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My favourite Canadian equity ETFs

While dividend-investing takes some time and effort, investing in some ETF products in my opinion, does not.

In fact, I bet you can construct the Canadian equity portion of your portfolio with relative ease.   This post, will hopefully help you do just that.

I’ve said this before, when it comes to part of my portfolio, certainly for my RRSP in particular, I’m pretty lazy.  Don’t get me wrong, I love dividend-investing and dividend-paying stocks but I honestly don’t have the time (not to mention the cash) to build a highly diversified portfolio that will weather everything Mr. Market throws my way; in both my unregistered and registered accounts.  So, I decided some time ago I’m going to take a hybrid approach with my portfolio:

Index Investing in my RRSP and Dividend Investing in my unregistered and TFSA accounts.

I do this for many reasons, but one key one is, I want my RRSP to be lazy – there is significant comfort in setting-and-forgetting part of my portfolio.  To weather Mr. Market’s bipolar personality, diversification is key.  Always has been, always will be.  Over time, while it’s my plan to be diversified with a robust basket of dividend-paying stocks it’s going to take some time to get there.  I need to be patient.  Until I get to this destination, especially in my unregistered and TFSA accounts, I’m going to use a few exchange traded-funds (ETFs) to keep my investment costs super low, achieve near-market returns and offset a whack of active management risk.

Here is the essence of my index investing approach for my RRSP:

  • With the right products, it will produce market returns.
  • I use it to keep our management fees extremely low.
  • We reinvest all dividends paid whenever possible to buy more units.
  • It’s a great compliment to our dividend investing approach.
  • It’s an excellent complement to our defined pensions at work.
  • It’s simple.

I love the last one.

Exchange-Traded Funds (ETFs) are a simple, easy way to passively invest in the market.  I avoid any stock selection decisions with ETFs.  Although I’ll never beat the market with them, I’ll always pay low fees and get market returns.

Doesn’t that sound like a very powerful RRSP formula?  I’m biased, but of course it does folks!  :)

This post will identify my favourite Canadian equity ETFs, why I like them, and if and when I plan to hold them.

XIU

I like the iShares S&P/TSX 60 Index Fund because it tracks the performance of the largest, most liquid stocks that trade on the TSX. The MER is a dirt-cheap 0.17%.  That means I get to keep and reinvest more of my money.  XIU also pays some decent distributions every quarter yielding about 2.5%. While XIU does not cap any single stock (i.e., recall the Nortel effect?) I’m more than willing to take the risk.  I consider this one the best “set it and forget it” Canadian equity ETFs you could own.

Disclaimer:  I own XIU and don’t plan on selling it anytime soon.

XIC

If you want a capped, low-cost, ETF that tracks the Canadian market, this is an excellent product.  The key benefit of XIC over XIU is the built-in diversification, XIC owns 260 companies instead of 60.  Diversification and capping the securities though comes at a cost, almost twice as much as XIU.

Disclaimer:  I do not own XIC and don’t plan on owning it.

XDV

I like the iShares Dow Jones Canada Select Dividend Index Fund since it “seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the Dow Jones Canada Dividend Index.”  This index is comprised of 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index according to indicators such as dividend growth, yield and average payout ratio. The weight of any one stock in XDV is limited to 10%.  I used to own this product but since I now own more than 10 of the ETF securities via direct stock ownership, there is no major advantage here anymore – I’m on my to creating my own index if you will.  If you’re not comfortable with direct stock ownership, XDV is a nice gift-wrapped dividend-paying portfolio for you.  For about 0.50% in fees, you get a tidy monthly yield as well.  One downside to this product, it’s heavy in financials. When Mr. Market is happy, you’ll be rewarded but when Canadian banks and lifecos in particular are suffering so does XDV.

Disclaimer:  I do not own XDV and don’t plan on owning it again.

