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.
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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 bills generated by the yearly distributions most conventional mutual funds pay out to unitholders.
Below are six exchange-traded funds (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 may 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 now see as a sell.
ISHARES S&P/TSX 60 INDEX ETF is a buy.The 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 0.18%. The units give you a 2.7% 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, 7.8%; Shopify, 7.4%; TD Bank, 7.1%; CN Rail, 4.9%; Scotiabank, 4.5%; Enbridge, 4.4%; Brookfield Asset Management, 3.7%; Bank of Montreal, 3.4%; and CP Rail, 3.0%.
ISHARES CANADIAN SELECT DIVIDEND INDEXETF 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 0.55%. The ETF, which began trading on September 28, 1999, yields a high 4.2%.
Most market-index exchange-traded funds (ETFs) 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 are CIBC at 8.1%; Canadian Tire, 6.8%; Bank of Montreal, 6.1%; Royal Bank, 6.1%; Labrador Iron Ore, 5.4%; Scotiabank, 5.0%; TC Energy, 4.9%; BCE, 4.8%; and TD, 4.5%.
SPDR S&P 500 ETF is a buy.The U.S. ETF(New York symbol SPY; buy or sell through brokers; www.spdrs.com) offers investors exposure to the stocks in the S&P 500 Index; they are 500 major U.S. companies based on their market cap, liquidity and industry group. The ETF began trading on January 22, 1993.
The fund’s MER is a very low 0.09%; it yields 1.4%.
The highest-weighted stocks for investors in the SPDR S&P 500 ETF are Apple, 5.7%; Microsoft, 5.3%; Amazon.com, 3.9%; Alphabet, 3.6%; Facebook, 2.1%; Tesla, 1.5%; Berkshire Hathaway, 1.5%; JPMorgan Chase, 1.4%; Johnson & Johnson, 1.3%; Visa, 1.1%; UnitedHealthGroup, 1.0%; Walt Disney, 1.0%; Procter & Gamble, 1.0%; Nvidia, 1.0%; Home Depot, 1.0%; and Mastercard Inc., 0.9%.
ISHARES MSCI CANADA INDEX FUND 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 0.51% MER and gives you a yield of 1.9%. It began trading for investors on March 12, 1996.
The ETF’s top holdings are Royal Bank, 7.4%; Shopify, 6.7%; TD Bank, 6.7%; Bank of Nova Scotia, 4.4%; CN Rail, 4.3%; Enbridge, 3.8%; Bank of Montreal, 3.3%; Brookfield Asset Management, 3.3%; CP Rail, 3.0%; CIBC, 2.6%; TC Energy, 2.5%; and Manulife, 2.5%.
If you want to own Canadian index exchange-traded funds (ETFs), you should buy the iShares S&P/TSX 60 Index ETF (see page 4). You’ll pay about a third as much in management fees, while holding essentially the same stocks.
SPDR DOW JONES INDUSTRIAL AVERAGE ETF is a buy.The ETF(New York symbol DIA; buy or sell through brokers; www.spdrs.com) lets you tap the 30 stocks that make up the Dow Jones Industrial Average.
The ETF began trading on January 14, 1998. Your MER for the SPDR Dow Jones Industrial Average ETF is a low 0.16%; it offers investors a yield of 1.7%.
The fund’s top holdings for unitholders are UnitedHealth Group, 7.4%; Goldman Sachs, 6.5%; Home Depot, 6.1%; Boeing Company, 5.1%; Amgen, 5.0%; Microsoft, 4.7%; Caterpillar, 4.6%; McDonald’s Corp., 4.5%; Honeywell, 4.3%; Salesforce.com, 4.2%; and Visa Inc., 4.2%.
INVESCO QQQ ETF is a buy for aggressive investors.The ETF(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 fund’s MER is 0.20%. It gives you a yield of 0.5%.
The Nasdaq 100 Index lets you own 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.
The ETF’s highest-weighted stocks are Apple, 10.9%; Microsoft, 9.6%; Amazon.com, 8.4%; Alphabet, 7.1%; Tesla, 4.1%; Facebook, 3.8%; Nvidia, 2.7%; PayPal Holdings, 2.3%; Intel, 2.1%; and Comcast Corp., 2.0%.
Most of the other top holdings for investors are also high quality: Adobe, 1.9%; Netflix, 1.9%; Cisco, 1.8%; PepsiCo, 1.6%; Broadcom, 1.6%; Texas Instruments, 1.4%; T-Mobile, 1.3%; Costco Wholesale, 1.3%; and Qualcomm, 1.3%.
How much of your mutual fund portfolio has now been converted over to ETF?
This article was originally published in 2017 and is regularly updated.
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