Why I don’t invest in Canadian Dividend ETFs
Fans of this site, including many long-time readers and investors who enjoy this site, continue to tout the benefits of low-cost investing to others.
And you know what?
They are right and they should!
That’s because when it comes to investing you often get what you don’t pay for – better returns usually come from a lower-fee fund structure.
That means when it comes to money management fees matter.
One way to reduce your investment fees, is to own lower-cost dividend ETFs.
Here are some of the great benefits that come from investing in dividend ETFs beyond just distribution income:
- Transparency – within a few clicks of a mouse or few swipes on my tablet – I can see what every single holding is in these funds. I can also read up on the fund’s prospectus to learn how fund turnover is managed and how often. Portfolio turnover within the fund costs money – someone needs to get paid! That brings me to my next point below.
- Modest fees – you might recall, active fund management costs more because money managers are paid to perform. A pay for performance mandate encourages the mutual fund money manager to buy and sell stocks frequently in an attempt to beat the market or the index they are tracking. Buying and selling frequently incurs costs, and those portfolio costs are passed on to you. Instead of all this trading, I think investors should strive to invest in a low-cost ETF that follows a reputable, established, broad market index such as the S&P/TSX Composite Total Return Index or for dividend investors in Canada, an established dividend-oriented index such as:
- S&P/TSX 60 Index, or
- S&P/TSX Composite High Dividend Index, or
- FTSE Canada High Dividend Yield Index.
- Lower effort – if you’re going to invest in some individual stocks, you need to spend some time understanding these companies and understanding what you own, why you own it. I read annual reports every year and follow metrics like yield, payout ratio, earnings per share, cash flow to name a few. Dividend ETFs don’t have this complexity – they bundle all these companies together for you.
There are certainly many benefits to owning Canadian dividend ETFs…but I still don’t invest in any of these Canadian funds. Here are my reasons why:
- I thought about building my own Canadian Dividend ETF – and so I did, and I’ll continue to do so!
Many years ago, I learned there is merit to owning the same Canadian stocks the big funds own – so I started that process. I’ve never looked back.
Here is one quick example – look at this RBC Canadian Dividend Fund in 2011:
And now the same fund’s top fund holdings as of April 2017:
Lots of differences eh? (Images courtesy of RBC’s site.)
Let’s look at another example and pick on BlackRock – XIU.
Now, again, if you don’t want to buy and hold certain stocks, nor try and create your own Canadian Dividend ETF like I have, then no problem. This fund is arguably one of the best ETFs to own in Canada!! (I recall iShares XIU was one of the world’s first ETFs.)
XIU holds the largest the largest Canadian companies. My perspective is, if collectively the largest 60 companies in Canada aren’t making money year-over-year, nobody is.
This ETF has provided strong Canadian market returns over the last decade and remains a great choice for your indexed portfolio should you decide to go that route:
That said, the top-10 or top-20 holdings in this ETF rarely go out of style. From April 2017:
As of April 2019, the top-14 holdings in XIU:
Images courtesy of BlackRock’s site.
2. I control the portfolio turnover – which is largely non-existent!
I can count on my hand how many stocks I’ve bought then quickly sold over the last 10 years. Instead of buying and selling, I buy and hold and reinvest almost all dividends paid for income. You can see how that (boring) approach is working out for me below. I think things are snowballing rather nicely:
3. I save on fees.
As a consequence of buying and holding, I don’t pay any money management fees except for a few $9 or so transactions, a few times per year.
4. I am able to participate in dividend increases.
Money that makes money, can make more money – if you leave it alone. While XIU has been a solid performer, and likely will continue to be, you can see from the information below it certainly doesn’t increase your passive income as much as some of the holdings within XIU have in the past. Take Royal Bank stock in particular, image from Royal Bank’s site:
When you go this page, you’ll see the dividend has almost doubled in the last 8-years. Meanwhile, for XIU (image from BlackRock’s site) – the distribution has grown far more modestly:
By creating my own Canadian dividend ETF per se, I now essentially own what the big funds own in Canada and pay no ongoing money management fees to do so.
While this is my preferred approach to invest in Canada for now (own Canadian dividend paying stocks directly) I must say, I still feel owning U.S. dividend ETFs make great sense given that market does not operate as an oligopoly.
There are many great, low-cost U.S. dividend ETFs and international ETFs you can own – and you can find my favourites including the ones I’ve decided to own for income and growth on my ETFs page here.
What do you make of my decisions to invest this way? What do you think of owning dividend ETFs in general? Do you feel lower-cost, broader-market ETFs are the better way to go? Let me know what you think in a comment!