ETFs vs stocks: many Canadian investors ask which is better for building wealth. This guide compares ETFs vs stocks for investors in Canada, covering costs, taxes (TFSA, RRSP, non‑registered), risk, and investor profiles to help you decide.
Quick intro
What this article does: explains the difference between ETFs and individual stocks, the pros and cons of each in a Canadian context, tax and account considerations, and a practical decision framework. It's general information — consult the CRA or a professional for personal tax advice.
What are ETFs and stocks?
ETF (exchange-traded fund): a pooled fund that trades on an exchange and usually tracks an index, sector, commodity, or a basket of securities. Common in Canada: equities, fixed income, and commodity ETFs.
Stock: ownership of a single company's equity. Buying a share makes you a partial owner of that company.
Key differences at a glance
Diversification: ETFs offer built-in diversification across many securities; stocks concentrate risk in one company.
Cost structure: ETFs have a management fee (MER) and trading costs; individual stocks have trading commissions and spreads but no MER.
Management style: ETFs are often passive; stocks require active selection and ongoing research.
Liquidity and execution: Both trade intraday; liquidity varies by ETF and stock.
Tax/treatment in accounts: How dividends and distributions are taxed depends on account type (TFSA, RRSP, non‑registered) and fund domicile.
Why Canadians choose ETFs
Benefits
Broad diversification with a single trade — reduces company-specific risk.
Low ongoing cost for many passive ETFs (MERs can be under 0.10% for index ETFs).
Simple portfolio construction — use a few ETFs for global equity, bonds, and real assets.
Automatic rebalancing easier: fewer holdings to manage.
Good for tax‑sheltered accounts: ETFs work well inside RRSPs and TFSAs for long-term investing.
Drawbacks
MERs and tracking error: ETFs carry an MER and may not perfectly match index returns.
Less upside from single winners: owning an ETF dilutes the effect of one exceptionally good stock.
Dividend withholding complexity: U.S. dividends inside TFSAs and non‑registered accounts can face withholding tax; RRSPs may have treaty relief in some cases — details below.
Why some Canadians pick individual stocks
Benefits
Potential for higher returns if you pick successful companies.
Control: choose sectors, themes, or dividend-paying companies you understand.
Tax planning: you can harvest capital losses and time sales for tax efficiency (be mindful of superficial loss rules).
No MER: you don't pay fund management fees.
Drawbacks
Concentration risk: poor selection leads to larger losses.
Time and knowledge required to research companies and fundamentals.
Higher emotional trading: investors often buy/sell in reaction to news, harming returns.
Trading costs and commissions: although many Canadian brokers now offer commission-free ETF trading, stock trading may still incur fees depending on platform.
Costs and execution — what to watch
MER (management expense ratio): paid annually by ETF investors; reduces returns directly.
Trading commissions: many Canadian brokers (Wealthsimple Trade, Questrade, RBC) have varying fee structures — check before trading.
Bid‑ask spread: can be meaningful for thinly traded ETFs or small‑cap stocks.
Currency conversion fees: buying U.S.‑listed ETFs or stocks involves currency conversion; some brokers allow USD accounts to reduce conversion costs.
Hidden costs: tracking difference, securities lending revenue, and creation/redemption costs for ETFs.
Useful resource: see investor protection and brokerage guidance at the Financial Consumer Agency of Canada (FCAC).
Taxes and accounts — Canada‑specific considerations
Important accounts: RRSP, TFSA, RESP, and non‑registered.
TFSA
Primary benefit: tax‑free growth and withdrawals.
Dividend withholding: U.S. dividends in a TFSA are generally subject to 15% U.S. withholding tax; you cannot claim a foreign tax credit. That makes Canadian‑domiciled ETFs or Canadian dividend payers more tax‑efficient inside a TFSA.
Tip: hold Canadian dividend equities or Canadian-domiciled ETFs in a TFSA to avoid U.S. withholding.
RRSP
Primary benefit: tax-deferred growth; withdrawals taxed as income.
U.S. withholding: U.S. dividends in an RRSP are often exempt from withholding under the Canada‑U.S. tax treaty when properly handled by custodians — check with your broker.
Tip: U.S.-domiciled ETFs can be tax‑efficient inside RRSPs if the treaty exemption applies.
Non‑registered accounts
Tax treatment: capital gains taxed at 50% inclusion; eligible Canadian dividends receive a dividend tax credit.
Foreign withholding: U.S. dividends generally face 15% withholding; you cannot recover this in a TFSA but can claim foreign tax credits for withholding on non‑registered accounts.
