Top Canadian Dividend ETFs
What makes a great Exchange Traded Fund (ETF)? What makes a great Canadian dividend Exchange Traded Fund? What are the top Canadian dividend ETFs to own?
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Let’s back up the truck – what is an ETF?
An ETF (Exchange Traded Fund) is a diverse collection of assets (like a mutual fund) that trades on an exchange (like a stock does). This makes an ETF a marketable security and for this reason, this trading capability, ETFs can experience price changes throughout the day as they are bought and sold. ETFs typically have lower fees than mutual funds (although not always), which can make them an attractive alternative to mutual funds.
Based on my personal experiences over the last 10+ years as a serious investor, ETFs are easy to buy using a discount brokerage and offer a low-cost way to own dozens if not hundreds of stocks to diversify your portfolio. Although you don’t need to buy equity ETFs, it is my belief that you’re FAR better off owning more equities than bonds over long investing periods. The reason for this is rather simple: if you want predictable returns you’re going to have to live with lower, long-term returns that offer this predictability. If you want higher, long-term returns, you’re going to have to live with the short-term volatility that comes with higher risk equities.
If you’re just starting out your investing journey, you can learn more about ETFs here.
Before we get into my favourite Canadian dividend ETFs, here are some elements that make up a solid ETF:
Style – ETFs can track an index, follow an industry sector, be rules-based like some smart-beta funds are, or be much more. For the most part, I prefer either plain vanilla, broad market equity indexed ETFs or dividend ETFs. This is because the former provides market-like returns less skimpy money management fees. Basically plain vanilla ETFs offer a set-and-forget investing approach. Contribute money every month, quarter or annually and let it grow for the next 30-40 years. Some examples of what I like in the Canadian market will follow in the paragraphs below. The latter, those dividend ETFs, can provide income; tangible money you and I can use as we please while offering some long-term growth. I avoid other types/styles of ETFs based on futures, hedges or swap agreements. By and large those products tend to make the company offering those funds rich, not you.
Fees – Hopefully by now you know high money management fees kill portfolio values over time. When it comes to fund fees in particular, my bias is, I try to keep the management expense ratio (MER) (the fee paid to the fund’s manager, as well as taxes and other costs) low for as long as possible. That means I wouldn’t consider owning any ETF over an MER of about 0.50% – including any Canadian dividend ETF. You should also be considering investing in products with fees that are lower than that.
Tracking error – In short, tracking error is the difference between the performance of the fund (the ETF) and its benchmark (it’s track). I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs with low tracking errors.
Diversification – Along the same lines ‘Style’, you should be very mindful of the assets within an ETF before you buy it. ETFs are not created equal – and that’s a good thing when it comes to returns. For a quick example, I’ve been a huge fan of Canadian broad market ETFs like XIU, XIC, ZCN, VCN, along with others over the years. XIU holds the largest 60 stocks in Canada. XIU however has nowhere near the number of holdings that VCN has (214 at the time of this post) yet XIU has delivered stellar long-term returns. Just because of the limited fund holdings, is XIU really an inferior product to VCN for our Canadian market? Hardly. Based on my personal experiences, diversification can be a great ally as a risk mitigation tactic against stock picking but that doesn’t mean it’s bulletproof. Typically the larger the ETF equity holdings are, the better the chance you’ll own both stock duds and studs as well. More stock holdings does not automatically equate to better returns.
Tax efficiency – If you never intend to max out your TFSAs, RRSPs, kids’ RESPs, or other registered accounts then this is a non-issue for you. For some investors however, who invest outside registered accounts (such as the aforementioned RRSPs, RRIFs, TFSAs, RESPs, LIRAs) like I do, then you need to consider the tax efficiency of your ETFs. Be wary of ETFs that have lots of turnover by the fund manager (through buying and selling securities) – those funds are likely to result in more costs to you. In taxable accounts, I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs that are as tax efficient as possible.
