Today’s stock market is changing at a rapid and some would say unprecedented pace. And that has bearing on what you should hold in your tax-free savings account (TFSA).
Just a few days ago, SpaceX went public, nabbing a jaw-dropping $2.4 trillion market cap and making Elon Musk a trillionaire, despite having no profit and a limited total addressable market. SpaceX’s competitors OpenAI and Anthropic are eying the same feat, planning IPOs that will take place while the former company is unprofitable and the latter one is trading at an extreme multiple. If all three of these companies trade at multi-trillion dollar valuations, then the NASDAQ-100 will be trading at levels not seen since the dotcom bubble. That bubble was followed by a 90% decline in the prices of tech stocks!
In this environment, you want to rebalance your portfolio away from hype and toward companies that generate real cash flows at sensible valuations. Here, Canadian value ETFs could be just the ticket. Canadian value stocks are much cheaper than the Canadian markets as a whole, and certainly far cheaper than the U.S. markets that are being inflated by unprofitable companies in hyper-competitive industries.
In this article, I share two exchange-traded funds ETFs I’d hold in a value-oriented Canadian TFSA.
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The Vanguard Canadian Value ETF
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) is a Canadian dividend-themed ETF that also has a slight value tilt. Value stocks and dividend stocks overlap to a considerable extent, so that should come as no surprise. The lower the price, the higher the yield (assuming the stock pays a dividend at all). So, VDY, while it is a dividend-themed fund, it is also a value fund, uniquely suited to today’s overheated market.
As the name implies, the Vanguard FTSE Canadian High Dividend Yield Index ETF mostly invests in dividend-paying Canadian sectors. These include banking, utilities, energy, and non-bank financials. The fund has a 3.2% dividend yield – about 1.2% higher than the Canadian markets as a whole – and sports a portfolio P/E ratio of 17 and a portfolio price/book ratio of 2.3. It’s cheaper than average, so likely to survive any turbulence caused by today’s overheated market. It could make a great TFSA holding.
iShares Canadian Value Index ETF
The iShares Canadian Value Index ETF (TSX:XCV) is a Canadian index fund managed by Blackrock that invests in value-oriented Canadian stocks. As mentioned previously, there’s a lot of overlap between high-yield stocks and dividend stocks, so XCV holds many of the same stocks that VDY does. Nevertheless, it’s a unique fund in its own right.
First off, XCV’s portfolio is considerably cheaper than that of VDY’s, trading at a mere 16 times earnings!
Second, the fund is overwhelmingly dominated by financials (61%), while VDY’s concentration in financials is a little lower (57%).
Third and finally, XCV’s management fee of 0.50% is considerably higher than VDY’s 0.22%. So, keep that in mind if you’re feeling inclined to buy XCV as the cheaper of the two funds. XCV’s higher fee will eat into its returns more than VDY’s will. Nevertheless, it’s probably a decent TFSA ETF.
