The second-best deal ever in the history of Canadian investing, the iShares CDN Large Cap 60 Index Fund , has just marked its 10th anniversary.
Ever wonder why financial journalists, bloggers and an increasing number of investment advisers talk so much about exchange-traded funds? Look no further than the iShares large cap fund, commonly known by its XIU ticker symbol.
Time has papered over the fact that XIU actually raised the cost of ETF investing when it was designated to replace a pair of predecessor funds that were offered by the Toronto Stock Exchange, called TIPS. This was back when ETFs were still known as index participation units and the global market for these products included just 33 names. Today, there are 2,339.
TIPS were the first-best deal ever in Canadian investing. They had a management expense ratio of about 0.05 per cent, which is as close to free as investors are ever going to get in a fund product that offers a diversified portfolio in a single purchase. XIU - it was originally known as the i60 - raised the ante for the investment industry in a couple of different ways.
First off, XIU came in with an MER of 0.17 per cent when it was listed for trading on Oct. 4, 1999 (it merged with TIPS a little later). While pricier than TIPS, XIU became a notable bargain compared with mutual funds.
Second, XIU gave the company that introduced it, Barclays Global Investors, the business foundation it needed to build a family of 30 funds that now controls about 80 per cent of the Canadian ETF market.
"Obviously, XIU is the flagship," said Heather Pelant, head of iShares at Barclays Global Investors Canada. "You can't have a conversation about ETFs in Canada without talking about this fund."
The word on XIU hasn't always been good, mind you. Early on, there was some controversy over whether TIPS should be converted into an ETF that followed the S&P/TSX 60 index of big blue chips, or a rival index from Dow Jones. The Dow Jones index was actually turned into an ETF here in Canada, but it quickly folded.
Back in 2000, XIU was criticized for having too much exposure to Nortel Networks, which at one point accounted for 45.5 per cent of the underlying S&P/TSX 60 index. In response, Barclays introduced a version of XIU that capped all stocks at 10 per cent of the portfolio. It was later rejigged to track the broader S&P/TSX composite index, which includes more than 200 stocks.
There's now about $10.6-billion invested in XIU, about 30 per cent of it from individual investors and the rest from institutions like pension funds. It's not unusual to see it listed as the most actively traded share on the Toronto Stock Exchange. Why is it so popular?
"It has a very cost-effective MER, and it trades like stink," Ms. Pelant said.
Liquidity - the volume of trading - is what draws institutional investors. The low fees are for everyone.
The average MER for Canadian equity funds like XIU is 2.45 per cent, but that's not a fair number to use because the big funds with most of the money charge less than that. The average for the largest dozen funds is actually 1.9 per cent, which is still vastly higher than XIU's 0.17 per cent.
What do lower fees mean to performance? Some in the mutual fund industry will say little, or nothing. In the real world, they add up to XIU ranking second in the Canadian equity category over the five years to Aug. 31 and fifth for the three years. XIU was mid-pack in the past year, not bad for an index-hugging investment with no latitude to take shelter from the bear market by holding cash or seeking comparatively safe sectors (note: industry-wide 10-year numbers to Sept. 30 aren't ready yet, but XIU's return was 6.6 per cent).
Even the competition attests to the importance of XIU in the marketplace. Som Seif, chief executive officer of Claymore Investments, said it's a benchmark that all money managers specializing in Canadian stocks must measure themselves against.
"If they're not doing their job, this ETF is just sitting there waiting to take their place," he said. "It's a benchmark that everyone has to live and die by. If you do really well and you beat the XIU, great. If you don't, then you don't deserve your capital."
Does your Canadian equity fund deserve your capital? If not, you have more than half-a-dozen ETF alternatives from four different companies. One of them is XIU, which you might call the father of them all.
Rob Carrick