One by one, the higher-cost ETF categories are getting cheaper for investors.
Bond funds, at one time over-priced by the standards of the exchange-traded fund business, have become cheaper to own in the past year or so. Now, fees for dividend ETFs are getting the chop.
BlackRock's iShares division has announced a new series of dividend ETFs with industry-leading fees. The new iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV) has a management fee of 0.1 per cent. Expect the management expense ratio, including the management fee plus taxes and some other costs, to be in the area of 0.12 or 0.13 per cent. As noted in the Canadian dividend installment of the Globe and Mail ETF Buyer's Guide, MERs for dividend funds range from 0.22 per cent to 0.67 per cent and higher. XDIV definitely pushes the boundaries on fees.
There are new low-fee U.S. and global dividend ETFs from iShares as well – the iShares Core MSCI US Quality Dividend Index ETF (XDU) and the iShares Core MSCI Global Quality Dividend Index ETF (XDG). Versions of both are available with currency hedging. Management fees for XDU and XDG are 0.14 per cent and 0.2 per cent, respectively. Again, these are low by current standards.
Of course, fees are just one aspect of choosing an ETF. You also want a well-constructed underlying index or stock screening strategy. The index tracked by XDIV – the MSCI Canada High Dividend Yield 10% Security Capped Index – sounds a lot like other dividend indexes in that it targets stocks with above average yields, steady or increasing dividends and strong financials (holdings are capped at 10 per cent of the portfolio). Back-testing shows the index consistently offered a higher yield than the S&P/TSX composite index from 1999 through 2016.
Liquidity is also important in an ETF, but the new iShares ETFs began trading in mid-June and thus haven't established any sort of a record. Same goes for returns. Suggestion: Put these ETFs on a Globeinvestor.com Watchlist and see how they run.
The ETF sector in Canada gets more cluttered by the day as new companies enter the field, often with higher-priced funds that use proprietary screening or active management. But the core appeal of ETFs remains low fees. It's good to see that some ETF companies recognize this.