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ETFs of Note
Vanguard Canadian Short-Term Bond Index ETF (TSX: VSB) – This is my top pick for broad-based short-term bond exposure. Despite carrying an MER that is 1 basis point higher than the iShares version (XSB), I prefer it for its higher credit quality and greater exposure to government bonds. I have always viewed short-term fixed income as a safe haven, and with my expectation of higher equity-market volatility in the next few months, I believe this offering will hold up slightly better than XSB.
iShares Core Canadian Universe Bond Index ETF (TSX: XBB) – Designed to track the FTSE Canadian Universe Bond Index, this ETF is my top pick for broad-based Canadian fixed income exposure. It provides exposure to the largest government and corporate bonds in Canada and has provided a modest level of outperformance to its peers, the BMO Aggregate Bond ETF (TSX: ZAG) and the Vanguard Canadian Aggregate Bond Index ETF (TSX: VAB). The portfolio has a bit more exposure to corporate bonds than VAB, which offers a slightly higher yield and a slightly lower interest rate sensitivity. Costs are roughly in line, although VAB and ZAG are a basis point cheaper. Still, I currently favour XBB as my top core bond holding.
iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) – This cap-weighted ETF provides exposure to the benchmark S&P/TSX Composite Index. Costs are low with a management fee of 5 basis points (bps), resulting in an MER of 0.06%. Performance between this and the BMO version (ZCN) has been similar; however, the higher share price of XIC would be expected to result in modestly lower trading costs when commissions and spreads are considered.
BMO MSCI EAFE Index (C$ Hedged) (TSX: ZDM) – The pickings for international and global ETF offerings are significantly lower than what is available for Canadian and U.S. ETFs. This makes finding a ETF good solution a bit more difficult. Another challenge with the international and global offerings is they tend to come at a higher cost than Canadian and U.S. versions, making them much less attractive to using actively managed mutual fund offerings. But if you’re looking for low-cost, passive international equity exposure, this BMO offering would be my pick. It offers exposure to the broadly diversified MSCI EAFE Index, has outperformed other passive EAFE options, and does so at a cost of 22 basis points.
Invesco S&P/TSX Composite Low Volatility ETF (TSX: TLV) – The consensus is that to earn higher returns, you need to take on higher risk. This has held true across asset classes, with bonds earning more than cash, and equities gaining more than bonds. However, within equities, there is an anomaly where the least volatile stocks have outperformed in many different market environments, resulting in long-term return numbers that are in line with the broader markets, but with much less volatility.
In the past few years, we’ve seen many new low-volatility ETFs and funds come to market, each using their own unique spin to take advantage of the anomaly. In the Canadian equity space, this ETF from Invesco is my top pick. It invests in the 50 least volatile stocks that trade on the TSX. It has no constraints on sector weights or market cap, meaning concentration risk may be a potential concern, but looking at historic performance, it has tended to be the least volatile of the available offerings, making it a good pick for a potentially volatile period.
Invesco Canadian Dividend ETF (TSX: PDC) – Dividends have made up a substantial portion of the total return of equities over the long-term, and there is little sign that this will change into the future. That makes dividend investing a solid strategy for most investors.
This offering from Invesco is one of my favourites in the Canadian dividend category. It invests in liquid, high yielding Canadian equities that have a track record of growing dividends. To be included in the index, a company must have paid stable or growing dividends in each of the past five years. There are no limits on sector exposure, so it can get pretty concentrated from a sector perspective. Unlike some of the other dividend mandates, this focuses more on larger companies. It has historically offered a nice balance of return and lower volatility.
iShares MSCI Minimum Volatility USA ETF (TSX: XMU) – This iShares ETF tracks an index that is designed to provide exposure to a portfolio of lower volatility stocks. Unlike Invesco’s TLV discussed above, which invests in the least volatile stocks, the methodology uses more of an optimization approach to build the portfolio. While the focus is on low volatility, the sector mix is roughly in line with the broader market.
The index providers then use an optimization process to build the mix of securities that provides the best risk-return trade-off. It tends to be a touch more volatile than the Invesco version, but the returns have also been slightly higher. I have found that this methodology has produced slightly better results in the U.S. and international markets, making this my top pick.
BMO U.S. Dividend ETF (TSX: ZDY) – ZDY invests in a portfolio of U.S. dividend-paying stocks. The portfolio is constructed using a rules-based approach that considers a stock’s liquidity, three-year dividend growth rate, dividend yield, and dividend payout ratio. These factors are scored, and the top 100 or so most attractive stocks make up the fund’s portfolio. It’s been a very solid pick in the U.S. dividend category.
