Is it possible to find a stock market-traded investment that is worth holding forever?
Many will tell you, “No, it’s not possible. Companies come and go; the strongest company in the world today could be headed straight for obsolescence tomorrow.”
Indeed, that is often the case with individual companies. While some stand the test of time, it’s harder to say that a company will stand the test of time with foresight, than to note that it happened in hindsight.
Nevertheless, there are certain stock market-traded investments that are worth holding forever. Most notably, exchange-traded funds (ETFs).
ETFs are pooled investment vehicles that trade on the stock market. Much like their cousins, mutual funds, ETFs hold diversified portfolios of stocks, meaning you can buy an entire portfolio through an ETF. Diversification is a good characteristic to have in a portfolio, and with ETFs, you can get considerable diversification with just one asset (or what ‘feels’ like just one asset, rather).
ETFs that are based on popular stock market indexes – index funds – are among the best ETFs to hold, because they do incur active management costs. Their entire strategy is to track an index published by a third party, such as S&P Global or MSCI. ETFs have to pay licensing fees to copy these companies’ indexes, but the fees are minimal compared to the cost of hiring an active portfolio manager. As a result, ETFs often boast some of the lowest fees and highest after-fee returns of any asset class. In the ensuing paragraphs I will explore one ETF that I hold in my retirement account and never plan on selling.
iShares S&P/TSX 60 Index Fund
The iShares S&P/TSX 60 Index Fund (TSX:XIU) is a Canadian index fund based on the TSX 60 Index – an index of the 60 largest companies in Canada. The fund holds all 60 of those stocks, meaning that it likely tracks its index very well (many index ETFs use a sampling method that introduces tracking risk). XIU is the most popular and widely traded Canadian ETF, serving as a proxy for the large cap part of the overall Canadian market. Its representation of a large part of the Canadian equity markets makes it suitable for ultra-diversified passive portfolios.
One thing that XIU has going for it right now is a portfolio that is well suited to today’s market conditions. The fund is heavily weighted in banks, non-bank financials, energy companies and utilities, a group of stocks that offer a decent counterweight to today’s high-flying tech stocks. The tech stocks got where they are for a reason – you shouldn’t avoid them entirely – but trading at 40 times earnings on average, they’re probably overdue for a near term correction. If you hold a lot of U.S. index funds already, adding some Canada exposure through ETFs could make a lot of sense, both for the increased geographic diversification and because Canada has different sector exposures than the U.S. does.
Basic fund characteristics
One of the things that makes XIU such a great fund is the fact that it has a lot of technical characteristics that lend themselves well to good performance:
- The fund is relatively cheap, with a 0.15% management fee and a 0.18% management expense ratio (MER).
- It has a very narrow 0.03% bid-ask spread. A wide spread is a kind of hidden fee; market makers capture this fee when they trade your orders for you.
- It benefits from backing by Blackrock, one of the world’s biggest and most reputable asset managers.
All of these characteristics combine to make XIU a best-in-class Canadian index fund. Personally, I may just hold it for life.
