There are a lot of exchange-traded funds (ETFs) to pick from on the TSX Index these days. And the options go well beyond just index ETFs. With sector ETFs, factor-based ETFs, active ones, income-boosting covered call ETFs, and even a combination (covered call sector ETFs), there’s something for everyone. But, in my view, I’m a believer in keeping costs low. That means ensuring that you’re getting some good mileage from every basis point (bp) of management expense ratio (MER) you’ll pay.
Indeed, just because the selection has grown does not mean you need to own a piece of everything or even know about new ETFs that have landed unless, of course, you’re in a target audience that needs something very specific and is willing to pay up for it. Personally, though, I have no issue with sticking with simple, low-cost products that mirror something like the S&P 500, hedged or unhedged.
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So many ETFs are raining down on the TSX. But what actually is worth buying up here?
For risk takers, there are leveraged ETFs that might be a suitable alternative for traders who usually jump in and out of stocks or options. Personally, I’d steer clear of excessively leveraged ETFs, given the risks and how things could backfire in a hurry for traders caught on the wrong side of a reversal.
Though modest amounts of leverage (think 25% cash leverage ETFs) might make sense for some looking to raise the bar on their risk for a shot at more reward, I think that it’s really hard to justify the added steps, which only add to the MER. Indeed, it’s not cheap to have the use of leverage, keep things equal-weighted, actively pick stocks, or implement some kind of covered call strategy.
Such techniques might seem tactical, but unless you’re willing to accept the added risks and higher MERs, I think there’s no shame in keeping things simple. If anything, more selection means more competitive pressure on prices!
iShares Core MSCI Canadian Quality Dividend Index ETF
In terms of a stellar ETF fit for investors, I think something like iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV) is worth knowing about. As you may know, I’m a huge fan of the Canadian dividend ETFs out there.
And while the XDIV has ample overlap with comparable products on the ETF market, I must say that in terms of cost (MER), this ETF stands out ahead of the pack. It’s so competitively priced that it gives a TSX Index or S&P 500 index fund a run for its money. With an MER of 0.11%, the XDIV sets a new low bar for dividend ETFs, which, I think, could be the new standard.
As expected, you’re getting a lot of big bank exposure. But what’s interesting is that the insurers are also in the top 10. Indeed, the financials have been roaring higher, and it’s not just about the big banks! While the number of holdings might be rather limited (only 21 stocks at the time of this writing), I must say that every name carries weight, not just in terms of yield, but also in terms of dividend growth.
All considered, I like the 3.33%-yielding ETF and think it’s a fantastic, low-cost option not only for investors who want a monthly payout (yes, the XDIV pays monthly as well, which is something else it has over competitors), but for steady appreciation potential (XDIV is up over 60% in two years in a rather smooth upward line).
Quality dividend payers at a rock-bottom MER. That’s all you could really ask for as a passive-income investor!
