.  

Consider George, an entrepreneur. He is saving to put a down payment on a house in exactly 5 years. 

Because George has a variable income and a short time horizon of 5 years, he has a low ability to take risks. 

He would not be able to withstand a serious stock market crash if he was in 100% stocks. Therefore, George can invest primarily in short-term savings assets like short-term bonds or money market funds. 

Now consider Lisa, a 24-year-old government worker who is happy renting for a long time.  Lisa can control her human biases and doesn’t panic sell during sharp market downturns. 

Lisa can endure a 50% drop in the stock market and will keep investing. She has a high-risk tolerance and can invest in 100% stocks. 

Generally, your risk tolerance depends on:

  1. Your ability to hold on through market crashes
  2. Income stability
  3. Income relative to expenses (savings rate)
  4. Total Debt (including mortgage debt)
  5. Time horizon – based on age and upcoming purchases.

You can learn more about investment risk and how to assess your unique risk tolerance in this post in Investment Risk and Risk Tolerance: An Introduction.

Finally, you can ask yourself “how much risk do I NEED to take to meet my financial goals?”

It doesn’t make sense to take more investment risk than necessary, even if you have sufficient risk tolerance. You are most likely to meet your financial goals if you take the lowest amount of risk necessary to do so.  

Education Phase: Resources

Invest in Index Funds Phase 2: Planning

Time to start planning.

“By failing to prepare, you are planning to fail” – Benjamen Franklin.

And you don’t want to fail. You want to succeed over the long term. In the planning phase, we will cover two steps: 

  • Setting Your Asset Allocation (Stock/Bond mix). 
  • Finding ETFs that match your asset allocation.

Planning is dependent on your unique circumstances and your long-term financial goals.

A financial “planner” provides the most value in the planning stage. They provide an unbiased perspective on your true risk tolerance and unique goals.

Step 4: Set Your Asset Allocation

Now it’s time to design an investment portfolio that matches your unique risk tolerance.

A 100% stock portfolio can have years with losses of 40-50%. That’s a  portfolio of globally diversified stock index funds that minimizes risk for a 100% stock portfolio. Not all investors can tolerate this level of risk.

This is where bond index funds come into the picture.

Bond prices are much more stable than stock prices. They effectively “pad” a portfolio, reducing volatility. In exchange for the stability offered by bonds, you receive lower expected returns.

The mix of stocks and bonds that you hold is called your asset “allocation”. Finding your asset allocation is one of the most important parts of investing. This is a primary duty of a financial advisor.

Vanguard’s Investor Questionnaire can help you estimate your asset allocation. Notice that the questions aim to determine your willingness and ability to take on risk.  Then it suggests a stock/bond mix that matches your risk tolerance.

Step 5: Find ETFs that Align with Your Asset Allocation

Congratulations, you now have a target asset allocation. Now it’s time to find stock and bond index funds to match this allocation.

You can select your index ETFs the easy way, or the hard way. Let’s start with the easy way first.

The Easy Way

I like keeping things as simple as possible to achieve the desired effect.  

Asset allocation ETFs from Vanguard, iShares and BMO are “index portfolios in a box”.

These “Asset Allocation ETFs” are single ETFs that hold underlying stock and bond ETFs. They are automatically re-balanced to meet your target asset allocation. Now you have exposure to 1000’s stocks and bonds around the world for low fees.

These underlying stock and bond ETFs are total market “cap-weighted” index funds. 

You can read more about the specific asset allocation ETFs on this Canadian Couch Potato page, including fees and links to the product descriptions.

Asset allocation ETFs exist that meet the following asset allocations: 

  • 100% Stocks, 0% Bonds
  • 80/20
  • 60/40
  • 40/60
  • 20/80

The Hard Way

Want to make your life hard?

Then select individual index ETFs that provide international exposure. For example, stock exposure could look like this:

  • 30% Canadian Stocks (VCN)
  • 30% US Stocks (VUN)
  • 30% International Stocks (XEF)
  • 10% Emerging Market Stocks (VEE)

Next, you can buy a bond index, like VAB or ZAG, to provide the necessary bond exposure.

What does one get from this complexity? 

  • You may be able to save 0.1% or 0.2% per year.
  • You can fine-tune your geographic exposure.
  • You can optimize your ETF expenses
  • You can place these ETFs in specific accounts to minimize tax drag once the TFSA/RRSP are maxed. 

I use this hard method. I can confirm it’s not worth your efforts unless it’s your hobby. 


Consider what happens if the Canadian market goes on a tear, and your 30% allocation to Canadian stocks becomes 40%. Now your geographic asset mix is out of whack. In addition, your asset allocation mix between stocks and bonds will need to be corrected.

