Some useful intel for investors looking at the unreal returns lately from U.S. equity ETFs: The annualized 20-year return for the entire U.S. stock market was 6.9 per cent in Canadian dollars as of the end of last year.
Your attention is drawn to this number because of how much better recent results have been from exchange-traded funds tracking U.S. stocks. Check out the one-year returns in this third installment of The Globe and Mail ETF Buyer’s Guide – they averaged 23 per cent and topped out at 50 per cent.
The recent outperformance by U.S. stocks argues for some caution in selecting ETFs. The Buyer’s Guide can help you by showing:
- Exposure to tech stocks: Most, but not all, ETFs in the guide have significant exposure to this meteoric and volatile market sector.
- Beta: Measures an ETF or stock’s tendency to move around in price compared with a benchmark index, in this case the S&P 500; a beta of less than 1.0 suggests an ETF is less volatile than the S&P 500, and greater than 1.0 indicates more volatility.
- Recent and medium-term returns: Funds tracking major indexes like the S&P 500 have stunning returns through the one-, three- and five-year time frames; low-volatility ETFs have lagged badly in the past year, but have done well in less heated market conditions than we saw in 2020.
ETFs listed in the guide have at least a five-year track record and can be considered for core U.S. exposure, which means they could be your one and only U.S. equity fund. Most funds in this edition of the Buyer’s Guide do not use currency hedging, which gives you the returns of the underlying portfolio with no distortions caused by currency fluctuations. However, there are usually hedged versions available.
With hedging, your U.S. returns won’t be undermined when our dollar rises, nor will they be enhanced when the dollar falls. Unhedged funds do better when our dollar is falling and lag when the dollar rises. Some investment pros believe there’s no point in hedging if you have a long time horizon.
Notes: Market data as of March 5, 2021. Returns to Feb. 28, 2021. Sources: Rob Carrick; Globeinvestor.com, TMX Money, ETF company websites
Here’s a look at some of the terms used in the ETF Buyer’s Guide:
Assets: Shown to give you a sense of how interested other investors are in a fund; the smallest funds may be candidates for delisting.
Management expense ratio (MER): The main cost of owning an ETF on a continuing basis; as with virtually all funds, 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; add the TER to the MER for a fuller picture of a fund’s cost. Most of the U.S. equity ETFs included here don’t do enough trading to generate much of a TER.
Distribution frequency: If you’re primarily focused on dividend income, note that few U.S. equity ETFs make monthly dividend payments. Many other types of ETFs do pay monthly. Also note the low yields of most of these funds.
Number of holdings: Gives you an indication of whether a fund offers broad stock market coverage, or holds a more concentrated portfolio that may behave differently than benchmark indexes.
Sector weightings: Included to help you verify how well a U.S. equity ETF will diversify your Canadian holdings with exposure to sectors such as tech and health care.
Launch date: The older an ETF is, the more likely it is that you can look back at a history of returns through good markets and bad.
Stay informed about your money. We have a newsletter from personal finance columnist Rob Carrick. Sign up today.
Build your personal news feed
- Follow topics and authors relevant to your reading interests.
- Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.