Top Performing Canadian ETFs in 2023

Imagine you had invested in one of Canada’s top-performing ETFs at the start of 2023. By the end of the year, your returns might surprise you. The year saw market volatility, rising inflation concerns, and geopolitical shifts, yet certain Canadian ETFs thrived in this environment. What made these funds stand out? Let's dive deep into the performance metrics and strategies behind the best-performing Canadian ETFs of 2023.

Why This Matters Now

Canada's ETF market has evolved tremendously, with more investors looking for ways to diversify and achieve returns without the high fees of mutual funds. In 2023, while some sectors struggled, others rose above expectations. If you're wondering where to place your next dollar, knowing which ETFs performed best might help guide your decision-making.

Big Picture: The year was defined by volatility. But within that volatility came opportunity. Some ETFs that outperformed in 2023 are poised to continue doing well in 2024. Below, we explore how these funds did so well and what set them apart from the competition.

ETF #1: Horizons S&P/TSX 60 Index ETF (HXT)

The Horizons S&P/TSX 60 Index ETF stands out as one of the top performers in 2023. This ETF tracks the performance of 60 large Canadian companies listed on the TSX.

• 2023 Return: 12.8%
• Expense Ratio: 0.03%
• Market Focus: Large-cap Canadian companies

What drove its performance? The answer lies in the weight of key sectors like energy and financials. Canada's energy sector performed robustly despite fluctuating oil prices, and the financial sector managed well, given the increase in interest rates. HXT's exposure to giants like Royal Bank of Canada and Canadian Natural Resources proved invaluable in this volatile market.

ETF #2: iShares S&P/TSX Capped Energy Index ETF (XEG)

The XEG ETF had an incredible year, especially for those who believed in a sustained oil recovery.

• 2023 Return: 24.5%
• Expense Ratio: 0.61%
• Market Focus: Canadian energy companies

With the global energy crisis in the backdrop, oil prices fluctuated, but remained relatively high throughout the year. This ETF's exposure to major players like Suncor Energy and Cenovus Energy helped it ride out the volatility and deliver exceptional returns for its investors. High oil prices + energy demand = strong performance.

ETF #3: BMO Low Volatility Canadian Equity ETF (ZLB)

Low volatility was key in 2023. Amidst global economic instability, ZLB provided a haven for investors looking for stability.

• 2023 Return: 10.9%
• Expense Ratio: 0.39%
• Market Focus: Low-volatility Canadian equities

The beauty of ZLB lies in its stock selection—the ETF targets companies that demonstrate consistent performance, minimizing risk during volatile periods. In 2023, this fund’s exposure to consumer staples and utilities proved to be a strategic choice, given the uncertain economic environment.

ETF #4: Vanguard FTSE Canada All Cap Index ETF (VCN)

VCN is another all-encompassing ETF that offers exposure to the entire Canadian market—large, mid, and small-cap companies. In a volatile year like 2023, diversification proved to be a smart move.

• 2023 Return: 9.6%
• Expense Ratio: 0.05%
• Market Focus: Total Canadian market

The fund's balance between different market capitalizations helped reduce risk while still capturing growth. While the energy sector had a strong year, so did the industrial and tech sectors, which VCN was also well exposed to. It's a great pick for those looking for broad market exposure without focusing too heavily on any one industry.

ETF #5: Purpose Bitcoin ETF (BTCC)

A wildcard in the Canadian ETF space in 2023 was Purpose Bitcoin ETF, which is Canada’s first Bitcoin ETF. Cryptocurrency markets were turbulent, but this ETF still managed to capture interest, especially in the first half of the year.

• 2023 Return: 14.3%
• Expense Ratio: 1.00%
• Market Focus: Bitcoin

Despite the ups and downs of Bitcoin prices, Purpose Bitcoin ETF benefited from a series of institutional interest and broader acceptance of cryptocurrencies. For those with a higher risk tolerance, this ETF offered a fascinating opportunity to participate in the crypto market without directly holding Bitcoin.

Performance Factors: What Drove Success in 2023?

Several factors contributed to the strong performance of Canadian ETFs in 2023:

1. Sector Allocation: Energy, technology, and financials performed exceptionally well.
2. Interest Rate Increases: Financial and real estate-focused ETFs benefited from rising interest rates.
3. Global Energy Crisis: Energy ETFs like XEG surged as oil and gas prices remained elevated.
4. Low Volatility Preference: In uncertain times, ETFs like ZLB, which target lower volatility stocks, attracted investors seeking stability.

What to Watch for in 2024

• Energy and Renewables: Energy ETFs, especially those focused on clean energy, may continue to be a strong play given the global focus on sustainability.
• Tech and AI: Canadian ETFs with exposure to tech companies, especially in the AI space, could see big gains as demand for AI services and products expands.
• Interest Rates and Financials: Watch for ETFs in the financial sector to perform well if interest rates remain high, as they tend to benefit from higher lending margins.

Conclusion

Canadian ETFs performed well in 2023, especially those with exposure to key sectors like energy and financials. While the broader market experienced turbulence, select ETFs capitalized on unique market conditions to generate significant returns. Investors who carefully chose their ETFs based on sector trends and market conditions found themselves rewarded handsomely.

Looking forward, the lessons from 2023 will remain critical—sector selection, volatility management, and keeping an eye on global trends will continue to shape the ETF landscape in 2024 and beyond.