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Curb your enthusiasm if you’re looking at the amazing returns of Canadian dividend ETFs in the past 12 months.

The average total return for the year to March 31 was 41 per cent for the nine dividend funds included in the fifth installment of The Globe and Mail ETF Buyer’s Guide. At first glance, that’s a five-star result from a fund category that holds a lot of low-drama stocks in sectors like utilities and telecom.

Be careful about drawing any conclusions about dividend exchange-traded funds based on their 12-month returns. For one thing, these numbers measure returns from pretty much the bottom of the stock market crash last year, a generational moment in time for buying stocks. From the end of February, a point where stocks were already sliding, 12-month dividend ETF returns came in around 5 to 10 per cent.

As good as dividend ETFs were, most still trailed the S&P/TSX Composite Index in total returns (share price changes plus dividends) over the past one-, three- and five-year periods. Here, we arrive at a sobering truth about these funds. While they’re great for producing tax-efficient dividend income, they can be second-best for growing your money behind holding plain old Canadian equity funds.

The funds in this installment of the ETF guide had yields in early April of 2.7 to 4.5 per cent, which compares with about 2.1 per cent, at best, from five-year guaranteed investment certificates and close to 1 per cent on a five-year Government of Canada bond. Held in a non-registered account, Canadian dividend ETF yields look even better because you can make use of the dividend tax credit.

Don’t mistake dividend ETFs as a conservative way to generate income. Last year’s ETF guide installment on dividend funds documented their jagged losses in the market crash of 2020. But if you can live with fluctuations in the price of your ETF, the income is attractive.

We’ll close out the 2021 edition of the ETF Buyer’s Guide by looking at balanced funds, also known as asset allocation funds, on April 22. The guide has already covered Canadian, U.S. and global/international equity funds, as well as bond funds.

Additional resources you may find useful:

-The dividend investor’s dilemma: Should you use a TFSA, RRSP, RRIF or taxable account? (tgam.ca/dividend-dilemma);

-ETF tax primer (tgam.ca/ETFtaxprimer).

Click here to download an Excel version of the guide.

Click here to download a PDF version of the guide.

Notes: Market data as of April 5, 2021. Returns to March 31, 2021. For comparative purposes, the S&P/TSX Composite total return was 44.3% (1-yr), 10.2% (3-yr), 10.1% (5-yr). 3-yr Beta was 1.

Sources: Rob Carrick; Globeinvestor.com, TMX Money, ETF company websites



Here’s a discussion of terms used in this edition of the ETF Buyer’s Guide:

Assets: Shown to give you a sense of how interested other investors are in a fund.

Management expense ratio (MER): The main cost of owning an ETF on a continuing basis; published returns are shown on an after-fee basis.

Trading expense ratio (TER): The cost of trading commissions racked up by the managers of an ETF as they make adjustments to the portfolio of investments; add the TER to the MER for a full picture of a fund’s cost.

Yield: Based on the recent pattern of monthly payouts and the latest share price; may reflect payments of dividends and return of capital; check the fund profiles on ETF issuer websites to find out what kinds of income have been contained in distributions in recent years.

Returns: ETF companies show total returns, or share-price change plus dividends or distributions.

Three-year beta: Beta is a measure of volatility that compares funds with a benchmark stock index, which always has a beta of one. A lower beta means less volatility on both the up and down side.

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