Canadian investors have some tough decisions to make this RRSP season. Coming off a banner year for stocks, unsettled markets have renewed the case for caution. U.S. equity momentum has stalled, the loonie has dropped to a nearly five-year low, and capital is draining out of emerging markets.
The return of such volatility will have many investors hunting for safe, defensive options. Exchange-traded funds generally offer lower costs, but with so many to choose from, we asked some investment professionals for their top ETF picks for the conservative investor.
Wickham Investment Counsel
1. Guggenheim Defensive
Equity Index ETF (DEF-NYSE)Large companies with attractive risk-return profiles make up the index that this ETF tracks – the Sabrient Defensive Equity Index. Eligible companies typically have market capitalizations of greater than $1-billion, growing dividends, conservative accounting, "and a history of outperformance during bear markets and economic downturns," Mr. Bowman said.
2. BMO Low Volatility
U.S. Equity ETF (ZLU-TSX)This ETF is designed to offer exposure to a bundle of large-cap U.S. stocks with low beta, or limited sensitivity to market fluctuations. The lower the volatility, the greater the stock's weighting.
3. Consumer Staples Select
Sector SPDR Fund (XLP-NYSE)As demand for consumer staples is resistant to economic deterioration, the stocks in this ETF have defensive characteristics. "They are not affected by changes in spending patterns and they manufacture low priced items used every day," Mr. Bowman said. The ETF also pays a 2.6 per cent dividend.
Vice-president and associate
portfolio manager, Burgeonvest Bick Securities
1. Vanguard U.S. Dividend Appreciation Index ETF
(VGG-TSX)This ETF provides exposure to companies listed on the Nasdaq that have a history of increasing their dividends over time. It also has a relatively low management fee of 0.28 per cent.
2. Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY-TSX)Also aiming to maximize exposure to dividends, this ETF's weightings are spread across all industries among Canadian small-, mid- and large-cap stocks. "Canadian stocks are still below where they were in 2008, so there's a built-in margin of safety," Mr. DeGoey said.
3. iShares DEX Floating
Rate Note Index Fund
(XFR-TSX)This portfolio of floating-rate bonds selected by BlackRock Canada aims to offer income while limiting interest rate risk. "This is the most conservative product of the three and the only one that can reset when rates rise," Mr. DeGoey said.
Vice-president of investments
Cougar Global Investments
1. First Asset Morningstar U.S. Dividend Target 50 Index ETF (UXM-TSX)Diversified across all sectors, this ETF invests in the largest and most liquid U.S. companies. "We like the exposure to the strength of the U.S. economy and the fact that companies that pay dividends tend to have stronger fundamentals than non-dividend payers," Ms. Frame said.
2. iShares Dow Jones Canada Select Dividend Index Fund (XDV-TSX)This ETF includes 30 of the highest yielding companies in the Dow Jones Canada Total Market Index. Heavily weighted in dividend-paying financial stocks, this is a play on the strength of the Canadian economy, Ms. Frame said. "The Canadian economy is expected to benefit from a more accommodative interest rate environment."
3. First Asset Morningstar
Canada Value Index ETF
(FXM-TSX)This offers exposure to large Canadian issuers with good value characteristics and favourable ratios. This ETF skews away from financials and energy picks and is overweight on utilities, industrials, materials and consumer non-cyclicals, "all sectors currently dense with value stocks," Ms. Frame said.
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ETFs for conservative investing
|Guggenheim Defensive Equity Index ETF||DEF-N||34.98||30.28||-2.46||9.96|
|BMO Low Volatility US Equity ETF||ZLU-T||18.54||15.13||3.78||N/A|
|Consumer Staples Select Sector SPDR Fund||XLP-N||43.46||36.79||-4.70||10.94|
|Vanguard U.S. Dividend Appreciation Index ETF||VGG-T||28.07||24.07||0.62||N/A|
|Vanguard FTSE Canadian High Dividend Yield Index ETF||VDY-T||30.73||25.57||-2.22||10.70|
|iShares DEX Floating Rate Noote Index Fund||XFR-T||20.20||20.10||-0.10||0.10|
|First Asset Morningstar U.S. Dividend Target 50 Index ETF||UXM-T||12.08||10.39||-1.83||13.06|
|iShares Dow Jones Canada Select Dividend Index Fund||XDV-T||24.69||21.09||-2.37||7.28|
|First Asset Morningstar Canada Value Index ETF||FXM-T||14.17||11.51||0.22||18.40|