More and more, exchange-traded funds (ETFs) are finding their way into the portfolios of investors.
That’s because, unlike many other financial innovations, they 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 exchange-traded funds (ETFs). They’re considered a low-cost alternative to mutual funds.
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.
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.
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 bills generated by the yearly distributions most conventional mutual funds pay out to unitholders.
Below are six ETFs that hold mostly blue-chip stocks. They’re widely traded on Canadian and U.S. exchanges. Each ETF mirrors, or tracks, the performance of a major stock market index. That’s different from narrower indexes that focus on resources or themes such as solar power or biotech.Of course, you pay brokerage commissions to buy and sell these ETFs. But their low management fees give them a cost advantage over most mutual funds.
Below, we update our advice on all six exchange-traded funds (ETFs)—five buys and one we don’t recommend.
SHARES S&P/TSX 60 INDEX ETF $25.57(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, 8.3%; TD Bank, 7.8%; Enbridge, 5.3%; Bank of Nova Scotia, 4.9%; CN Rail, 4.9%; Suncor Energy, 3.6%; Bank of Montreal, 3.5%; TC Energy (formerly TransCanada Corp.), 3.3%; Brookfield Asset Management, 3.1%; and BCE, 3.0%.
iShares S&P/TSX 60 Index ETF is a buy.
ISHARES CANADIAN SELECT DIVIDEND INDEXETF $25.82(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 4.5%.
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, 8.0%; Royal Bank, 6.5%; Bank of Montreal, 6.0%; Bank of Nova Scotia, 5.4%; BCE, 5.1%; TC Energy, 5.1%; TD Bank, 4.8%; Laurentian Bank, 4.6%; Emera, 4.2%, National Bank, 4.1%; and IGM Financial, 3.9%.
iShares Canadian Select Dividend is a buy.
SPDR S&P 500 ETF $309.28(New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index; they are 500 major U.S. companies chosen based on their market cap, liquidity and industry group. The ETF began trading on January 22, 1993.
The highest-weighted stocks for the SPDR S&P 500 ETF are Microsoft, 4.2%; Apple, 3.6%; Amazon.com, 3.2%; Alphabet, 2.7%; Facebook, 1.9%; Berkshire Hathaway, 1.7%; Johnson & Johnson, 1.5%; JPMorgan Chase, 1.5%; ExxonMobil, 1.3%; and Visa, 1.2%.
The fund’s MER is a very low 0.09%; it yields 1.8%.
SPDR S&P 500 ETF is a buy.
ISHARES MSCI CANADA INDEX FUND $29.51(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 yields 2.3%. It began trading on March 12, 1996.
The ETF’s top holdings are Royal Bank, 8.1%; TD Bank, 7.6%; Enbridge, 4.9%; Bank of Nova Scotia, 4.6%; CN Rail, 4.5%; Suncor, 3.6%; Bank of Montreal, 3.5%; TC Energy, 3.1%; and Brookfield Asset Management, 2.9%.
If you want to own a Canadian index fund, you should buy the iShares S&P/TSX 60 Index ETF (see page 52). You’ll pay about a third as much in management fees.
We don’t recommend the iShares MSCI Canada Index Fund.
SPDR DOW JONES INDUSTRIAL AVERAGE ETF $277.60 (New York symbol DIA; buy or sell through brokers; www.spdrs.com) holds the 30 stocks that make up the Dow Jones Industrial Average.
The ETF began trading on January 14, 1998. The MER for the SPDR Dow Jones Industrial Average ETF is a low 0.17%; it yields 2.1%.
The fund’s top holdings are Boeing Company, 9.3%; UnitedHealth Group, 6.3%; Home Depot, 5.3%; McDonald’s Corp., 5.3%; Apple Inc., 5.1%; Goldman Sachs, 5.1%; 3M Company, 4.4%; Visa Inc., 4.4%; Travelers Companies, 3.8%; and Johnson & Johnson, 3.6%.
SPDR Dow Jones ETF is a buy.
INVESCO QQQ ETF $201.46 Nasdaq symbol QQQ; buy or sell through brokers; www.invesco.com), formerly called the PowerShares QQQ ETF, holds stocks that represent the Nasdaq 100 Index. They include the exchange’s 100 largest stocks by market cap. This ETF first began trading on March 10, 1999.
The Nasdaq 100 Index contains shares of companies in a number of major industries, including telecommunications, computer hardware equipment and software, retail/wholesale trade, and biotechnology. It does not contain financial firms.
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