Exchange-traded funds (ETFs) may have a place in your portfolio. 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. Instead, they give you a low-cost, flexible, convenient alternative to mutual funds. ETFs are also getting a boost from the last wave of CRM2 changes coming into effect in July 2016. Those rules will force brokers to fully disclose all the fees and trailers attached to mutual funds.
Unlike those other 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.
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, we update our advice on six ETFs — five buys and one sell.
ISHARES S&P/TSX 60 INDEX ETF $20.39 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way to buy the top stocks on the TSX. The units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Expenses are just 0.17% of assets.
The index mostly consists of high-quality companies. However, it must ensure that all sectors are represented, so it holds a few we wouldn’t include.
The index’s top holdings are Royal Bank, 7.8%; TD Bank, 7.1%; Valeant Pharmaceuticals, 5.6%; Bank of Nova Scotia, 5.4%; CN Railway, 4.8%; Suncor Energy, 3.6%; Enbridge, 3.6%; Bank of Montreal, 3.5%; BCE, 3.2%; Manulife Financial, 3.1%; Canadian Natural Resources, 2.9%; Trans- Canada Corp., 2.8%; Brookfield Asset Management, 2.7%; CIBC, 2.6%; and CP Rail, 2.5%.
iShares S&P/TSX 60 Index ETF is a buy.
ISHARES CANADIAN SELECT DIVIDEND INDEX ETF $22.20 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highestyielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of the ETF’s assets. The fund’s MER is 0.55%, and it yields 4.2%.
The fund’s top holdings are CIBC, 8.4%; Bank of Montreal, 6.3%; Royal Bank, 6.1%; Bank of Nova Scotia, 5.3%; BCE, 5.1%; IGM Financial, 4.7%; Ag Growth International, 4.4%; Laurentian Bank of Canada, 4.3%; TransCanada Corp., 4.2%; and TD Bank, 4.0%.
The ETF holds 53.5% of its assets in financial stocks. The top Canadian finance stocks have sound prospects. However, if you invest in this ETF, be sure to adjust the rest of your portfolio so it won’t be overly concentrated in the financial sector.
iShares Canadian Select Dividend is a buy.
SPDR S&P 500 ETF $204.91 (New York symbol SPY; buy or sell through brokers; www.spdrs.com) holds the stocks in the S&P 500 Index, which consists of 500 major U.S. companies that are chosen based on their market cap, liquidity and industry group.
The index’s highest-weighted stocks are Apple, ExxonMobil, Microsoft, Procter & Gamble, Johnson & Johnson, J.P. Morgan Chase, Pfizer, General Electric, Berkshire Hathaway and Wells Fargo & Co. The fund’s expenses are just 0.10% of its assets.
If you want exposure to the S&P 500 Index, the SPDR S&P 500 ETF is a buy.
SPDR DOW JONES INDUSTRIAL AVERAGE ETF $175. 63 (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 SPDR Dow Jones ETF’s top holdings are Apple, IBM, Goldman Sachs Group, Home Depot, 3M, Travelers Cos., Walt Disney Co., UnitedHealth Group, United Technologies and Boeing. The fund’s expenses are about 0.17% of its assets.
SPDR Dow Jones ETF is a buy.
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POWERSHARES QQQ ETF $105.60 (Nasdaq symbol QQQ; buy or sell through brokers; www.invescopowershares.com), formerly called Nasdaq 100 Trust Shares, holds stocks that represent the Nasdaq 100 Index, which consists of the 100 largest shares on the Nasdaq exchange, based on market cap.
The Nasdaq 100 Index contains shares of companies in a number of major industries, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies. The fund’s expenses are about 0.20% of its assets.
The index’s highest-weighted stocks are Apple, Microsoft, Amgen, Google, Cisco Systems, Intel Corp., Amazon.com, Gilead Sciences, Comcast and Facebook.
PowerShares QQQ ETF is a buy for aggressive investors only.
ISHARES MSCI CANADA INDEX FUND $27.18 (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 0.49% MER.
The index’s top holdings are Royal Bank, 7.0%; TD Bank, 8.3%; Valeant Pharmaceuticals, 5.2%; Bank of Nova Scotia, 4.9%; CN Railway, 4.4%; Suncor Energy, 3.3%; Enbridge, 3.3%; Bank of Montreal, 3.1%; and Manulife Financial, 2.7%.
If you want to own a Canadian index fund, you should buy the iShares S&P/TSX 60 Index Fund (see previous page). You’ll pay about a third of the management fees.
We don’t recommend iShares MSCI Canada.
Note: This article was originally published in 2010 and is regularly updated.