CDZ

This product is very similar to XDV but is not nearly as heavy in financial companies, which can be a very good thing.  I think you get more “downside” protection this way.  This Claymore S&P/TSX Canadian Dividend ETF is also a little more diversified than XDV, it has more holdings (39).  Another bonus.

Disclaimer:  Because I don’t own XDV, I also do not own CDZ and don’t plan on owning it.

 

Here are some very good products to consider but these don’t rise to the top for a couple of reasons outlined below.

CRQ

This product is designed to replicate the performance of the RAFI Canada Index; companies in this index have strong dividends, free cash flow and equity value as some key factors. This is a good product.  Like XIU, some of the main CRQ holdings include the big-5 Canadian banks, energy and material companies; companies that make money and pay dividends – my kind of ETF.  Unlike XIU, the upside is CRQ pays distributions every month.  There is a downside as well – it has a higher MER at 0.72%.  This is a little high for my liking, this is my key reason for not owning it.  If the MER was closer to 0.30%, I’d seriously consider it.

Disclaimer:  I do not own CRQ and don’t plan on owing it.

ZCN

The BMO Dow Jones Canada Titans 60 Index ETF seeks to achieve the performance of the Dow Jones Canada Titans 60 Index, net of expenses and competes in a similar space as XIU.  Components of ZCN are capped at 10% and the ETF is float-adjusted quarterly.  The MER is a skinny 0.15% which should suit many DIY investors.

Disclaimer:  I already own XIU, so I don’t plan on owing ZCN.

HXT

Horizons BetaPro has a neat and cheap product, the S&P/TSX 60 Index ETF.  Like XIU, it seeks to mirror the performance of the S&P/TSX 60 Index but I think you need to be a gambler of sorts to own it.  Why?  While the MER less taxes is a microscopic 0.07%, HXT uses swap agreements to gain exposure to the index.   For me, any ETF that uses the words “swap” or “agreements” or “derivatives” or “indirect” in their investment strategy does not belong in my lazy RRSP portfolio.  HXT will not pay any quarterly dividend distributions.  Not good for me who likes ETFs and companies that pay distributions and dividends for reinvestment purposes.

Disclaimer:  I do not own HXT and don’t plan on owing it.

So, there are my favourites friends.  Some ETFs I love, others not so much but all of these should at least be considered for your retirement portfolio.  I’m not just saying this, I’m living it – good cooks need to eat their own cooking, don’t you think?

What do you think of my favourite Canadian equity ETFs?

Did I leave any of your favourites out? 

Do you own any Canadian equity ETFs yourself and if so, which ones and why?

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Cheers!

Filed in: Exchange Traded Funds (ETFs), Index Investing

40 Responses to "My favourite Canadian equity ETFs"

  1. Peter says:

    Hey Mark, first time posting here. Love your blog. Nice post on Canadian ETF’s, really enjoyed it.

    Question regarding index mutual funds, do you know anything about the TD e-series? The Canadian index fund, for example, has MER 0.33%, but also a trailing commission of up to 0.25%. Will this trailing commission erode my returns?

    Thanks

    • @Peter,

      Thanks for the kind words. Glad you are enjoying this site!

      As far as I know, the TD e-series funds will not charge trailing fees, because as Ninja referenced in his answer to me, they are bought and sold in-house at TD only. All purchases, redemptions and other account activity for e-series funds must be carried out online. This significantly reduces the fee-structure charged to investors. This series is available exclusively through TD Waterhouse discount brokerage and TD Canada Trust’s EasyWeb Internet banking. Some funds might charge a 2% early redemption fee if units are redeemed within 90 days of purchase but you wouldn’t be redeeming these guys often, at least I hope not?

      I would have to call TD Waterhouse myself to confirm all this though, as I don’t own the products.

