Are you looking to add some diversification to your portfolio with exchange-traded funds (ETFs)?
If so, you’re making a wise choice.
ETFs are some of the safest equity investments available, because their very broad diversification “spreads your eggs across many baskets.” With a broad market index fund, a serious catastrophe at one company won’t affect you as much as if you’d had all your money in that company’s stock. With that in mind, here are three Canadian ETFs that could add some much-needed diversification to your portfolio in June 2023.
TSX 60
The iShares S&P/TSX 60 Index ETF (TSX: XIU) is an index ETF that I have been holding for several years now. It tracks the TSX 60 – the 60 largest Canadian companies by market cap. The ETF has a 0.16% annual management expense ratio (MER), which is fairly low. The fee is higher than the fee you’d pay on a broad market TSX fund, but XIU has one advantage:
Liquidity
As the most popular ETF in Canada, XIU is traded in very high volumes. This results in tight bid-ask spreads, meaning that you don’t lose an overly high percentage of the price to market makers. Market makers are traders who execute trades for you; they make their money by pocketing the bid-ask spread. Because of its razor-thin spread, XIU has very low execution costs, which is especially important for those who are trading frequently.
TSX Composite
The S&P/TSX Capped Composite Index Fund (TSX: XIC) is another iShares fund based on Canadian stocks. This one is based on the TSX Composite Index, which consists of 250 stocks rather than 60. You get much more diversification with XIC than with XIU, although XIU’s long-term returns have been somewhat better. That may be due to a combination of tighter bid-ask spreads and a higher concentration in large cap stocks, which have outperformed their small cap cousins in recent years. The TSX Composite Index doesn’t have any true microcaps on it, but it does have more small caps than the TSX 60. In Canada, which is dominated by a few large companies in banking, energy and utilities, these smaller companies may be holding back XIC’s returns. This isn’t guaranteed to remain the case forever, though, so XIC is still a fund worth holding.
Low volatility stocks
Last but not least, we have the BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This is an ETF that might be worth adding to your portfolio if you’re a bit more risk-averse than average. It’s a “low beta” ETF, which means that it holds stocks that are less risky (as measured by the beta coefficient) than the market. Generally, you can expect this fund’s price to fluctuate less widely than that of broad market funds. That doesn’t mean that you will get better returns by holding it, but you may experience less stress than you would holding other investments. The fund’s 0.35% maximum fee is higher than the other funds on this list, but not so high that it will seriously damage your returns.