History – While past performance is never indicative of future results unfortunately history is all we have since nobody can predict the financial future with any accuracy. I think owning funds that have an established history of > 3 years is generally smart. While new ETF entrants are fine, ETF tactics can change by the company that runs the fund at will – so buyer beware of any ETF niche products. This is yet another reason I believe sticking to plain vanilla funds or dividend ETFs that are easy to understand; something you can explain to a 10-year-old, will ultimately deliver more value to you as the long-term investor.
My top Canadian dividend ETFs
OK, now to the blogpost topic – what are some of the top Canadian dividend ETFs to consider for your portfolio? Here you go!
All data and information is current at the time of this post.
|Vanguard Canadian High Dividend Yield Index ETF (VDY)||FTSE Canadian High Dividend Yield Index||0.22%||63||3.9%||8.83%||n/a|
|BMO Canadian Dividend ETF (ZDV)||Weighted yield of Canadian dividend paying stocks – a rules based methodology that considers the three year dividend growth rate, yield, and payout ratio to invest in Canadian equities||0.39%||51||4.4%||6.66%||5.59%|
|iShares Core S&P/TSX Composite High Dividend Index ETF (XEI)||S&P/TSX Composite High Dividend Index||0.22%||75||4.7%||7.67%||5.73%|
|iShares S&P/TSX 60 Index ETF (XIU)||S&P/TSX 60 Index||0.18%||60||2.7%||7.70%||9.52%|
Vanguard Canadian High Dividend Yield Index ETF (VDY)
Vanguard Canada remains a low-cost ETF leader and Canadian investors have benefited from their direction in recent years – thanks Vanguard! With a low MER, there are only two major downsides I see to this product. One, the top-10 holdings dominate it. (I’ve actually chosen to own all these top-10 VDY stocks directly in my portfolio but your mileage may vary.) Two, the monthly distributions from this fund are a bit erratic. Otherwise, I believe this fund is top consideration for income and long-term growth. At the time of this post, since inception the fund has returned about 9%. That’s pretty good for our Canadian market.
Image from Vanguard VDY.
BMO Canadian Dividend ETF (ZDV)
I think for all around performance, yield, cost and diversification, this Canadian dividend ETF remains top-notch. Last time I checked the MER for this BMO ETF was about 0.39% (within my max 0.50% MER criteria for any ETF to bother owning). The fund was also yielding over 4%. Distributions are monthly and steady at about $0.063 per unit at the time of this post.
Image from BMO ZDV.
iShares Core S&P/TSX Composite High Dividend Index ETF (XEI)
This is one of my favourite Canadian dividend ETFs because of the low management fee (0.22% MER), high number of dividend holdings (75), and consistent yield over 4%. Although like other top Canadian dividend ETFs, that own Canadian banks, energy, pipeline and telecommunication companies in their top-10 holdings, there are a number of consumer discretionary stocks and Real Estate Investment Trusts (REITs) that spice up this ETF among fund assets. I consider this ETF an excellent candidate for the Canadian content of your income-oriented portfolio.
Image from iShares XEI.
iShares S&P/TSX 60 Index ETF (XIU)
This remains one of my favourite Canadian dividend ETFs because it’s also considered one of the best “plain vanilla” equity ETFs in Canada. For a skimpy MER of 0.18%, you hold the largest 60 blue-chip companies in Canada.
Year after year, I consider this ETF arguably one of the best products you could own for the Canadian content in your portfolio; steady yield of about 3% and long-term growth.
Image from iShares XIU.
Disclosure – I used to own this fund before I decided to unbundle this ETF for income.
There are certainly many other Canadian dividend ETFs to consider but these ones float to the top of my list for all the reasons I think some ETFs are great for most investors to own anyhow:
1.keep your fund fees low.
2.consider funds that invest in many companies across many sectors (so you can downplay fear of individual stock selection).
3. leverage ETFs for transparency of holdings from the major institutions that offer these funds.
These funds will not only provide income but some modest capital appreciation over time.
What are your top Canadian dividend ETFs? Do you hold any and if so, which ones and why?
More ETF reading:
What other top ETFs should I consider owning?