Exchange traded funds (ETFs) are set up to mirror the performance of a stock-market index or subindex. They hold a more or less fixed selection of securities that represent the holdings that go into the calculation of the index or sub-index.
ETFs trade on stock exchanges, just like stocks. In contrast, you can only buy conventional mutual funds at the end of the day, at a price that reflects the fund’s value at the close of trading.
Prices of ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most 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.
Here are two Canadian ETFs we cover regularly in Canadian Wealth Advisor.
ISHARES S&P/TSX 60 INDEX FUND (Toronto symbol XIU; 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, 8.3%; TD Bank, 7.3%; Bank of Nova Scotia, 6.4%; Suncor Energy, 4.5%; CN Railway, 4.1%; Bank of Montreal, 3.9%; Manulife Financial, 3.1%; Canadian Natural Resources, 3.1%; CIBC, 3.0%; BCE, 3.0%; Enbridge, 3.0%; Valeant Pharmaceuticals, 2.9%; TransCanada Corporation, 2.7%; Potash Corp., 2.4%; CP Rail, 2.1%; Telus, 2.0%; and Cenovus, 1.9%.
Dividend ETF has majority of assets in Canadian financial stocks
ISHARES DOW JONES CANADA SELECT DIVIDEND INDEX FUND (Toronto symbol XDV; ca.ishares.com) holds 30 of the highest-yielding Canadian stocks. Its selections are based on dividend growth, yield and payout ratio. The weight of any one stock is limited to 10% of its assets. The fund’s MER is 0.55%. It yields 4.1%.
The fund’s top holdings are CIBC, 6.8%; National Bank, 6.4%; Bonterra Energy, 6.4%; TD Bank, 5.9%; Bank of Montreal, 5.7%; Telus, 4.7%; Royal Bank, 4.6%; IGM Financial, 4.5%; Bank of Nova Scotia, 4.3%; and BCE, 4.0%.
The ETF holds 55.3% of its assets in financial stocks. 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.
In the latest issue of Canadian Wealth Advisor, we look at the long-term outlook for Canadian stock prices and in particular at the prospects for Canada’s finance stocks. We conclude with our clear buy-hold-sell advice on both of these exchange-traded funds.
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A flood of heavily marketed new ETFs have been introduced that don’t really reflect a full exchange or index, and often have higher fees. When you invest in ETFs do only buy funds that mirror an index or sub-index, or have you also bought so-called ‘hybrid ETFs’? Overall are you satisfied with the results you have obtained from ETFs?
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