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.
Today, we look at two Canadian ETFs that hold many of the Canadian stocks we recommend for 2022. iShares S&P/TSX 60 Index ETF and iShares Canada Select Dividend Index ETF mirror, respectively, sub-indexes holding the 60 most-heavily trades stocks and 30 of the highest-yielding dividend stocks on the Toronto exchange. Each of the Canadian ETFs represents a low-fee way of holding many of the country’s best stocks.
If you need a primer on ETFs, download The ETF Investor’s Handbook (it’s free!) Our comprehensive handbook tells you why ETFs are so popular, which ETFs are best for investors (not investment firms) and how to use ETFs to increase your wealth and enrich your retirement.
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ETF, including Canadian 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 Canadian 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.
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 unit holders.
Note that the best Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditionally, Canadian 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 Canadian 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.
Two Canadian ETFs that are a BUY
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.
iSHARES S&P/TSX 60 INDEX ETF (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way for you to buy the top companies listed on the TSX. Specifically, the fund’s holdings represent the S&P/TSX 60 Index. It focuses on the 60 largest, most heavily traded stocks on the exchange.
The ETF began trading on September 28, 1999. Investors pay an MER of just 0.15%. The units give you a 2.9% yield.
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 companies we would not include.
The quality of the ETF’s holdings should drive your future gains: its top stocks include Royal Bank; Shopify; TD Bank; Scotiabank; Enbridge; and CN Rail.
iSHARES CANADIAN SELECT DIVIDEND INDEXETF (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) is a buy. The fund (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yield Canadian stocks. The ETF also considers dividend growth and payout ratios to make its selections.
The weight of any one stock holding is limited to 10% of the fund’s assets. Its MER is 0.50%. The ETF, which began trading on September 28, 1999, yields a high 4.4%.
Most market indexes are set up for investors so that the stocks in the index are those with the highest market capitalization and are 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; it also considers their prospects for dividend growth and sustainability for investors.
That means this ETF is more actively managed than, say, the iShares S&P/TSX 60 Index ETF. As a result, you pay a higher MER.
The fund’s top holdings include CIBC; Canadian Tire; Bank of Montreal; Royal Bank; Scotiabank; TD; and TC Energy.
You may be surprised at how much you can get out of ETFs. They open up new investment opportunities for every kind of investing. Subscribe to our Best ETFs for Canadian Investors advisory, and you will get our recommendations on the best Canadian ETFs and the ETFs that give you the simplest way to benefit from the top U.S. stocks.
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