      If no trailing commission, then I wouldn’t worry too much about your fees eroding your returns. TD e-series are excellent products. Fees are forevever. The lower your MER, the better, the MUCH better. Did you read my post about that? Scary what fees will do to your portfolio value…..

      http://www.myownadvisor.ca/2011/07/17/why-i-left-the-mutual-fund-industry/

      Thanks your question and contribution, I hope I helped :)

  2. MOA great post man! a nice summary of Canadian equity ETFs! Will you be doing the Canadian bond ETF’s as well? That would be great ;)

    Peter as far as I am aware TD e-series do not charge “trailing fees” or “trailer fees” as they are termed, becuase they are sold in-house with TD. If you buy e-series with TD no trailing fees, but if you bought them thorugh your broker (why would you do that?) then yes TD may reimburse your broker. But these fees are already included in the MER, so no it doesnot impact your return over the MER.

    An MER of 0.33% is a pretty low MER in the scheme of things, and you can reduce your expenses even further with the ETFs Mark listed here. But you need a few thousand to offset the trading fee. XIU would be the equivalent of TD Canadian e-series. 0.17% MER for XIU is very low! Do not buy any Horizon’s products such as HXT or HXS, as they are complete swaps (derivative based).

    Cheers
    The Dividend Ninja

    • @Ninja,

      Are you reading my mind? :)

      Yeah, I hope to have another two more posts done related to this one: one about my favourite Canadian bond ETFs and my favourite international/foreign ETFs. Look for those posts over the next week or so.

      Thanks for checking in; always appreciate your contributions!

  3. I enjoyed reading this Mark. It was a nice way to get caught up on the available ETFs on the TSX. Nicely done. Canadians do have some great options.

    • @Andrew,

      Thanks for the kind note! Yeah, there are some pretty good options now for CDN equity ETFs. We’ll see what Vanguard can offer retail investors in the future. Gotta love low management fees!

      Cheers!

  4. Lazy Investor says:

    Great Blog – My favorite.

    I did invest in XIU a couple weeks ago (during one of the dip).
    But right now, I am thinking about buying some of these stocks directly as I seem to get the “market average” with this ETF…

    What about U.S. Equity XSP ETF right now? Would you recommend it? (maybe in another post)

    • @Lazy Investor,

      Glad to hear this is your favourite blog! (Tell your friends ;)

      Yes, I own a few of the XIU holdings directly, since, over time, I’d rather pay no fees than a few via XIU! That said, XIU is awesome.

      I don’t plan on selling it anytime soon!

      Although I wish…I simply don’t have the cash, income, both; to invest in all 60 XIU holdings. Some I won’t, ever, since they don’t pay healthy dividends.

      XSP? I think it’s a good product but not ideal. I have a post coming up about my favourite international ETFs in another week or so, but here’s a preview of my post about it:

      -charges 0.25% fees, which is pretty low.
      -ETF is market cap-weighed, seeking to mirror S&P 500 index.
      -Hedged, which is OK, but I prefer not to do this over the long-term. Why?

      a) Foreign ETFs are typically cheaper, lower MER. See Vanguard :)
      b) Foreign ETFs are typically better in terms of tracking errors for the index they follow. I’d argue a long-term holding in XSP will trail IVV returns in USD $$$ b/c XSP’s performance will reduced due to its tracking error. You can avoid this buy buying the U.S. ETF in USD $$$ and holding it in your RRSP. See Vanguard :)
      c) A rising CDN $$$ vs. USD $$$ will help the hedged investor but the results haven’t been by leaps and bounds:

      http://www.canadiancapitalist.com/currency-hedged-funds-underperformed-in-2010/

      Personally, I think hedging overall is not a great idea for most foreign or emerged markets. Why? The CDN investor is “open” to a diversified basket of currencies, which actually reduces currency risk over the long haul. Example: CDN $$$ might appreciate against the USD $$$, but depreciate against the Japanese Yen or the Chinese Yuan, other.

      Thoughts? Do you share the same view?

      Thanks very much for your comment and question, check back in again!

  5. Kelvin says:

    My favorite is XIU also (I thought they too had a 10% cap – maybe I’m mistaken). However, I am “dabbling” in some HXT product from Horizon. This forces me to follow the ETF and compare the returns to XIU. The tax man taketh too much of my XIU returns.