RESP
Tax treatment: grows tax-deferred until withdrawn for education; grants and tax rules apply.
Withholding: similar to non‑registered for foreign dividends — check rules before placing U.S.-domiciled funds in an RESP.
Helpful links: CRA's pages on [TFSA rules and contribution room], [RRSP basics], and using [CRA My Account] to track contributions.
U.S. withholding and fund domicile — a short guide
Canadian‑domiciled ETFs that hold U.S. stocks typically see U.S. withholding at the fund level; this reduces distributions to Canadian shareholders.
U.S.‑domiciled ETFs held in a TFSA generally face U.S. withholding on dividends, and that withholding cannot be recovered.
RRSPs often avoid U.S. withholding on U.S. dividends due to the tax treaty, but this depends on the ETF's structure and broker administration.
Rule of thumb: If you want exposure to U.S. dividends inside TFSA, prefer Canadian-domiciled ETFs that use structures to minimize double taxation — but confirm with the provider.
Risk management and trading tactics
Superficial loss rule: in Canada, if you sell at a loss and buy the "same or identical" security within 30 days, the loss may be denied. Be careful when swapping between ETFs and stocks that track the same index.
DRIP (Dividend Reinvestment Plans): helpful for long-term compounding; check whether DRIP reinvests in the same currency or triggers fees.
Dollar-cost averaging: especially useful with stocks if you lack timing confidence.
Rebalancing: decide a schedule (annual or semi-annual) to maintain target allocation; fewer holdings (ETFs) make this simpler.
Decision framework — how to choose (step-by-step)
Define your objective: growth, income, or capital preservation?
Set your time horizon: short (<5 years), medium (5–10 years), or long (10+ years).
Assess risk tolerance: comfortable with volatility or prefer steadier returns?
Consider tax-sheltered accounts: TFSA for long-term tax-free growth; RRSP for tax-deferral and retirement.
Pick structure:
If you want low maintenance and broad diversification → consider ETFs.
If you enjoy research, want concentrated bets, or seek alpha → consider individual stocks.
Factor costs and taxes: check MERs, trading commissions, and withholding implications.
Implement portfolio: choose allocation—core (broad-market ETFs) and satellite (individual stocks or sector ETFs).
Review annually: rebalance and adjust for life changes.
Investor profiles and practical suggestions
Beginner / busy saver: Use low-cost broad-market ETFs (Canadian equity, U.S./global equity, and bond ETFs) inside TFSA/RRSP. Consider a target‑date or all‑in-one ETF if available.
DIY long-term investor: Build a core with ETFs and add a few individual Canadian dividend stocks for income and potential tax advantages (eligible dividend tax credit).
Experienced stock picker: Keep a concentrated stock sleeve for alpha, but maintain a diversified ETF core to manage risk.
Income-focused retiree: Use a mix of fixed-income ETFs and dividend-paying stocks; pay attention to tax-efficient placement (RRSP vs non‑registered).
Checklist: what to compare when choosing an ETF or stock
ETF: MER, index tracked, domicile, liquidity (AUM and average daily volume), bid-ask spread, distribution yield, tax efficiency.
Stock: valuation, competitive position, dividend history, balance sheet strength, volatility, sector exposure.
For both: suitability for account type (TFSA/RRSP), currency exposure, and ease of rebalancing.
Common myths debunked
"ETFs are always cheaper than stocks." Not necessarily — ETFs have MERs; a buy-and-hold on low-cost stocks can be cheaper if you avoid frequent trading.
"Stocks always outperform ETFs." Not guaranteed. Stocks can outperform but carry higher risk and require skill.
"TFSA is safe from all foreign taxes." No — U.S. withholding can apply to dividends inside a TFSA.
Where to learn more (Canadian resources)
Read investor guidance at the Financial Consumer Agency of Canada (FCAC) for brokerage and account basics.
Check the Canada Revenue Agency (CRA) on RRSP, TFSA, and capital gains rules.
Learn ETF mechanics and fund facts from major Canadian ETF providers and the Canadian ETF Association.
Final takeaways
ETFs suit most Canadians who want low-cost diversification, especially in TFSA and RRSP accounts.
Individual stocks suit those willing to do research and accept concentration risk for higher potential returns.
Mixing both often works best: build a diversified ETF core and use stocks as satellites for added upside.
Always consider tax treatment, account type, costs, and your personal time horizon when choosing.
For account rules and contribution limits, check the CRA pages: [TFSA basics and contribution room] and [RRSP information].