Exchange traded funds (ETFs) tend 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 calculating the index or sub-index.

Here’s an ETF that holds many of the Canadian stocks we recommend for 2023 and beyond. This fund holds 30 of the highest-yielding dividend stocks on the Toronto exchange. It represents a low-fee way of holding many of the country’s best stocks.

ETFs trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.

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Prices of Canadian 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.

What’s more, 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 taxes generated by the yearly distributions to unit holders of most conventional mutual funds.

Note that the best Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditionally, Canadian ETFs stick with this passive management—they follow the lead of the sponsor of the index (for example, Standard & Poor’s). Stock index sponsors do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

iSHARES CANADIAN SELECT DIVIDEND INDEX ETF (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) is a buy. The fund 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 4.1%.

Most market indexes 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.

ETFs: Higher MER arises from active management for iShares Canadian Select Dividend Index

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 include CIBC; Canadian Tire; Bank of Montreal; Royal Bank; Scotiabank; TD; and TC Energy.

Recommendation in Canadian Wealth Advisor: iShares Canadian Select Dividend Index ETF is a buy.