What are we looking for?
ETFs and mutual funds with similar characteristics to Canada’s oldest and largest ETF, iShares S&P/TSX 60 Index ETF.
The screen
Experienced Canadian investors may remember that the very first ETF started trading in Canada in 1990 (then known as TIPs, or the Toronto 35 Index Participation Fund). Now, more than 30 years later, the same fund has $11.3-billion in assets under management, making it the largest standalone ETF in Canada by assets. A staple for Canadian investors, XIU has performed quite well, outperforming many funds in the Canadian equity category over the past decade with a competitive MER of just 0.18 per cent and a forward-looking Morningstar rating of silver, implying that Morningstar believes the fund will continue to outperform peers on an after-fee basis.
Curious investors may be wondering what other funds on offer might be reasonable alternatives to the Canadian ETF heavyweight. To answer this question, I used the Equity Fund Similarity Tool within the Morningstar Direct Analytics Lab to help dissect where the returns of the fund come from and to look for other Canadian-domiciled ETFs and mutual funds with similar characteristics.
The analysis starts by first determining what risk factors drove the returns of an investment over the past 12 months. It looks at exposure to common style factors such as size, liquidity, volatility, momentum, yield and value/growth, while also considering both sector and regional exposures (together forming the basis of the Morningstar Global Standard Risk Model). Exposure to energy and real estate sectors were detected to have noticeable contributions to return (remembering that contribution can include being underweight or overweight in a particular sector), as was exposure to volatility and liquidity factors. These factors were weighted the heaviest (among many) in the search for similar funds. Only the oldest share class of each fund was considered in the analysis.
To ensure utility of the output for Canadian investors, I requested that the analysis only show similar funds with a Morningstar Medalist Rating of gold, silver or bronze. Recall that this rating isolates funds that Morningstar believes will produce excess after-fee returns in the future, based on our analysis of people (quality of the management team), parent (stewardship of the fund company) and process (robustness of investment decision-making).
What we found
The analysis returned a list of 10 funds, which are listed in the accompanying table and sorted by similarity (from most similar to least similar). Also included in the table are MERs, trailing returns, sector exposure and Morningstar ratings. It’s worthwhile pointing out that no constraints were placed on the peer category during the comparison process. The resulting funds are largely in the Canadian equity category, which helps confirm the analysis. This type of analysis would be useful to keep in mind toward the end of the year, during tax-loss harvesting season, which is of course dependent on how Canadian equity markets do.
This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA