Canadian Investors: Replace Your Bank, Tech, and Energy Stocks With These ETFs

Got too many stocks to manage? Try replacing some of them with ETFs.

Tony Dong, MSc, CETF®

Tony turned a series of 2017 marijuana stock losses into a freelance career advocating for ETF investing. He currently holds a Master’s in Risk Management from Columbia University and is a Certified ETF Advisor (CETF®). Tony is the founder of ETF Portfolio Blueprint (etfportfolioblueprint.com) and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE. His analysis has also been featured in publications like Kiplinger, 24/7 Wall St., U.S. News & World Report, TheStreet, and Benzinga.

Published July 25, 2022 3:30 pm EDT

I’m personally not a stockpicker, but there’s nothing wrong with buying a diversified portfolio of blue-chip Canadian equities. Well, until it gets too big to manage, that is. While experts urge investors to pick 30 or more stocks to be diversified, this can quickly become unwieldy and difficult to manage.

Rebalancing a portfolio of 30 stocks, keeping track of dividends, and staying on top of the news for each one can be a daunting task. For that reason, I’m in favor of what I call the “core/satellite” approach. The “core” of a portfolio should be held in low-cost exchange-traded funds (ETFs), supplemented by a few key “satellite” stock picks.

While a regular index fund is probably best, investors can also use a variety of thematic or sector-specific funds to gain exposure to a particular subset of stocks. Today, I’ll be going over three great, low-cost ETFs for tracking the TSX banking, energy, and tech sectors, respectively.

ETF chart stocks — Image source: Getty Images

Bank ETF

The TSX banking sector tends to be very oligopolistic, with companies like the Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal, and National Bank dominating the industry. Canadian bank stocks often pay great dividend yields, and have a long history of increasing them.

An easy way to buy all six big bank stocks in equal proportions is via the BMO S&P/TSX Equal Weight Banks Index ETF (TSX:ZEB). ZEB itself costs a management expense ratio (MER) of 0.28%, or around $28 in annual fees for a $10,000 investment. The ETF has a distribution yield of 4.20%, which is paid out monthly compared to the quarterly dividends paid by most banks.

Tech ETF

The Canadian technology sector has been hard-hit recently due to rising interest rates. Numerous tech stocks like Shopify and Constellation Software are down significantly from all-time highs. Investors keen on buying the dip can use the iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT), which holds a total of 24 TSX tech stocks.

Currently, 26% of the ETF is in Shopify, while 25% is in Constellation Software. XIT also holds companies like Open Text, CGI, Nuvei, Lightspeed Commerce, Descartes Systems Group, and BlackBerry, in smaller portions. While the MER might be more expensive at 0.61%, it might still be cheaper than overpaying in commissions to buy each one of these stocks.

Energy ETF

Oil prices may have dropped off recently, but overall, commodity prices remain elevated year-to-date, and the energy sector continues to strongly outperform the index. A great way to ride the momentum of the TSX energy sector is via the iShares S&P/TSX Capped Energy Index ETF (TSX: XEG), which holds a total of 22 Canadian energy stocks.

The top five holdings of XEG include Canadian Natural Resources, Suncor Energy, Cenovus Energy, Tourmaline Oil, and Imperial Oil, with the first two stocks comprising 25% and 24%, respectively, of the fund. XEG also caps each individual holding at 25% so no single stock can overly influence the ETF’s performance. Like XIT, XEG costs a MER of 0.61%.