    • @Kelvin,

      Thanks for your comment!

      Yeah, XIU is great. To confirm though:

      XIU is a capitalization-weighted index of 60 large, liquid stocks that trade on the TSX.

      XIC tracks the performance of the broader TSX Composite index, has some 250 stocks, is slightly more expensive, and caps the weight of a single stock at 10%. Therefore, XIC is never oveweight in a single stock.

  6. Lazy Investor says:

    Thanks for the answer! Looking forward this next post about this subject.

    Indeed, it seems like Hedging overall has a lot of cons.
    It’s hard to choose when you’re too lazy to compare with costs of converting to USD!
    I’ll check Vanguard though :)

  7. As I’ve learned about investing, my future plans were to implement a plan just like this. Keep the dividend income outside of my tax-advantaged accounts (except for maybe some American companies) and go with index funds and ETFs the rest of the way. Great overview of the Canadian ETF sector.

    It is interesting how this ETF craze has led to an explosion of ridiculous ETF products available. There are now “actively managed” ETFs which kind of defeat the whole point in my opinion. As usual, the financial products field will find a way to corrupt this originally beautifully simplistic investment vehicle with high management fees!

    • @MUM,

      I think for the most part, that is a good rule of thumb: dividend income in taxable accounts, index funds and ETFs the rest of the way. For the most part, I’m doing that, although I must say I am partial to tax-free dividends in my TFSA :)

      The ETF craze is ridiculous. I like my ETFs plain vanilla.

      Thanks for checking in!

  8. Good blog content in this post and overall. Keep up the good work. Canadians need sites like yours.

  9. le says:

    c) A rising CDN $$$ hurts USD returns for a Canadian investor, in a hedged product.

    I think you have this backwards. Hedging helps when our cerrency is rising and hurts when it is falling. Just look at the cdn dollar returns of cwo and vwo, which are the same product except cwo is hedged.

    Secondly, HXT’s returns are that factoring in dividend reinvestment.

    • @le,

      You’re right, a higher CDN helps the hedged investor – I have updated my comment about my mistake and also provided an example of what I meant to say by referencing post I read.

      To your point about HXT’s returns, don’t all ETFs do the same?

  10. le says:

    @ lazy: “I did invest in XIU a couple weeks ago (during one of the dip).
    But right now, I am thinking about buying some of these stocks directly as I seem to get the “market average” with this ETF…”

    Are you levelling us?

  11. le says:

    Well he did mention that the total returns in USD were smaller in the hedged version (probably due to the cost of hedging), however he later on states that someone who held the S&P (unhedged) would have a return of ~8% vs ~13% for hedged due to a rising currency.

    The better question is at what level would you consider hedging. I would definetely hedge new money if the CDN dollar was down to .90 US.

    As for the comment about HXT, it is my understanding that the returns HXT are that with dividends being reinvested, wheras XIU pays out the dividends and you would have to reinvest them manually or with a DRIP. Either way, HXT should take greater advantage of compounding in smaller accounts where someone can’t DRIP many shares or has a lot of cash left over.

    If you go on google finance and lay HXT over XIU, you will see that HXT is slowly increasing more than XIU which accounts for the dividends being reinvested.

    Now, whether you want to deal with a product that uses swaps is up to you but one would hope that Bank National is pretty safe. Also, I thing Canadian Couch Potato had a series on this product and its safety.

    • @le,

      Fair comment about HXT. I might take a deeper look and learn more about it. Just sounds a little complicated, no? I guess I favour transparency and simplicity, lots of it, via XIU.

  12. An awesome post!

    If I had to choose among Canadian equity ETFs, XIU is probably on top of my list. With such a low MER as you mention, I can definitely see this as a core holding for many investors.

    After verifying the Top 10 holdings within the TD e-Series Canadian Index fund, it too looks pretty solid but the MER is a bit high at 0.33%.

    I’m really looking forward to your future posts on bond and international ETFs.

