You could buy just blue chips for investing in Canada's stock market and call it a day.
It's widely accepted that broad market exposure including small, medium and large companies produces better returns than focusing just on large companies. But if your comfort level as an investor precludes owning smaller, riskier stocks, then it's a viable strategy to buy just blue chips.
We have an index of blue chip stocks for the Canadian market – the S&P/TSX 60. The gain for this index through Nov. 21 was 27.5 per cent, which compares to 30.5 per cent for the more diversified S&P/TSX composite index. Blue chips as exemplified by the 60 index are at a disadvantage over this timeframe, but they've done better than the composite index in the year to date, the past 12 months and the past three years. That's typical for the 60 and the composite indexes – they tend to take turns outperforming, with neither asserting its dominance over an extended period.
Another perspective on the benefits of blue chips in the Canadian market can be seen in the returns from mid– and small-size stocks over the past five years. The S&P/TSX completion index – that's the odd name for Canada's definitive index of middling companies – has a strong five-year gain of 41.5 per cent, but has lagged significantly in the past one– and three-year periods. The S&P/TSX small cap index has been just dismal – a five-year cumulative gain of 13.7 per cent, and a three-year gain of just 0.6 per cent. This year, it's up just 1 per cent, compared to 10.9 per cent for the composite index and 12.1 per cent for the 60 index.
It happens that Canada's oldest and largest exchange-traded fund is a vehicle for buying the 60 index. The iShares S&P/TSX 60 Index ETF (XIU) has a management expense ratio of 0.17 per cent, which is quite reasonable but not as cheap as ETFs now get. Funds tracking the composite index from iShares and BMO have MERs around 0.07 per cent. Cheaper is better in ETFs, but in this case the difference isn't enough to detract from the idea of buying Canadian blue chips and calling it a day.
Rob Carrick