The major Canadian and U.S. stock markets, while still subject to volatility, continue to offer attractive returns for investors—especially if you buy the top stocks. All in all, we think that if you can afford to stay in the market for several years or longer, now is a good time for new buying. We see ETFs (exchange traded funds) like iShares S&P/TSX 60 Index ETF as one way for you to profit from the continuing stock market rise while at the same time cutting your risk.
That’s because, unlike many other financial innovations, ETFs don’t load you up with heavy management fees, or tie you down with high redemption charges if you decide to get out of them. Regulatory changes in Canada, introduced starting in 2015, have also forced investment brokers and advisors to disclose the commissions they earn on mutual funds. That has helped to drive interest in ETFs. They’re considered a low-cost alternative to mutual funds.
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ETFs trade on stock exchanges, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell ETFs. However, ETFs’ low management fees still give them a cost advantage over most conventional mutual funds.
There’s one more advantage: ETF’s change their holdings only when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital-gains bills generated by the yearly distributions most conventional mutual funds pay out to unitholders.
The best of these funds offers a diversified group of stocks and charge you low management fees. Here’s one we think you should pass on buying for now, as well as another we favour in its place.
ISHARES MSCI CANADA INDEX FUND (New York symbol EWC) is a sell in favour of a cheaper alternative. The ETF (New York symbol EWC; buy or sell through brokers; ca.ishares.com) holds the stocks in the Morgan Stanley Capital International Canada Index.
The fund has a 0.50% MER and gives you a yield of 2.2%. It began trading for investors on March 12, 1996.
The ETF’s top holdings are Royal Bank, 7.1%; TD Bank, 5.4%; Shopify, 4.7%; Canadian Natural, 4.1%; CPKC, 4.1%; Enbridge, 3.8%; CN Rail, 3.6%; Bank of Montreal, 3.5%; Bank of Nova Scotia, 3.1%; Brookfield Corp., 2.9%; and Constellation Software, 2.7%.
If you want to own a Canadian index fund, you should instead buy the iShares S&P/TSX 60 Index ETF (see below). You’ll pay about a third as much in management fees, while holding essentially the same stocks.
ETFs: How to get the same stocks for a lower fee
ISHARES S&P/TSX 60 INDEX ETF (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. Investors pay an MER of just 0.18%. The units give you a 3.0% 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 are Royal Bank, 7.4%; TD Bank, 5.6%; Shopify, 5.0%; Canadian Natural, 4.4%; CPKC, 4.3%; Enbridge, 4.0%; CN Rail, 4.0%; Bank of Montreal, 3.7%; and Bank of Nova Scotia, 3.2%.
Recommendation in Canadian Wealth Advisor: iShares MSCI Canada Index Fund is a sell in favor of the iShares S&P/TSX 60 Index ETF.
