7 No-Muss, No-Fuss Canadian ETFs

04/10/2013 12:52 pm EST


John Heinzl

Reporter and Columnist, GlobeInvestor.com

Exchange traded funds can be a valuable component of a balanced portfolio. Here's a breakdown of some top picks from north of the border by John Heinzl, reporter and columnist for Globe Investor.

Interested in dividend investing, but don’t have the time or inclination to manage a portfolio of individual stocks? No problem. Thanks to exchange traded funds, you can enjoy all the fruits of dividend investing without the hassles.

The good news is that the number of dividend ETFs is growing. The bad news? With an increasing number of options to choose from, there’s more homework involved in selecting the ETF that’s right for you.

ETFs have several advantages: They provide diversification. They have low costs. And they can be bought and sold throughout the day just like stocks. But all ETFs are not created equal, as our Canadian dividend ETF survey reveals.

Can’t decide on a particular ETF from the list? There’s no reason you can’t mix and match. Just remember that ETFs—like stocks—can drop in value. So use ETFs as part of a well-balanced portfolio, with equity and fixed-income weightings that are appropriate for your age and risk tolerance.

iShares Dow Jones Canada Select Dividend Index Fund (Toronto: XDV)
Yield: 4.2%
Holdings: 30
XDV is the biggest—and oldest—dividend ETF in Canada. The management expense ratio (MER) of 0.55% isn’t the lowest on the block, but it’s still cheap compared with dividend mutual funds that charge three or four times as much.

One concern: Financials account for 51% of the fund, which is a hefty concentration for one sector. For the three years ended March 31, the annualized total return including reinvested dividends was 7.9%, beating the 4.5% total return of the S&P/TSX composite index.

iShares S&P/TSX CDN Dividend Aristocrats Index Fund (Toronto: CDZ)
Yield: 3.2%
Holdings: 62
CDZ used to allow only stocks whose dividends had risen for at least five consecutive years, but that bar was too high for many companies, including the chartered banks. So, in 2011, the rules were relaxed to allow up to two years of flat dividends.

CDZ is more diversified than XDV—financials account for just 20%—but the yield is lower and the fee of 0.67% is higher. The three-year annualized return of 10.1% is impressive.

BMO Canadian Dividend ETF (Toronto: ZDV)
Yield: 4.4%
Holdings: 51
ZDV’s management fee of 0.4% is attractive, and the yield is the highest of the bunch (keep in mind, however, that higher yields don’t always mean higher returns).

Unlike XDV and CDZ, both of which track indexes, ZDV uses a “rules-based methodology that considers the three-year dividend growth rate, yield, and payout ratio.” Financials and energy account for about 60% of the assets. The annualized return since inception in October 2011 has been about 10%.

Vanguard FTSE CDN High Dividend Yield Index ETF (Toronto: VDY)
Yield: n/a
Holdings: 81
VDY was launched in November, so there’s no 12-month yield or one-year performance data yet. The MER of 0.34% is a plus, but diversification is a problem: Financials alone account for 60% of the fund, followed by energy at 27%.

First Asset Morningstar Canada Dividend Target 30 Index ETF (Toronto: DXM)
Yield: 3.5%
Holdings: 30
Launched in February 2012, DXM uses several screens—including dividend yield, five-year earnings per share growth, return on equity, and cash flow to debt ratio—to choose companies with high, sustainable dividends.

Diversification is good, with financials at 27%, energy at 23%, and utilities, consumer discretionary, and telecom stocks accounting for about 10% each. The MER of about 0.64% is on the high side, but the rigorous selection methodology is a potential plus.

Horizons Active Cdn Dividend ETF (Toronto: HAL)
Yield: 3%
Holdings: 50
HAL is the only Canadian dividend ETF run by an active manager, so the MER is higher, at 0.99%. Since inception in February 2010, the fund’s annualized total return—including reinvested dividends—has been a solid 9.4%. With this fund, it’s all about the manager’s performance.

PowerShares Cdn Dividend Index ETF (Toronto: PDC)
Yield: 3.6%
Holdings: 45
PDC’s 65% weighting to financials is extreme, but it’s inflated by the presence of real estate investment trusts and corporations, which account for about nine percentage points.

Since inception in June 2011, the ETF has returned 9.2% annualized, including dividends. The MER is 0.54%.

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