Topic: ETFs

Two Canadian ETFs hold most of Canada’s best stocks

Canadian ETFs

Today, we look at two Canadian ETFs that hold many of the Canadian stocks we recommend for 2017. iShares S&P/TSX 60 Index ETF and iShares Canada Select Dividend Index ETF respectively mirror subindexes holding the 60 most-heavily trades stocks and 30 of the highest-yielding dividend stocks on the Toronto exchange. Each represents a low-fee way of holding many of Canada’s best stocks.

Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or subindex. They hold a more or less fixed selection of securities that represent the holdings that go into calculating the index or sub-index.

ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.

Prices of ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most mutual funds.

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As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains taxes generated by the yearly distributions most conventional mutual funds pay out to unitholders.

Note that the best ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditional ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

In contrast, there are a lot of ETFs that have been created to tap into popular, but risky, themes and fads. So you need to be very selective with your ETF holdings.

Theme investing has a natural appeal. It simplifies things. Investors like it because they feel it can put their investment returns into overdrive. Some also feel it adds fringe benefits to their investing, by letting them support social or environmental objectives. Brokers also like it because it gives them a rationale to recommend a variety of stocks.

When you focus on theme investing, however, it’s easy to overlook the fundamentals.

Below we update our advice on two Canadian ETFs—both of which we like—and both of which follow the traditional, passive style we recommend..

SHARES S&P/TSX 60 INDEX ETF $23.10 (Toronto symbol XIU; buy or sell through brokers; is a good low-fee way to buy the top stocks on the TSX. Specifically, the units are made up of stocks that represent the S&P/TSX 60 Index—the 60 largest, most heavily traded stocks on the exchange.

The ETF began trading on September 28, 1999. Expenses are now just 0.18% of assets, and it yields 2.7%.

The S&P/TSX 60 Index mostly consists of high-quality companies. However, it must ensure that all sectors are represented, so it holds a few we wouldn’t include.

The fund’s top holdings are Royal Bank, 8.8%; TD Bank, 7.6%; Enbridge, 5.8%; Bank of Nova Scotia, 5.8%; CN Railway, 4.8%; Suncor Energy, 4.4%; Bank of Montreal, 4.0%; BCE, 3.5%; TransCanada Corp., 3.5%; and Canadian Natural Resources, 3.1%.

iShares S&P/TSX 60 Index ETF is a buy.

ETFs: Financial stocks dominate this ETF with over 50% of holdings

SHARES CANADIAN SELECT DIVIDEND INDEX ETF $24.50 (Toronto symbol XDV; buy or sell through brokers; holds 30 of the highest-yield Canadian stocks. Its selections are based on dividend growth, yield and payout ratios. The weight of any one stock is limited to 10% of the ETF’s assets. The fund’s MER is 0.56%, and it yields 3.7%. This ETF began trading on September 28, 1999.

The MER for iShares Canadian Select Dividend is higher than the MER for iShares S&P/TSX 60 Index ETF; that’s because it’s more actively managed. Most market indexes are set up so that the stocks in the index are those with the highest market capitalization and also the most widely traded. However, the iShares Canadian Select Dividend Index ETF focuses on the 30 stocks that it sees as having the highest dividend yields, but also the best propects for dividend growth and sustainability.

The fund’s top holdings are Agrium, 8.0%; CIBC, 8.0%; Royal Bank, 5.7%; Bank of Montreal, 5.6%; BCE, 5.3%; Bank of Nova Scotia, 4.9%; TransCanada, 4.4%; Laurentian Bank, 4.0%; IGM Financial, 3.9%; and Emera, 3.7%.

iShares Canadian Select Dividend is a buy.

For a recent article on two foreign ETFs that can benefit Canadians, read Two international ETFs offer timely diversification for Canadian investors.

Do you think ETFs are a better investment than mutual funds?

This article was initially published in November 2016 and is updated regularly.


  • Subhash Juneja

    Excellent article that will be useful to many of your readers who find it difficult to pick ETFs given that there are too many of them. However, I would like to ask you about selecting equal weighted ETFs to avoid concentration of one sector in the ETF such as the financial sector in ISHARES S&P/TSX 60 INDEX ETF. As well ETFs with high MERs e.g. ISHARES CANADIAN SELECT DIVIDEND INDEX ETF.

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