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Carrie Bottomley/Thinkstock

As I was reviewing my portfolio the other day, it hit me: Canada is a lousy place to be an index investor.

Now don't get me wrong: Although I'm a dividend investor first, I also believe in the core principles of indexing – keeping costs low, staying diversified and letting the markets do their thing. That's why, in addition to owning individual dividend stocks, I have a chunk of my portfolio in Canada's biggest exchange-traded fund, the S&P/TSX 60 Index Fund (XIU).

Problem is, XIU has been a total mutt.

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For the five years ended Sept. 30, this ETF – which has a hefty $12.4-billion in assets – posted an annualized return of negative 2.95 per cent. If you include dividends, the total annual return was negative 0.39 per cent. Ouch. I would have done better putting my money into ING.

Meanwhile, most of my dividend stocks have posted double-digit gains.

Yes, XIU has a management expense ratio of just 0.18 per cent. But who cares? It's still a dog, and here's why: It provides lousy diversification. It's got way too much exposure to volatile energy, materials and financials stocks, and not nearly enough in the way of more stable companies such as utilities, pipelines, telecoms and consumer names.

You can try to get around the problem by buying ETFs that specialize in certain sectors, stock types or investment styles. But then you're looking at much higher MERs, which sort of defeats the purpose of indexing. The iShares S&P/TSX Dividend Aristocrats Fund, for instance, has an MER of 0.67 per cent. No thanks.

Or you could invest outside Canada, but then you're taking on currency risk. What about hedging? It doesn't always work as advertised.

At this point I'm thinking I may be better off selling my XIU and going with an all-stock portfolio instead.

So, if anyone knows of a Canadian ETF that's cheap, provides excellent diversification and (let's get out our crystal balls here) won't spend the next five years losing money, tell us about it (use the comments section).

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