With substantially lower fees, our preferred Canadian ETF has delivered comparable returns for investors at lower cost
Investors use ETFs in a variety of ways. To build the best ETF portfolio, you should know both the advantages they offer, and some potential drawbacks.
Diversification is one of the most attractive features of ETFs. With an ETF, an investor is accessing all the stocks in an index.
ETFs give investors the broad market exposure of a traditional mutual fund, plus the ability to trade at will with nominal fees. The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term.
Investors can buy ETFs via stock exchanges, as well as on margin. They can also sell them short. High quality ETFs offer well-diversified portfolios with exceptionally low management fees.
The MERs (Management Expense Ratios) are also generally much lower on ETFs than on conventional mutual funds. That’s because most ETFs take a much simpler approach to investing. Instead of actively managing their portfolios, these ETF providers invest so as to mirror the holdings and performance of a particular stock-market index.
ISHARES MSCI CANADA INDEX FUND is a sell in favor 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 2.0%. It began trading for investors on March 12, 1996.
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The ETF’s top holdings are Royal Bank, 7.5%; Shopify, 5.5%; TD Bank, 5.0%; Enbridge, 4.6%; Brookfield Corp., 3.4%; Bank of Montreal, 3.3%; CPKC, 3.1%; Canadian Natural Resources, 3.1%; Constellation Software, 3.0%; Bank of Nova Scotia, 2.8%; and Agnico Eagle, 2.6%.
If you want to own a Canadian index fund, you should instead buy the largest TSX ETF, the iShares S&P/TSX 60 Index ETF. You’ll pay about a third as much in management fees, while holding essentially the same stocks.
Here’s our preferred fund for Canadian equity exposure
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. This is the largest TSX ETF.
The ETF began trading on September 28, 1999. Investors pay an MER of just 0.18%. The units give you a 2.8% 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, 7.9%; Shopify, 5.8%; TD Bank, 5.2%; Enbridge, 4.8%; Brookfield Corp., 3.7%; Bank of Montreal, 3.5%; CPKC, 3.3%; Canadian Natural Resources, 3.2%; and Constellation Software, 3.1%.
Recommendation in Canadian Wealth Advisor: iShares MSCI Canada Index Fund is a sell in favour of the iShares S&P/TSX 60 Index ETF.
