Canada’s primary stock market underperformed in September 2022 and will enter the fourth quarter in negative territory. The TSX is down 12.1% year to date, with only two out of 11 primary sectors showing positive gains. Energy is ahead 31.1%, while the consumer staples sector is up by a measly 1%.
The probability of a recession keeps rising with the aggressive rate hikes by the Bank of Canada. Because of recession fears, people are looking for places to hide their money in a volatile environment. One asset class that should help contain panic is an exchange-traded fund (ETF). Whether new or old, risk-averse investors can consider ETFs over individual stocks.
While there’s no risk-free investment, these three Canadian ETFs have lower-risk profiles. The dividend yields are moderate to high, but the asset mix, or allocation, in the respective funds should mitigate market risks.
Equities and fixed-income securities
Vanguard Balanced ETF Portfolio (TSX:VBAL) is a sound choice because the exposure is broad-based. The fund manager maintains a long-term strategic asset allocation of approximately 60% in equities and 40% in fixed-income securities (bonds). VBAL’s objective is to provide long-term capital growth with a moderate level of income to investors.
In terms of geographic exposure, the majority of the assets are from the U.S. (43.9%) and Canada (30%). Investments in Europe, the Pacific, and Emerging Markets complete the minority holdings. Moreover, sub-advisors to the fund reconstitute and rebalance the portfolio asset mix from time to time, or when necessary.
If you were to take a position in VBAL right now, the share price is $26.30. The dividend yield is a decent 2.56%, while the payouts are quarterly.
100% Canadian stocks
Sector-specific ETFs are available on the TSX, although the BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is best during uncertain market conditions. The 100% Canadian ETF invests in blue-chip companies in 9 of the 11 primary sectors, and only the healthcare and technology sectors have zero representations.
Regarding sector allocation, financials (21.50%), utilities (15.67%), and consumer staples (15.44%) have the most significant percentage weights. ZLB has a total of 47 stocks, with Hydro One, Intact Financial, and Metro Inc. as the top three holdings. This ETF outperforms the TSX and is down by only 4.8% year to date. At $37.91 per share, the annual dividend yield is 2.72% (quarterly distribution).
iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI) is an ideal option for dividend chasers. Besides the high dividend yield of 5.55%, the ETF’s payout frequency is monthly. Like ZLB, the Fund invests only in Canadian stocks. XEI replicates the performance of the S&P/TSX Composite High Dividend Index and seeks long-term capital growth. The current share price is $23.98 (-2.8% year to date).
XEI carries a medium-risk rating and has 75 stock holdings. Because the exposure is to dividend-paying Canadian stocks from various sectors, investors can spread the risks. The financials (30.5%), energy (29.3%), and communications services (12%) sectors have ample representation. You can own shares of industry leaders RBC, Enbridge, and BCE in one basket of funds.
The strong headwinds in 2022 will likely extend to next year or until inflation eases close to the central bank’s target range (2% to 3%). Meanwhile, it’s advisable to be extra defensive today by owning ETFs for instant diversification.