The iShares S&P/TSX 60 Index Fund is by far the biggest ETF in Canada, with more than $12-billion in net assets, but its ability to deliver long-term growth is challenged by its concentration.
One of the biggest drawbacks to buying the S&P/TSX 60 Index is its lack of diversity. More than three-quarters of the portfolio’s exposure consists of three industries (Financials – 34.5 per cent, Energy – 25.2 per cent, Materials – 17.6 per cent). A further challenge is the top three holdings are all banks, which make up more than 20 per cent of the total (RBC – 7.8 per cent, TD – 6.7 per cent, BNS – 6 per cent).
While the Dow Jones Industrial Average continuously makes an effort to stay relevant, by adding companies like Cisco, Intel and Microsoft, the S&P/TSX 60 is comprised predominantly of old world firms. Besides the big banks, the list includes Suncor, CN Railway, Potash, Enbridge, TransCanada and Barrick. The average founding date of the top 10 holdings is 1908. Further down the list, there are glimmers of life, with BCE, Telus and Rogers, but their combined relative weighting does not effectively leverage the century that has passed since the stalwarts of the S&P/TSX 60 opened their doors.
2012 was a banner year for the S&P 500, which delivered a total return of 16 per cent, more than twice the return of the S&P/TSX 60. Aided in no small part by a much more balanced sector spread, comprised of Technology (19 per cent), Financials (15 per cent), Healthcare (12 per cent), Consumer Discretionary (11 per cent), Energy (11 per cent), Consumer Staples (11 per cent) and Industrials (10 per cent). Amongst its biggest holdings are many of the technology big caps, like Apple, Microsoft and Google, combined with blue chips that have stood the test of time, like Exxon, GE and Chevron.
If you’re searching for ETFs to add domestic TMT (Telcom, Media, Technology) exposure, the choice in Canada is limited to the iShares S&P/TSX Capped Information Technology Index Fund, made up of only seven holdings, with CGI and Research in Motion (soon to be just BlackBerry) accounting for 50 per cent of the total, and the iShares S&P/TSX Equity Income Index Fund, which includes Thomson Reuters, Shaw Communications and BCE amongst its top five holdings. But their inclusion in XEI is driven by yield rather than the high-growth potential of their respective sectors, and ultimately the Telecom and Consumer Discretionary aggregate accounts for less than the totals of both Energy and Financials in this fund.
The other solution to gaining TMT exposure is to buy a NASDAQ focused ETF, of which there are three: BMO NASDAQ 100 Equity CAD-Hedged Index ETF, iShares NASDAQ 100 CAD-Hedged Index Fund and PowerShares QQQ CAD-Hedged Index ETF. Plus there is a covered call and a leveraged option: First Asset Tech Giants Covered Call ETF and Horizons BetaPro NASDAQ-100 Bull Plus ETF.
But why should investors have to settle for a U.S. focused ETF when there is no shortage of compelling big cap Canadian companies?
The nation’s second largest wireless provider with 29 per cent of the market, BCE is the largest local exchange carrier in Ontario and Quebec, and Canada’s largest digital television and high-speed Internet provider. The company owns CTV Inc., which controls 58 television stations and 33 radio stations, and BCE also owns minority interests in the Montreal Canadiens, the Bell Centre and Maple Leaf Sports & Entertainment Ltd. Its share price was essentially flat in 2012 and it pays out an annual dividend yield of 5.1 per cent.
THOMSON REUTERS CORPORATION
A worldwide leading news provider and trading service provider for the financial community, Thomson Reuters has over 60,000 employees covering more than 100 countries. The company’s share price was up 3.4 per cent in 2012 and has an annual dividend yield of 4.2 per cent.
ROGERS COMMUNICATIONS INC.
Canada’s largest wireless service provider with approximately 35 per cent of the total market, Rogers Communications controls 32 per cent of the cable television market and is a leading high-speed Internet provider. The company also owns a stable of television and radio stations, a large publishing group, the Toronto Blue Jays, the Rogers Centre and has joint ownership of MLSE. In 2012, the stock price appreciated 14.6 per cent while also offering investors an annual dividend yield of 3.8 per cent. The latest rumours suggest the company is angling to acquire Shaw Communications, one of its largest competitors.
Canada’s third largest wireless provider with 28 per cent of the market. The company’s stock price appreciated 13.5 per cent in 2012 and has a dividend yield of 3.7 per cent.
CANADIAN TELECOM, MEDIA & TECHNOLOGY
The list of notable players in the industry is far more extensive than the current offering of ETFs suggests. Amongst those with a market capitalization of $1-billion or more, the list includes: Shaw Communications, CGI Group, Research In Motion, Bell Aliant, OpenText, CAE, Constellation Software, Astral Media, Manitoba Telecom, Cineplex, MacDonald Dettwiler & Associates, Corus Entertainment, Quebecor, Cogeco Cable and Celestica.
Using a $1-billion market cap as the cut-off, a Canadian TMT ETF would have 19 holdings and be anchored by BCE, Thomson Reuters and Rogers Communications. This portfolio would effectively harness the dominant position of Canada’s industry leaders, while simultaneously offering solutions to address the lack of diversity in Canada’s largest index.