PowerShares Canadian Dividend Index

Analysis: Launched just over five years ago today, the PowerShares Canadian Dividend Index Fund was one of the first funds that invested solely in ETFs. It has one holding, the PowerShares Canadian Dividend Index ETF (TSX: PDC). The underlying ETF invests in the 45 largest Canadian listed companies that have had stable or increasing dividends for at least the past five years.

With its focus on large companies that have stable or growing dividends, it is not unexpected to see it heavily skewed towards financial services. At the end of October, financials made up more than half the fund, and the big five banks themselves represented 35%. The next largest sectors are energy at 15% and communications at 12%. This is even more concentrated than the S&P/TSX Composite, where the three largest sectors make up less than two-thirds.

Performance has been strong, gaining 13.6% for the past three years, handily outpacing the S&P/TSX Composite Index and most of its peer group. Volatility has been well below the broader market, and it has offered very strong downside protection. This combination has resulted in strong outperformance on a risk adjusted basis.

In addition, it offers a very attractive yield, with the underlying yield estimated at more than 4%, well above the broader market and many of its peers. This will certainly help to preserve capital and increase returns in periods of higher than normal volatility. It pays a variable monthly distribution that over the past 12 months has yielded approximately 3.6%

Understandably, because the underlying investment is an ETF, the costs are very competitive, with an MER of 1.81%. Yes, this is higher than the underlying ETF, but it’s important to note that it includes the cost of the underlying ETF, a 1% trailer to the dealer, and a modest amount of operating expenses. So all in, the costs are still very reasonable. If a buy and hold do it yourself investor, the ETF is probably a better choice, but if you are working with an advisor, would like to make additional transactions or prefer the structure of a fund, the mutual fund version is the way to go.

My biggest concern with this fund is its concentration. While the fund has been less volatile than the broader markets, the level of concentration increases the total risk of the fund. If there is any sort of a crisis that hits the banks or other financial services companies, this fund could be hit very hard. As a result, I am somewhat reluctant to recommend it as a core holding. Instead, I can see it as a portion of your Canadian equity exposure, providing a low cost way to access higher yielding equities and generate a modest cash flow.