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Portfolio Strategy

Rob Carrick's ETF Buyer's Guide, Vol. 4: Income-paying ETFs Add to ...

Another helpful primer on your options for exchange-traded funds ... this time spotlighting dividend and REIT ETFs

Give us dividends. Give us bond interest. Give us distributions from real estate investment trusts.

Canada’s aging population naturally gravitates toward income investments, but that doesn’t fully explain the proliferation of income-paying exchange-traded funds. All ETF firms now offer dividend and diversified income funds that in most cases make monthly payments of cash. In the fourth instalment of The Globe and Mail ETF Buyer’s Guide, these products go under the microscope.

There are so many income ETFs that some rules had to be set for inclusion here. Funds must focus on the Canadian market and be core investments rather than specialty products like covered call ETFs (they use financial tools called derivatives to generate investment income). Bond ETFs are also excluded, but they’ll be covered in depth in a fifth volume of the Buyer’s Guide that will appear in the coming weeks. The Guide has already covered Canadian equity ETFs, U.S. equity ETFs and international equity ETFs.

One of the most important variables in choosing income ETFs is the yield, which can be measured a few different ways. Here, you’ll find the distribution yield, also sometimes known as portfolio yield. It’s calculated using recent monthly or quarterly payouts and the latest share price. ETFs are a low-fee version of mutual funds that trade like a stock. Traditionally, ETFs tracked major stock and bond indexes; today, many funds follow more obscure indexes or have a manager who picks stocks. To invest in ETFs, you need a brokerage account. For help on that, consult my latest ranking of online brokers. Here’s some explanation of the terms you’ll find in ETF Buyer’s Guide:

Assets: Shown to give you a sense of how interested other investors are in a fund; unless they’re new, the smallest funds may be candidates for de-listing.

Management expense ratio (MER): The MER is the main cost of owning an ETF on an ongoing basis; as with virtually all funds, published returns are shown on an after-fee basis.

Trading expense ratio (TER): The TER is the cost of trading commission racked up by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index; add the TER to the MER for a fuller picture of a fund’s cost. Note many ETFs do so little trading that their TERs round down to zero. The most recently reported full year numbers are presented here.

Average daily trading volume: Trading of less than 10,000 shares per day on average tells you an ETF isn’t generating much interest from investors.

Top sector weightings: Financial stocks dominate dividend and income ETFs, so be cautious if you already have a lot of exposure to the sector. ETF company websites will show you the latest percentage weightings for sectors and individual stock or bond holdings.

Top three stocks: Another view on what’s inside an ETF.

Returns: ETF companies typically disclose total returns, or share price change plus dividends or distributions.



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Click here for a printable excel table.


* Note: Management fees only, shown for newer funds that do not yet post a full MER (management fees are a component of MER).
Sources: ETF company websites, Globeinvestor.com

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