Absolute returns have trailed the broader U.S. market slightly, but with the lower volatility, risk-adjusted returns have been comparable. This version is unhedged, while hedged version (ZUD) offers the same underlying investment exposure with all of the foreign currency exposure hedged back to Canadian dollars. I prefer the unhedged version as it tends to be less volatile, particularly in a market selloff.
iShares MSCI EAFE Minimum Volatility ETF (TSX: XMI) – This ETF is built using a very similar approach to XMU, discussed above, with a key difference being that it uses the MSCI EAFE Index as its benchmark. It roughly matches the country mix and sector exposure of the broader index and is optimized to produce the best risk-reward balance. Returns over the past five years have outpaced the broader market with lower volatility. More recently, it’s trailed modestly.
This is one of the few international equity offerings that doesn’t include U.S. equities. I am more likely to blend this with a U.S. equity option when building my own portfolio, rather than using an option that incorporates both U.S. and international stocks. Costs are reasonable, coming in with a management fee of 35 basis points, compared with 20 bps for the broader EAFE Index.
BMO International Dividend CAD-Hedged (TSX: ZDH) – Like ZDY discussed above, this ETF provides exposure to a diversified portfolio of high-yielding equities, with the key difference being that this one is focused on non-U.S. equities.
The investment process is identical, using a rules-based approach that considers a stock’s liquidity, three-year dividend growth rate, dividend yield, and dividend payout ratio. These factors are scored, and the top 100 or so most attractive stocks make up the portfolio. This version is fully hedged to Canadian dollars, while its companion ZDI is unhedged.
Unlike the U.S. version, the fully hedged fund has resulted in a more favourable risk-reward profile. More than 70% of the portfolio is invested in Europe, and with the uncertainty caused by Brexit and the overall economic environment in the region, I am not bullish on the outlook for the euro. That leads me to favour this fully hedged version.
Horizons Active Corporate Bond ETF (TSX: HAB) – This is an actively managed bond ETF that is run by the fixed income team at Fiera Capital. Fiera is a Montreal based Canadian money manager with more than $144 billion in assets under management. This ETF is managed using a blend of top down macro analysis and bottom up security selection. The process starts with an overview of the economy and bond market, looking at the outlook, their expected outcomes, and how the market has priced each area. This helps to identify the mispricing and the potential for outsized gains. They will also review the trends and consider the outlook for central bank activity and the direction of yields. Once this is complete, they look for the sectors that offer the most attractive opportunities and then seek to identify individual issues where the true value has not been fully recognized by the market. The Managers have the flexibility to invest in the areas where they see the best opportunities, irrespective of the constraints of a benchmark. It is expected the portfolio will be over-weight corporate issues in most scenarios as Corporates tend to offer higher yields and less interest rate sensitivity than government bonds. That will lead to outperformance in most market environments, compared with government bonds. However, it is likely there will be underperformance if we see significant market volatility and investors seek safe haven in government bonds. Costs, while more expensive than the passive bond options are very reasonable. The management fee is 0.50%, which results in an MER of 0.59%.
Horizons Active Canadian Dividend ETF (TSX: HAL) – This systematically managed ETF has delivered very strong absolute and risk-adjusted returns for investors since its launch in February 2010. Its 5-year average annual compounded rate of return to July 31was 6.1%, outpacing the S&P/TSX Composite, which returned 4.4% over the same period. Manager Sri Iyer and his Systematic Strategies team at Guardian Capital look for Canadian companies that can pay, sustain, and grow their dividends. The team uses a ruled-based screening process that analyzes 31 different factors, looking for positive rates of change. These factors focus on growth, payout ratios, efficiency, valuation, and investor sentiment. The result is a well-diversified portfolio, holding around 45 names, with the top 10 making up roughly a third of the ETF. It invests in companies of any size and approximately half the portfolio is invested in large cap names, with the balance in small- and mid-caps. The sector mix is dramatically different than the broader Canadian market, with an overweight in energy, real estate, and utilities. It is significantly underweight financials, which is sort of rare for a dividend focused mandate. Valuation levels are slightly higher than the broader market and the peer group. However, the stronger-quality metrics, combined with the higher forward-looking earnings growth rate, more than offsets the higher valuation, making it one of the more attractive options in the dividend ETF category. It has also been one of the least volatile in the category, while delivering well above average returns. Looking at the defensive positioning of the portfolio, there is nothing to indicate a higher level of volatility ahead. The biggest knock on this ETF is its cost, with an MER 0.79%, which is well above the category average. Still, the alpha generated has more than offset this higher cost.