If you look at the most popular exchange-traded funds (ETFs) in Canada, you’ll quickly notice that many are the so-called all-in-one asset-allocation ETFs.
These funds are designed to be complete portfolios in a single purchase. They typically hold thousands of stocks spanning the United States, Canada, international developed markets, and emerging markets, all while automatically rebalancing the portfolio on your behalf. For many investors, they are an excellent solution because they offer broad diversification at a relatively low cost.
One thing you may notice, however, is that Canada is often overrepresented in these portfolios relative to its actual weight in the global stock market. That is intentional.
ETF providers generally maintain a home-country bias because Canadian stocks can offer certain advantages to Canadian investors, including more favourable tax treatment on eligible Canadian dividends and reduced currency exposure.
The result is a portfolio that is often more heavily tilted toward Canada than a purely market-cap-weighted global index would suggest. Of course, investors who prefer building their own portfolios can achieve that same home-country bias themselves.
Today, we’re looking at three Canadian ETF options that cover very different objectives. One focuses on broad-market exposure, one emphasizes dividend income, and one attempts to maximize income through the use of covered calls and leverage.
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The low-cost core option
iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) is about as straightforward as Canadian equity investing gets.
The ETF tracks the S&P/TSX Composite Index and provides exposure to approximately 225 Canadian companies across the investable Canadian stock market. Because the Canadian market itself is concentrated, the ETF naturally leans heavily toward financials, energy, materials, and industrials.
XIC currently offers a trailing 12-month yield of 2.06% while charging an extremely low 0.06% expense ratio. The ETF has also built an impressive track record. Since launching in 2001, it has grown to roughly $29 billion in assets under management. Over the past 10 years, it has generated annualized returns of 12.74% with dividends reinvested.
The Canadian dividend option
For investors who prioritize income, Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) offers a different approach.
Rather than owning the entire market, VDY focuses specifically on higher-yielding Canadian dividend stocks. The ETF currently carries a 0.22% management expense ratio and offers a trailing 12-month yield of 3.24%, paid monthly.
The tradeoff is concentration. VDY holds just over 60 companies, and financials make up a particularly large portion of the portfolio. In fact, the two largest holdings are Canadian banks that collectively account for roughly 25% of the ETF.
That level of concentration may not appeal to everyone, but historically it has worked quite well. Over the past decade, VDY has generated annualized returns of approximately 14.15%, outperforming the broader Canadian market over that period.
The maximum income version
Investors looking to maximize current income may want to examine Evolve Canadian Equity UltraYield ETF (TSX:CANY).
This is a much different ETF than either XIC or VDY. CANY uses an actively managed portfolio of Canadian stocks combined with a covered call strategy. Specifically, the fund writes covered calls on approximately 50% of the portfolio. This generates additional option income but also limits a portion of the portfolio’s upside potential.
To boost income further, the ETF employs modest leverage, borrowing up to approximately 33% of net asset value, or roughly 1.33 times exposure. The result is one of the highest-yielding Canadian equity ETFs available. Currently, CANY offers a yield of approximately 14%.
Another unusual feature is its distribution schedule. While XIC pays quarterly and VDY pays monthly, CANY pays distributions twice per month, making it one of the few semi-monthly ETFs available to Canadian investors.
Of course, investors should understand the tradeoffs. Covered calls can limit upside participation during strong bull markets. Leverage can amplify losses during downturns and is subject to financing costs as well.
The ETF also carries a 0.40% management fee, and because it is relatively new, the final management expense ratio has not yet been established. Once operating expenses are fully reflected, the total cost will likely be higher.