    Keep up the great work and thanks for sharing these details. ;)

    TWC

  13. Lazy Investor says:

    @le
    I am a little bit underqualified in investing to do so… I meant some of the stocks (repeat some).

    • @Lazy,

      We’re all learning, I doubt you’re underqualified. Keep reading, keep asking questions and keep learning to tailor your own path. If you’re on my blog, you’re already on that journey with me! :)

  14. Elemag says:

    And the last in line…as usual : )

    Mark, I haven’t had any exposure to ETFs yet. As a matter of fact, your posts help me gather information, so I can confidently transfer my mutual funds holdings to my Self-directed RRSP and purchase a few ETFs. Last week I finished reading “The Big Secret for the Small Investor” by Joel Greenblatt. It was an interesting read, perhaps you are familiar with his other book “The Little Book that Beats the Market”. Anyway, he makes a case that investing in the so-called “Value Index ETFS” significantly outperforms the market overtime, even though there could be periods of underperformance. I have read something similar in another one of my all-time favourites “The Little Book of Value Investing”. To me this is the tried and true and best way of investing. If you are interested, check out the book. There Greenblatt has provided a few lists of the above mentioned ETFs and few other similar products. An excellent and very informative post as usual! You the man ; )

    • @Elemag,

      Thanks, as always, for your comments!

      I’m glad my recent posts are helping you, this is why I’m writing them :) Well, you and others!

      I think this is a great move; moving your mutual fund holdings to your self-directed RRSP.

      I haven’t read “The Big Secret for the Small Investor” by Joel Greenblatt but I am familiar with the “The Little Book” series. I need to read that book as well “The Little Book of Value Investing”.

      Nice to hear Greenblatt and I are aligned. Again, hopefully these posts are an excellent starting point for research. Then again, I’m a bit biased about some of the products because I own them and believe in them so strongly.

      I am curious to know what you buy, when you buy it and why. Cheers!

  15. Peter says:

    Dan at Couch Potato just announced that Scotia iTrade is not doing commission-free ETF trading. Omg, I really want to switch over now! But it would be such a hassle, since I have everything with TD. I guess I just have to hope that TD Waterhouse does the same!

  16. Peter says:

    I did look at Scotia iTrade again though, and ETF’s like XIU or XIC are not on the eligible list for free commission, because it is mainly a partnership for Scotia with Claymore ETF’s.

  17. @My Own Advisor
    In a portfolio that’s designed to rebalance on a frequent basis, is it a safe bet to say that now would probably be a good time to buy equity funds like XIU and offload bonds like XBB?

    If I’m not mistaken, your positions in index funds are mainly of the ‘buy and hold’ nature, but you rebalance by adding positions with future dollars, correct? I’m just curious because I’m pretty sure Andrew Hallam re-balances his index funds by offloading previously invested dollars and adjusts accordingly when he feels the timing is right.

    I apologize in advance if I’m wrong here – I’m not even a newly minted index investor as of yet ;) (technically speaking I suppose)

    Cheers

    • @TWC,

      Correct, selling your bonds (e.g., XBB) and buying equities (e.g., XIU) with the proceeds would be a good move right now in this market climate, ala, Andrew Hallam! :)

      Also correct, my positions are more of a ‘buy and hold’ nature, with both bonds and equities DRIPping synthetically right now. I rebalance by buying more positions when equities or bonds have dropped in price. This way, previously invested dollars are always compounding and I never have to worry, too much, about selling anything when the timing may or may not be right. I’m not very good at predictions!

      Don’t apologize, you’ve got a great understanding of this stuff, you just don’t own lots of ETFs. What are your thoughts of my strategy? Always good to have feedback. Thanks as always for your detailed comment.

  18. Cristian says:

    Interesting post. However:

    compliment = expression of admiration, word of praise for someone
    complement = something added to complete; that which fills or makes whole

    I believe you meant to say your approach is a great complement, not compliment… ;-)

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