I’ve seen a lot of bad exchange-traded funds (ETFs) in my time. Some are confusingly structured. Others charge way too much in fees. A few do both, and that’s what brings us here today.
I’m thrilled to finally share one particularly egregious example with you. It’s the kind of fund that deserves to be left to gather dust in some forgotten account or delisted.
But I won’t leave you hanging in negativity. I’ll also give you one TSX-listed ETF that is low cost, tax efficient, and diversified – an ETF I consider a “buy hand over fist” candidate.
Source: Getty Images
Avoid This ETF
Let’s get this out of the way: the iShares India Index ETF (TSX:XID) is one of the worst ways you could try to invest in India as a Canadian.
It’s not because I dislike Indian stocks or the Indian economy. Frankly, I don’t know enough about its market to give a detailed take on its growth potential. The problem is how this ETF is built.
Instead of directly owning Indian companies, XID holds a U.S.-listed ETF that tracks the Nifty 50 Index. That’s right – your Canadian ETF is just a wrapper for a U.S. ETF, which itself is a wrapper for Indian equities.
Every time an Indian company pays a dividend, the Indian government takes a foreign withholding tax cut. Then, the U.S. ETF holding those stocks collects the dividend after that first cut and pays it out to XID, which gets hit again with a 15% U.S. withholding tax before anything reaches your hands.
Even in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), you’re getting taxed twice on the same dividend income. That’s because only direct U.S.-listed ETFs avoid the 15% cut in an RRSP, and XID isn’t one of them. It’s a Canadian-listed ETF holding a U.S. ETF that holds Indian stocks, making it a a tax inefficiency sandwich.
And the kicker? XID charges a 0.99% MER. That’s nearly $99 in fees for every $10,000 invested, every single year, before factoring in the double dividend haircut. That’s bordering on mutual fund territory, and we’re supposed to be past that era.
One ETF to Buy Hand Over Fist
Now let’s cleanse our palates with something that actually makes sense: the iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC).
XIC tracks the entire Canadian stock market, including large, mid, and small caps, with a cap of 10% on any one stock so no single company dominates the fund. It gives you diversified exposure to the Canadian economy with just one ticker.
XIC is everything XID is not. It’s straightforward, low cost, and tax smart. The MER is only 0.06%, or $6 a year on every $10,000 you invest. That’s nearly 17 times cheaper than XID.
Plus, XIC pays a solid 2.6% yield, and it’s made up of eligible Canadian dividends, which are incredibly tax efficient in non-registered accounts thanks to the dividend tax credit. And in registered accounts like the TFSA or RRSP, you get to keep 100% of those dividends – no foreign withholding, no hidden tax traps.