You need to sell off your Canadian market ETF and use the sales proceeds to purchase US and International stocks to realign with your target ratio. This is called rebalancing

Step 6. Find The Accounts To Invest

Where will you hold your index ETFs – a TFSA, RRSP, or a Taxable account? Such placement of your index funds is called your asset “location”.

Good asset location decisions maximize after-tax wealth.

To see how after-tax wealth varies with account selection, you can use this Google Sheets calculator. It compares your after-tax wealth based on investments in the TFSA, RRSP, or Taxable account. 

Tinkering with this spreadsheet can help you develop an intuition for the way the different account types shelter investments. 

Here are general rules of thumb to set a wealth maximizing asset location:

  • Fill the RRSP with an amount needed to maximize your employer match. A 1:1 employer match is like an immediate 100% return on your money.
  • Fill the TFSA first if your income today is lower than your expected income in retirement.
  • Fill the RRSP first if your income today is higher than your expected income in retirement.

The “easy method” from step 5 makes asset location easy. Simply place the asset allocation ETF in the priority account. Once the account is maxed, move to continue buying the asset allocation ETF in the next account. 

Complexity explodes when you use the “hard method” by holding individual ETFs. You can easily end up with 5 ETFs in each account to meet geographic exposure targets. That’s 15 ETFs to track and rebalance. 

Invest in Index Funds Phase 3: Execution

Now for the fun, buying the index ETFs and sitting back as your investments grow calmly in the background.

For the execution phase, I will focus on the one-fund Asset Allocation index ETFs discussed above.

I believe these portfolio-in-a-box solutions are the optimal approach for most DIY investors. Max simplicity. 

Step 7: Open a Brokerage Account

A brokerage is an interface between you and exchanges where your buy and sell your “Exchange Traded” index funds. In addition, it is with your brokerage that you open a TFSA, Taxable Account or RRSP.

Then you can invest buy/sell index ETFs from within those accounts. 

I, for example, use RBC Direct Investing. It’s here where I hold my TFSA, RRSP and Taxable accounts. I hold index ETFs within each of these accounts. 

Factors for you to consider when selecting a brokerage are:

  1. Commissions fees per trade.
  2. Integration with your other banking services.
  3. Ease of use.
  4. Available research tools.

Here are a few brokerages in Canada, to get you started on your research: 

Commissions are the main factor, especially if you buy ETFs in lower dollar amounts at higher frequencies. 

I accept the high $10 commission fee with RBC direct investing for a few reasons. I bank with RBC and enjoy the ease of integration. Plus, I don’t trade frequently and pay commissions with credit card points.

Once you have a brokerage account, you can transfer cash from a chequing or savings account to your investment account of choice that you selected in step  

Step 8: Invest in Your Index ETFs

Great. Now cash is sitting in your brokerage account eager to be invested in an asset allocation ETF. It’s time to execute transactions and buy your asset allocation ETFs.

At this point, you need to select the number of shares that you will purchase. You will divide the total amount you want to invest by the price per share. That yields the total number of shares. 

Let’s cover an example, where George invests $5,000 in an ETF that is priced at $26/share. George will need to buy $5,000/$26 = 192 shares. 

Set a Frequency

Will you invest bi-weekly, monthly, or every two months? If you are salaried, it is reasonable to set a target amount to invest at a set frequency. 

I personally invest at two-month intervals.

The nice thing about asset allocation ETFs is that when the account is maxed, you can buy the same asset allocation ETF in the next account. For example, George maxes his TFSA with XGRO and starts buying more XGRO in his RRSP.

Step 9: Monitor Your Risk Tolerance

Your unique asset allocation needs, based on your risk tolerance, may change if your life circumstances change.

Maybe you realize you need to draw your portfolio earlier than expected to support an aging parent. Or perhaps you lose your steady income because you took the (risky) leap to become an entrepreneur.

Risk tolerance monitoring is best done with the help of a financial advisor. 

Conclusion: 9 Steps To Invest in Index Funds

Learn. Plan. Execute.

The learning and planning phases permit sustainability. Otherwise, jumping direct to execution can make it hard to stay invested. Maybe you take too much risk, set unrealistic expectations, or purchased thematic “Index” ETFs that crashed hard.

Executing is simple, but hard. The hard part is waiting – leaving investments alone. This is difficult because we all have natural desires to make stupid investment decisions – like panic selling during downturns.

As your wealth compounds in the background with index ETFs, you can focus your time and energy on the important things in life.

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Jake out