An ETF primer

You can think of an exchange-traded fund (ETF) as a cross between a mutual fund and a stock.

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From the February/March 2013 issue of the magazine.

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ETF_allstars_hockey_322You can think of an exchange-traded fund (ETF) as a cross between a mutual fund and a stock. Like a mutual fund, an ETF holds a collection of stocks or bonds, usually in a specific investment category, or asset class. Some ETFs are devoted exclusively to U.S. stocks, for example, while others hold only Canadian bonds. These categories can also be sliced and diced: there are ETFs containing only large dividend-paying U.S. stocks, or only short-term Canadian government bonds. You can find ETFs covering just about every asset class imaginable, from real estate to gold bullion to Indian rupees.

But unlike mutual funds—which you typically buy directly from the investment company or through your adviser—ETFs trade on an exchange, just like stocks. That means you’ll need to open an online brokerage account to buy them yourself, or find an adviser who’s licensed to buy and sell individual securities. (Most are only licensed to sell mutual funds.)

The specific stocks and bonds in an ETF are not typically chosen by a manager like they are with most mutual funds. Instead, the fund tracks an index representing a particular asset class. For example, the oldest ETF in Canada, the iShares S&P/TSX 60 (XIU), simply holds the 60 largest companies in its benchmark index. Because this “passive” strategy does not require expensive research, ETFs can keep their fees very low. A typical Canadian equity mutual fund charges more than 2% annually, while you can find comparable ETFs for less than one-tenth as much.

Here’s a breakdown of one of our top 20 ETFs featured in our ETF All-Stars 2014. For the 2015 list of best ETFs, look for the February/March 2015 edition of MoneySense on newsstands starting Jan. 29, 2015.

iShares S&P/TSX 60 Index Fund

Ticker: XIU

Stock Exchange: TSX

Launched: 09/28/99

# of Holdings: 60

MER: 0.18%

PROFILE

Canada’s oldest ETF broke into the big leagues in 1999 and quickly revolutionized the game with its unique style. While its opponents use flashy but often ineffective strategies, XIU takes a more low-key approach and focuses on consistent performance in every season. In its leisure time, this blue-chip fund enjoys transparency, low turnover and tax efficiency.

HIGHLIGHTS

While XIU has never led the league in scoring, it is a perennial All-Star that finishes among the leaders almost every season. During the last decade the wily veteran has delivered an annualized return of over 9%, compared with the league average of less than 7%. It is currently the most popular ETF in the country, with an enthusiastic fan base of over $12 billion.

TOP 10 HOLDINGS

Royal Bank Of Canada – 7.43%

Toronto-Dominion Bank – 6.82%

Bank Of Nova Scotia – 5.79%

Suncor Energy – 4.53%

Barrick Gold – 3.74%

Canadian National Railway – 3.45%

Bank Of Montreal – 3.42%

Potash Corp. Of Sask. – 3.34%

Goldcorp –  3.33%

BCE  – 3.05%

SECTOR BREAKDOWN

Financials – 33.06%

Energy – 25.70%

Materials – 19.95%

Telecommunications – 6.21%

Industrials – 5.57%

Consumer Discretionary – 4.09%

Consumer Staples – 2.37%

Health Care – 1.41%

Utilities – 0.93%

Information Technology – 0.28%

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