Investing in index exchange-traded funds (ETFs) is likely the best approach to stock market investing for the average person. Such funds eliminate the need for stock selection expertise, on the part of both the investor and the fund manager, by diversifying widely based on established stock market indexes (lists of stocks). This approach reduces index funds’ management fees and gives them higher returns per unit of risk assumed than most active funds deliver.
With all that being said, ETFs are not all created equal. While many of the popular ones are very well constructed, low-fee, diversified machines, others have high fees and little diversification. These ETFs often deliver poor performance. To really capture the low risk and moderately high returns that ETFs promise, you need to invest in true index ETFs. In this article, I’ll explore three Canadian index ETFs that I either own or plan on owning in the near term.
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iShares TSX 60 ETF
The iShares S&P/TSX 60 Index ETF (TSX: XIU) is a Canadian ETF of large cap stocks managed by Blackrock’s iShares. It is based on the S&P/TSX 60 Index, a credible list of the 60 biggest Canadian companies by market cap. I’ve owned this fund for about six years now, and I do not plan on exiting the position (though I did trim it a bit recently).
XIU is the most popular Canadian index fund by trading volume. This is an important characteristic, as it means that the fund enjoys a narrow bid-ask spread. The lower the spread, the less you pay in “hidden fees” to market makers.
Apart from that, XIU has many characteristics that you’d expect from a quality index ETF.
It has low fees (a 0.15% management fees and a 0.18% total expense ratio).
It has 61 stocks, which is a reasonable if not maximal amount of diversification.
It’s sponsored by Blackrock, a reputable fund manager.
And finally, XIU’s focus on large caps gives the portfolio a tilt toward established, wide-moat companies. Overall, it is a fund any Canadian investor should consider holding, and one I’m happy to own.
Vanguard emerging markets
The Vanguard FTSE Emerging Markets All Cap ETF (TSX: VEE) is a Canadian fund made up of emerging markets stocks. I held this fund in the past and sold it, but I’m considering getting back into it.
VEE holds stocks in many emerging markets including China, India, Taiwan, Brazil, Malaysia, Mexico, Thailand, the United Arab Emirates, and more. Most of these markets are young and show incredible promise. They’re also considerably cheaper than the North American markets going by multiples: VEE’s portfolio trades at just 16.5 times earnings and 2.5 times book, well below US and Canadian market averages.
VEE is not the cheapest of funds out there. With a 0.26% management fee, it’s a little pricier than a typical S&P 500 fund. However, the index it tracks is not the most widely followed one in the world, making it a little bit harder to reproduce than others. Given this, I think VEE’s management fee is probably reasonable.
Vanguard high yield Canadian fund
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is a fund of Canadian high yield stocks offered by Vanguard. I do not currently own this fund, but I’m considering adding it to my portfolio.
VDY has many characteristics that make it desirable to income-focused investors. It is based on a FTSE index, making it a true index fund. It has about a 2.8% dividend yield, which is higher than that of the TSX Index as a whole. Finally, it has a 0.22% management fee, which is not overly high. Taking all these characteristics together, VDY seems like a sensible vehicle through which to get TSX dividend stock exposure into your portfolio.
