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 of the Canadian ETFs represents a low-fee way of holding many of the country’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.


Less likely to harbour hidden risks

“Here’s a good general rule to follow when choosing investments: Simple is better. The easier an investment is to explain and understand, the less likely it is to harbour hidden risks and costs that can only work against you. As the old investor saying goes, “Stick with plain vanilla.”
Pat McKeough explains why in this special report and recommends 11 ETFs for a stronger portfolio.

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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.

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 $24.45 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way 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. Its MER is just 0.18%; it yields 2.9%.

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 fund’s top holdings are Royal Bank, 8.2%; TD Bank,
7.6%; Enbridge, 5.6%; Bank of Nova Scotia, 5.0%; CN Rail, 4.9%; Suncor Energy, 3.9%; Bank of Montreal, 3.6%; TransCanada Corp., 3.2%; Brookfield Asset Management, 3.1%; and BCE, 3.3%.

ISHARES CANADIAN SELECT DIVIDEND INDEX ETF $24.66 (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 0.55%, and the ETF, which began trading on September 28, 1999, yields a high 4.4%.

Most market indexes are set up 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. That means this ETF is more actively managed than, say, the iShares S&P/TSX 60 Index ETF. As a result, its MER is higher.

The fund’s top holdings are CIBC, 8.4%; Royal Bank, 6.3%; Bank of Montreal, 6.2%; Bank of Nova Scotia, 5.2%; BCE, 5.1%; TransCanada, 4.8%; TD Bank, 4.6%; Laurentian Bank, 4.2%; National Bank, 4.0%; and Emera, 4.0%.

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 originally published in 2016 and is regularly updated.

Comments

  • Subhash J.

    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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