Exchange-traded funds (ETFs) are among the best investments money can buy. Offering high diversification and low fees, they offer the best of both investment worlds. On the one hand, these funds’ high levels of diversification help reduce the risk inherent in the holdings themselves. On the other hand, their low fees mean that investors don’t pay out too much of their returns in fees to fund managers. It all adds up to a low-risk, low-fee package.
That’s the theory, anyway. Although many of the world’s best-pooled investment vehicles exist in the form of ETFs, there are also ETFs that are as questionable as the world’s most recklessly run hedge funds. Ark Invest’s Ark Innovation ETF comes to mind here.
To invest profitably in ETFs, you need to know which ETFs are the real deal. With that in mind, here are three Canadian ETFs that are legitimate and likely to deliver reasonably good returns.
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The entire TSX!
iShares S&P/TSX Capped Composite Index Fund (TSX: XIC) is a Canadian broad market fund that covers the entire Toronto stock exchange. Consisting of 224 stocks, it is highly diversified. Since the fund’s largest holdings are banks, utilities, and energy stocks, it can serve a useful purpose in one’s portfolio. Many of the world’s biggest tech companies these days are quite expensive; if they prove in the end to have been overvalued at today’s prices, then those holding XIC will probably outperform. At any rate, as a Canadian, you pay no withholding tax on dividends received from XIC. So, there’s a tax case for owning it as well.
In addition to its ample diversification, another thing XIC has going for it is low fees. Its management expense ratio (management fees plus all other costs), or MER, is a mere 0.04%, low enough that it will barely affect your long-term results. So, XIC is a fund with a lot of things going for it.
Canadian dividend stocks
Next up, we have BMO Canadian Dividend ETF (TSX: ZDV). This is a BMO-managed fund of Canadian dividend stocks, boasting a 3.9% yield. Compared to XIC, it is lighter on tech and heavier on banks, utilities and energy companies.
ZDV has some pretty appealing features, especially for those wanting to minimize their exposure to today’s most expensive stocks. With its focus on high dividend sectors, its portfolio is relatively cheap. The fund has 55 holdings, which is a considerable amount of diversification. It also has a relatively modest 0.39% management expense ratio, which is not totally unreasonable. I’d feel comfortable investing my money in BMO Canadian Dividend ETF.
Canadian high-yield stocks
Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is another fund in the high-yield universe. This one boasts a 4.41% 12-month yield (yield to those buying 12 months ago), although the expected yield is lower today due to the fund having incurred some capital gains in the last year.
VDY is pretty similar to ZDV, with a focus on Canadian banks, utilities, and energy companies. However, it has a lower MER (0.22%) and a slightly higher yield. Its total returns since inception have been about 10% per year, which is pretty good compared to the TSX average — perhaps a little ahead of it. Overall, VDY is another fund worth considering.
