How to select Canadian Equity ETFs.
How does an Individual Investor sort through and select from the multitude of Exchange Traded Funds (ETFs)?
So again using PIAC as a reference portfolio, we next select the second largest allocation – Canadian Equities.
|ASSET MIX OF PLANS AT DEC 31, 2010||PIAC Allocation||ETF options include||Simplified allocation|
|CASH AND SHORT TERM||-1.52%|
|CANADIAN BONDS||26.20%||XBB, XSB||30%|
|REAL RETURN BONDS||4.58%|
|FOREIGN FIXED INCOME||1.76%||BND|
|REAL ESTATE||8.86%||XRE ZRE VNQ||10%|
|V.C. / PRIVATE EQUITY||7.24%|
Allocate ~20% to an ETF that gives us exposure to the Canadian stock market.
Using the TMX ETF screening tool, select Equity, Canada, Core, Large Cap, All sectors and All issuers. (Again, de-select Leveraged, Inverse, Advisor class and ETN).
iShares.ca XIU provides exposure to the S&P/TSX 60 index … Canada’s largest 60 stocks. XIU covers 73% of the Canadian market capitalization, has a low-cost (0.17%) MER and is multiples more liquid (trading volume) than any other ETF plus it has tenure (est. 1999). (Liquidity is not so much an issue for the buy-and-hold, long-term investor). One can get small cap exposure elsewhere and REIT exposure with a REIT ETF (see next time). By the criteria, XIU is ‘the’ best Canadian Equity ETF for the PIAC allocation.
Bank of Montreal ETF (ZCN) doesn’t (yet) meet criteria. While it is cheap (at 0.15% MER) it has small volume and a young inception date (May 2009).
Claymore’s CRQ is (ridiculously) expensive at 0.69%.
Horizons Beta pro has 4 ETFs for Canadian Equity … none qualifies (too young, doesn’t pay dividends, too expensive, use derivatives …).
iShares.ca’s XIC covers 95% of the Canadian market capitalization (258 stocks). It has exposure to Canada’s largest 60 stocks plus the next ~200. But Canada’s large cap stocks are, by global definition, small cap stocks. So Canada’s ‘small cap stocks are really ‘micro-cap stocks’. (No Thanks. That’s a job for active managers). Further REIT stocks are also in the TSX composite XIC. REITs are all smaller cap stocks too and Investors can get direct REIT exposure with a REIT ETF (see next time).
Using the Bloomberg ETF selection tool, select Canada, Equity and MER < 0.50% for much the same result.Next time? ETF selection tools – Global allocation. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan