A general rule to apply to newly launched ETFs: The companies issuing these funds need them a lot more than investors do.
All the exchange-traded funds you need to diversify a portfolio with gem-like precision have been available for years. New funds keep appearing because that’s the easiest way for ETF companies to attract new assets. Greet these new ETFs with skepticism but make exceptions where warranted.
Example: The just-launched Horizons S&P/TSX Capped Composite Index ETF (HXCN), with an anticipated management-expense ratio (MER) of just 0.05 per cent.
As you’ll know if you read the recent instalment of the Globe and Mail ETF Buyers’ Guide on Canadian equity funds, the cheapest MER for broad-based Canadian market exposure is 0.06 per cent. The 0.05-per-cent fee for HXCN is not a massive difference maker for most investors in practical terms, but it’s highly symbolic. ETFs are a phenomenally hot product in the investing world today, and the investment industry knows that low fees are a huge selling point. One company cutting fees challenges competitors to do likewise. One year from now, it would not be surprising to see all major Canadian equity ETF fees at 0.05 per cent or less.
HXCN is a bit different than BMO, iShares, TD and Vanguard products that allow you to conveniently drop the broad Canadian stock market into your portfolio. Like several other Horizon ETFs, HXCN is a total-return fund that pays no dividend income. Instead, the share price rises by a total return comprising share-price changes and dividends together. Total return funds are ideal for investors who are growth-focused and thus uninterested in dividends. These funds also play well in taxable accounts because they generate only capital gains, which in some cases are taxed more favourably than dividends (notably for people in high tax brackets).
A somewhat complex, derivative-based structure permits HXCN to reflect the total returns of the S&P/TSX Composite Index. If you find yourself stumbling over this, by all means buy a more conventional alternative. You’re never wrong to stay within your comfort zone when selecting from among various options in a particular investment category. That said, Horizon’s collection of total return ETFs seem to be popular with investors. Combined assets in these funds rose 17 per cent in the past year to $4.3-billion.
Horizons already has a very cheap total-return option for investors targeting the Canadian stock market – the Horizons S&P/TSX 60 Index ETF (HXT), with an MER of 0.03 per cent after a rebate that will stay in effect at least until the beginning of next year. Horizons says there’s demand for a total-return ETF that tracks the more diversified composite index rather than focusing on the big blue chips of the 60 index.
-- Rob Carrick
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Ask Globe Investor
Question: I am looking for an ETF that invests in consumer staples stocks and has a reasonable dividend yield. What do you suggest?
Answer: For Canadian stocks, there’s the iShares S&P/TSX Capped Consumer Staples Index ETF (XST). But I’m guessing the trailing 12-month yield of 0.7 per cent doesn’t meet your definition of “reasonable." ETFs that focus on U.S. and international consumer staples stocks generally offer higher yields – typically between 2 and 3 per cent. One example is the U.S.-listed Vanguard Consumer Staples ETF (VDC), which has an attractive MER of 0.1 per cent and yields about 2.4 per cent. VDC’s top holdings include Procter & Gamble Co., Coca-Cola Co., PepsiCo Inc., Walmart Inc. and Colgate-Palmolive Co. Presumably, these companies should hold up better than other sectors in an economic downturn because they sell household goods, personal care items, food and other products that people need in good times and bad.
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What’s up in the days ahead
This weekend brings the next installment of the 2020 ETF Buyer’s Guide. This time around, we look at the best bond products for your investment dollars.
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Compiled by Globe Investor Staff