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Gail Bebee is a personal finance author and speaker. (Tory Zimmerman/The Globe and Mail)
Gail Bebee is a personal finance author and speaker. (Tory Zimmerman/The Globe and Mail)

The Shrewd Investor

Top picks from the ETF universe Add to ...

As I declared in my previous column, exchange-traded funds are not perfect. However, some ETFs are definitely worth buying. This month, I will wade fearlessly into shark-infested fund waters to fish for the best ETFs available to Canadian investors. I can almost sense the approaching attack of the comments-section predators.

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My picks are drawn from the universe of ETFs that trade on U.S. or Canadian stock exchanges. U.S.-listed ETFs with at least a three-year track record made the initial cut. For the less mature Canadian marketplace, any ETF with at least a one-year record passed initial muster. Beyond this, my key selection factors were:

– above-average performance;

– low management-expense ratio (MER);

– diverse holdings within the category;

– regular dividends/distributions;

– no leveraged or inverse structures;

– whether I would consider owning the ETF.

Canadian equity

Lack of diversification is a shortcoming of market cap-weighted Canadian equity ETFs due to the TSX’s heavy weighting (more than 70 per cent) in just three sectors: financials, energy and materials. The following two funds use rules-based stock selection methodologies, which tend to result in broader sector diversification.

BMO Low Volatility Canadian Equity ETF (ZLB-T)

This relatively new ETF holds the 40 least market sensitive stocks from among the largest and most liquid Canadian securities. The one-year return is 19.31 per cent, well above the 9.82 per cent return of the traditional market cap benchmark, the S&P/TSX 60 Index. Simulated returns back to 1995 suggest that these better returns are not an anomaly. The MER is 0.34 per cent and the quarterly distribution yields 2.3 per cent.

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ-T)

CDZ holds larger Canadian companies that have increased their dividends every (or almost every) year for the past five years. The MER is steep at 0.66 per cent, but the returns have consistently exceeded the S&P/TSX 60 Index over the past five years. There is a monthly distribution of about 3.4 per cent.

U.S. equity

Lower costs and currency diversification are the extra benefits of buying U.S.-listed ETFs for American equity exposures in Canadian portfolios.

Vanguard Dividend Appreciation ETF (VIG-N)

With one purchase, you can own a piece of 146 large American companies spread across all economic sectors. This is a relatively conservative fund, as only well-established companies meet the major criterion: a record of 10 consecutive years of increasing their dividends. Over five years, the fund has slightly outperformed the venerable S&P 500 Index.The MER is only 0.10 per cent. The quarterly distribution is currently 2.2 per cent.

Vanguard Total Stock Market ETF (VTI-N)

This fund owns companies of all sizes and from every sector in the U.S. economy, more than 3,500 of them. The MER is a dirt cheap 0.05 per cent. Fund returns have outpaced the S&P 500 Index over the past five years. It pays a quarterly distribution of about 2 per cent.

Vanguard Extended Stock Market ETF (VXF-N)

This ETF holds more than 3,000 U.S. companies in the small- and mid-capitalization space. The investment risk is higher with stocks of this size; however, returns have consistently exceeded the above large-cap stock and total stock market ETFs. The fund is for capital gains enthusiasts, as distributions are low (1.4 per cent) and are paid only annually. As with all Vanguard funds, the MER is much lower (in this case 88 per cent lower) than the average expense ratio of funds with similar holdings.

International equity

Vanguard FTSE Developed Markets ETF (VEA-N)

Vanguard charges an MER of just 0.10 per cent for this developed markets ETF, which holds about 1,300 large- and mid-capitalization European and Asian stocks from more than 23 countries. The fund does not invest in U.S. or Canadian companies, so it is an easy way for investors to diversify their portfolio beyond the usual suspects: Canadian and U.S. stocks. The quarterly dividend is 4.7 per cent. Returns, while not impressive over the past five years, have been above average for the category.

WisdomTree Emerging Markets Equity Income Fund (DEM-N)

DEM provides exposure to more than 300 dividend-paying stocks spread across 14 emerging market countries. Stock selection is rules-based, which I think is a good approach for less developed markets. In this case, companies in the fund are among the highest dividend payers in the fund’s benchmark index. The quarterly distribution is 4.2 per cent. Despite a relatively high MER of 0.63 per cent, returns have been above average for the emerging markets class.

Fixed income

Fixed income funds are not a great place for your money when interest rates are on the rise, as fund values typically decline. My preference in such an environment is the venerable GIC ladder. However, the following ETF is worth a look.

Horizons Active Floating Rate Bond ETF (HFR-T)

This floating rate bond ETF is structured to minimize the impact of interest rate fluctuations on the market value of the fund. It holds corporate bonds and provides an income that tracks prevailing short-term corporate bond yields. The MER is 0.45 per cent and the monthly distribution is about 2.5 per cent.

Multi-asset class funds

iShares Growth Allocation ETF (AOR-N)

Multi-asset class ETFs offer cheap, low-effort investing. While there are a few Canadian-listed choices, my pick is the U.S.-listed iShares Growth Allocation ETF (AOR-N). This fund combines capital preservation and some current income with the opportunity for moderate capital appreciation. It holds a diverse mix of U.S. and international stocks and a broad selection of U.S. bonds. The 30-per-cent fixed income allocation (lower than the classic 40 per cent) should mitigate the impact of rising interest rates on returns. There is a quarterly distribution of just over 2 per cent. The three-year return is a respectable 10.3 per cent (U.S. dollars). Canadians will want to augment this fund with some Canadian holdings.

 

Return Rate*

  

ETF

1 yr

3 yr

5 yr

MER, per cent

Yield, per cent

BMO Low Volatility Canadian Equity ETF (ZLB-T)

19.31

-

-

0.34

2.3

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ-T)

10.18

10.47

6.24

0.66

3.4

Vanguard Dividend Appreciation ETF

(VIG-N)

17.06

16.75

7.91

0.10

2.2

Vanguard Total Stock Market ETF

(VTI-N)

20.22

18.95

7.83

0.05

2.0

Vanguard Extended Stock Market ETF

(VXF-N)

27.11

20.85

9.44

0.14

1.4

Vanguard FTSE Developed Markets ETF (VEA-N)

18.88

9.46

1.99

0.10

4.7

WisdomTree Emerging Markets Equity Income Fund (DEM-N)

-2.43

2.87

4.30

0.63

4.2

Horizons Active Floating Rate Bond ETF (HFR-T)

2.50

-

-

0.45

2.5

iShares Growth Allocation ETF

(AOR-N)

9.60

10.26

-

0.31

2.2

*All returns quoted as of Aug. 31, 2013

Disclosure: Ms. Bebee owns shares of VIG.

Ms. Bebee is Canada’s independent voice on personal finance and author of No Hype –The Straight Goods on Investing Your Money, a popular book of investing basics for Canadians from a financial industry outsider viewpoint. Through her writing, speaking and teaching, Gail shows people how to take control of their money and achieve their financial goals. Her column appears monthly on the Financial Road Map site. Her website is www.gailbebee.com

 
  • ZLB-T
  • CDZ-T
  • VEA-N
  • HFR-T
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