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What are we looking for?

Index ETFs that have outperformed category peers.

The screen

Readers of this column are likely already aware that it is difficult for an active manager to beat a benchmark index on an after-fee basis. Along this vein, I took a short look at this year’s performance data to understand whether this held true during a turbulent year in global markets, a time during which it can be argued that active management plays a larger role in avoiding steep losses.

When I compared Canadian-domiciled index mutual funds and ETFs (excluding strategic beta products or those that straddle the line between active and passive) with their peer groups, I found that 59.6 per cent of them (155 out of 260) outpaced their respective category peers. It’s important to note that Morningstar’s peer groups are defined by asset class and regional exposure. For example, the passive iShares S&P/TSX 60 ETF would be in the same category as the active Beutel Goodman Canadian Equity Fund.

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Broadly speaking, it would appear that so far during this year’s pandemic, passive investing continues to be a reasonable choice for investors seeking lower cost options for broad market exposure. For a few ideas in this space, I used Morningstar Direct to search for Canada-domiciled index ETFs that have:

  • Performed well relative to others in the same category, hence receiving a Morningstar Rating Overall of five stars. Recall that the Morningstar Rating Overall, commonly known as the star rating, is a historical comparison of after-fee risk adjusted returns against funds in the same category;
  • Received a Morningstar Quantitative Rating or Morningstar Analyst Rating of gold, silver or bronze. These medalist ratings are forward-looking assessment of a fund’s prospective ability to outperform similar funds after fees, based on: our assessment of the people (the quality of management team); the process (the effectiveness and consistency of the investment process); and the parent (organizational structure and talent retention). Over the long term, gold, silver and bronze funds are expected to outperform neutral and negative funds after fees.

More about Morningstar

Morningstar Research Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. Morningstar offers an extensive line of products and services for individual investors, financial advisers, asset managers, retirement plan providers and sponsors, and institutional investors. Morningstar Direct is the firm’s multi-asset analysis platform built for asset management and financial services professionals. Morningstar Canada on Twitter: @MorningstarCDN.

What we found

The funds that met the requirements are listed in the table along with their fees, inception dates, ratings and trailing performance. Funds are sorted by category, then by their three-year annualized performance.

It is vitally important that readers understand that the ratings are relative to each fund’s category peer group. As you can see in the table, the returns vary dramatically between categories. Before choosing a fund, it is imperative to understand whether the exposure to a particular asset class or region is appropriate to your risk tolerance.

This article does not constitute financial advice. It is always recommended to speak to a financial adviser or professional before investing in any of the products shown here.

Select Canadian-domiciled exchange-traded funds

NameTickerMorningstar CategoryMorningstar Rating OverallMorningstar Quantitative Rating or Analyst RatingMER (%)YTD Ttl. Rtn. (%)1Y Ttl. Rtn. (%)3Y Ann. Ttl. Rtn. (%)5Y Ann. Ttl. Rtn. (%)10Y Ann. Ttl. Rtn. (%)Inception Date
iShares Core Canadian ST Corp Bd ETFXSH-TCdn. Short Term Fixed Income5 StarsSilver0.105.36.03.93.1n/a9/13/2011
BMO Short Corporate Bond ETFZCS-TCdn. Short Term Fixed Income5 StarsSilver*0.115.15.93.83.03.010/20/2009
Vanguard Canadian Short-Term Corp Bd ETFVSC-TCdn. Short Term Fixed Income5 StarsSilver*0.115.46.03.83.0n/a11/2/2012
iShares 1-5 Year Laddr Corp Bd ETF CommCBO-TCdn. Short Term Fixed Income5 StarsSilver0.285.15.73.62.72.82/25/2009
iShares S&P/TSX Capped Materials ETFXMA-TNatural Resources Equity5 StarsBronze0.6124.934.812.213.8-0.712/19/2005
iShares S&P/TSX NA Prefr Stk ETF CADHXPF-TPreferred Share Fixed Income5 StarsSilver0.500.52.80.53.5n/a11/22/2010
Horizons Nasdaq-100 ETFHXQ-U-TU.S. Equity5 StarsBronze0.2836.049.226.4n/an/a4/19/2016
Invesco QQQ ETFQQC-F-TU.S. Equity5 StarsBronze0.2531.846.323.020.9n/a6/8/2011
iShares Nasdaq 100 ETF (CAD-Hedged)XQQ-TU.S. Equity5 StarsSilver0.3931.846.322.920.8n/a5/3/2011
BMO Nasdaq 100 Equity Hedged to CAD ETFZQQ-TU.S. Equity5 StarsBronze0.3931.746.222.820.718.91/19/2010

Source: Morningstar Direct. Data as of Oct. 20.

* Indicates Morningstar Analyst Rating

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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