One mistake newer Canadian ETF investors often make is defaulting to the biggest ETFs by assets under management from large providers. Size alone does not guarantee efficiency.
A good example is the iShares NASDAQ 100 Index ETF Hedged to CAD (TSX: XQQ). It launched in May 2011, has about $4.3 billion in assets, and is widely held. Despite that, it is not my preferred way to own the NASDAQ 100, for two reasons.
First, the cost. XQQ’s management expense ratio of 0.39% used to be competitive. Today, it is expensive relative to newer alternatives that offer the same exposure for much less. Fees compound negatively over time, especially for growth-heavy ETFs with modest yields.
Second, tracking error. Over the past 10 years, XQQ has delivered an annualized return of about 17.8%, compared with roughly 18.4% for the NASDAQ 100 itself. A big reason for that gap is currency hedging. While hedging can reduce short-term volatility, it tends to create a long-term drag that shows up in relative underperformance.
If you want NASDAQ 100 exposure in Canadian dollars, there are better options. Here are two I like from Global X Canada and Invesco Canada.
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The Global X option
The first alternative is the Global X NASDAQ-100 Index Corporate Class ETF (TSX: HXQ).
HXQ tracks the NASDAQ 100 Total Return Index and charges a lower 0.28% MER, which is already an improvement over XQQ. It does not use currency hedging. In the short term, a rising U.S. dollar helps returns, while a rising Canadian dollar hurts them. Over longer periods, however, you avoid the persistent drag that hedging introduces.
Another advantage is tax efficiency. HXQ is structured as a corporate class ETF and, so far, has not paid distributions. XQQ, by contrast, has a small trailing yield of about 0.25%. That income is taxable in non-registered accounts and adds reporting friction. With HXQ, taxes are deferred until you sell and realize capital gains.
The Invesco option
If tax efficiency is not a priority and you prefer a plain-vanilla structure, the Invesco NASDAQ 100 Index ETF (TSX: QQC) is a strong option.
QQC simply replicates the NASDAQ 100 by holding the same stocks at the same weights. Its key advantage is cost. The MER is just 0.21%, undercutting both XQQ and HXQ.
Invesco achieves this by using an ETF-of-ETFs structure. QQC holds its long-established U.S.-listed counterpart, allowing currency conversion to happen at institutional rates. That saves you the hassle and cost of converting currency yourself.
