Would you invest your entire portfolio into a single security?
Conventional wisdom – and much academic research – indicates that it is not such a good idea. When it comes to shares of single companies, the popular notion is probably correct: unless you have insider-like knowledge of a company, you probably don’t know it well enough to make it your sole holding.
But with exchange-traded funds (ETFs), it’s a different story. Many high quality ETFs have broad enough diversification and low enough fees to merit being an investor’s entire investment portfolio. A classic example would be a global index fund built on the FTSE All-World Index, which is more diversified than many investors’ portfolios.
For most investors, having such a fund as their entire portfolio – or at least the equity portion of it – wouldn’t be such a bad idea. In my case, I think I can identify an ETF that’s much less diversified than that, that I would invest my entire TFSA in. In this article, I reveal that fund and explain why I’d be comfortable having my entire TFSA invested in it.
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BMO’s Canadian Dividend ETF
The BMO Canadian Dividend ETF (TSX:ZDV) is a diversified Canadian exchange traded fund focused on high dividend stocks. Because of its dividend focus, the fund mainly holds stocks in high-yielding sectors like banking, energy, and utilities. Some large tech names like Shopify (TSX:SHOP) are left out, but for the most part, the fund’s largest holdings look pretty similar to those of a broad market TSX Index fund. Nevertheless, ZDV still sports quite a bit more yield than such funds do.
Income potential
The BMO Canadian Dividend ETF has roughly a 3.5% dividend yield at today’s price. That’s calculated by summing up the fund’s monthly dividend payouts ($0.07 each month or $0.84 in a year). All of these payouts divided by ZDV’s unit price ($24.22) equal roughly 3.5%. So, you can get about $3,470 in annual dividend income if you invest in ZDV and the dividend payout doesn’t change.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| BMO Canadian Dividend ETF | 24.22 | 4,129 | $0.07 per month ($0.84 per year) | $289 per month ($3,468 per year) | Monthly |
As you can see, you can get quite a bit of dividend income coming in with a $100,000 investment in ZDV. A similar investment in the TSX Composite Index would provide much less yield.
Diversification
Next up, we can look at the level of diversification in ZDV’s portfolio. Diversification is important because, when done correctly, it reduces risk. ZDV has 55 holdings, which is a significant amount of numerical diversification. The fund has additional diversification in its varied sector exposures. Numerical “diversification” doesn’t mean a lot if all of the assets move together in the same direction. What you need is uncorrelated assets, and with the many different sectors represented in ZDV’s portfolio, this fund has plenty of them.
Fees and other costs
Last but not least, we need to look at ZDV’s fee structure. The fund isn’t exactly dirt cheap by ETF standards, with a 0.39% management expense ratio (MER). That means fees and execution costs combined. Other funds have these as low as 0.04%. So, ZDV isn’t best in class on cost, but it has enough things going for it that I would be comfortable having my entire TFSA invested in it if I had to.
