Why This Matters
Interest rates remain elevated in early 2025, and many Canadian beginners are asking: “Should I just stick with risk-free yield, or is it time to add growth exposure?” “Index Funds or Treasury Bills?”
The simplest starting point is choosing between Government of Canada T-Bills and index funds. One is stable and short-term, the other is long-term and growth-oriented. Together, they create balance.
Tooltips:
Index Fund – A basket of stocks/bonds that tracks a market index.
Treasury Bill (T-Bill)] A short-term debt instrument issued by the Government of Canada, maturing in less than 1 year.
Volatility – How much an investment’s price fluctuates.
Real Return – Return after inflation.
Visual: Risk vs. Return
Illustrative only. Not historical performance.
What Are Treasury Bills (Canada)?
- Issuer: Government of Canada
- Tenors: Typically 3, 6, and 12 months
- How they work: You buy at a discount and receive full face value at maturity.
- Where to buy: Online brokers (Questrade, Wealthsimple, RBC Direct Investing, TD Direct Investing, etc.), or through primary auctions.
- Strengths:
- Extremely low default risk
- Short-term flexibility
- Competitive yield when rates are high
- Risks:
- Inflation risk if yields < inflation
- Reinvestment risk (new T-Bill may have lower rate at maturity)
- Taxed as interest income in Canada (fully taxable, no dividend tax credit or capital gains treatment)
What Are Index Funds?
- Definition: Funds (mutual funds or ETFs) that track a stock market index.
- Popular Examples in Canada:
- Canadian Market: Vanguard FTSE Canada All Cap ETF (VCN)
- Global Diversification: iShares Core MSCI All Country World ex Canada ETF (XAW)
- US Market: Vanguard S&P 500 Index ETF (VFV)
- Strengths:
- Diversification across many companies/countries
- Strong long-term growth potential
- Easy to automate via ETFs
- Risks:
- Prices fluctuate daily/annually
- Currency exposure if holding U.S./global ETFs (FX risk)
- Small annual [Tooltip: Expense Ratio] reduces returns slightly
Beginner Guide: How to Choose an Index Fund in Canada.
Head-to-Head: Index Funds vs. Canadian T-Bills
| Feature | Treasury Bills (Canada) | Index Funds |
|---|---|---|
| Goal | Capital preservation, yield | Long-term wealth growth |
| Time Horizon | 3–12 months | 3–5+ years |
| Risk/Volatility | Very low | Medium–high |
| Liquidity | Matures at face value; can be sold before maturity | Traded daily on exchanges |
| Inflation Protection | Weak (if inflation > yield) | Historically strong long-term |
| FX Exposure | None (CAD) | Some, if global ETFs |
| Fees | None beyond brokerage commission | Low expense ratios |
| Taxes | Fully taxable as interest | Dividends/capital gains (more tax-efficient) |
| Best For | Emergency funds, short-term savings | Retirement, long-term investing |
How to Decide – Index Funds or Treasury Bills?
- What’s your time horizon?
- < 1 year → T-Bills
- 3+ years → Index funds
- How do you handle market swings?
- Want stability → T-Bills
- Comfortable with ups/downs → Index funds
- Do you need CAD stability?
- For rent, tuition, near-term expenses → T-Bills
- For retirement and long-term goals → Index funds
Starter Portfolios
- Conservative: 80% T-Bills • 20% index fund
- Balanced: 60% T-Bills • 40% index fund
- Growth: 20% T-Bills • 80% index fund
Want a beginner-friendly allocation guide? Download the First $10k Investing Plan→ Beginner Investing Made Easy: Your First Safe Steps
How to Buy Treasury Bills in Canada
- Open a brokerage account (Questrade, Wealthsimple, RBC Direct, TD Direct, etc.).
- Fund your account with CAD.
- Search for T-Bills in the fixed-income or bond section.
- Choose term (e.g., 3, 6, or 12 months).
- Enter order size and place purchase.
- At maturity, you receive face value; decide whether to reinvest.
Pro Tips (For Canadian Beginners)
- Use T-Bills for your emergency fund and short-term needs.
- Use index funds in TFSA/RRSP accounts to maximize tax efficiency.
- Automate contributions monthly.
- Keep costs low (stick to ETFs with low expense ratios).
- Don’t chase last quarter’s returns—stick to your plan.
FAQs – Index Funds or Treasury Bills?
Q1: Are T-Bills in Canada risk-free?
They’re backed by the Government of Canada, making default risk negligible. The risks are inflation and reinvestment.
Q2: How are T-Bill returns taxed in Canada?
T-Bill income is fully taxable as interest (like GICs or bonds).
Q3: Can I lose money in index funds?
Yes, in the short term. But over decades, diversified index funds have historically delivered strong growth.
Q4: Should I put index funds in a TFSA or RRSP?
Yes—these accounts shelter gains from tax and maximize compounding.
Q5: Can I mix both?
Definitely. Many Canadians combine T-Bills (short-term safety) with index funds (long-term growth).
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David Edwin
September 4, 2025 at 3:15 pm
This was really insightful and educative.
David Edwin
September 4, 2025 at 3:16 pm
Good to hear that.