Portfolio Strategy
Rob Carrick's ETF Buyer's Guide, Vol. 2: U.S. Equity ETFs
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The second instalment of The Globe and Mail ETF Buyer’s Guide covers
what could be the most confusing category of them all for investors.
All the usual selection criteria apply when researching TSX-listed exchange-traded funds covering the U.S. stock market – including fees, the index being used and the diversification being offered. The extra step with U.S. equity funds concerns currency hedging. Many ETFs have it, a growing number don’t and a few others give you a choice of hedged or unhedged exposure to U.S. stocks.
All the usual selection criteria apply when researching TSX-listed exchange-traded funds covering the U.S. stock market – including fees, the index being used and the diversification being offered. The extra step with U.S. equity funds concerns currency hedging. Many ETFs have it, a growing number don’t and a few others give you a choice of hedged or unhedged exposure to U.S. stocks.
A quick primer on hedging: It eliminates distortions to index returns
caused by fluctuations in the Canadian dollar against the U.S. buck,
while also adding a bit to an ETF’s fees in some cases, and contributing
to tracking error. That’s where an ETF’s returns wander off the ideal
path of index returns minus fees. Hedging means your U.S. returns won’t
be undermined when our dollar rises, nor will they be enhanced when the
dollar falls. If you forgo the hedge, you lose out when our dollar rises
and benefit when it falls. The purpose of this guide isn’t to recommend
hedging or not – that’s your call. Rather, it’s to round up your ETF
options for investing in the broad U.S. market and help you make an
informed choice.
ETFs are a low-fee version of mutual funds that trade like a stock. Traditionally, ETFs tracked major stock and bond indexes; today, many funds follow more obscure indexes or have a manager who picks stocks. To invest in ETFs, you need a brokerage account. For help on that, consult my latest ranking of online brokers (read it here).
The Globe and Mail ETF Buyer’s Guide will cover a variety of asset class, including Canadian, U.S. and international equity, dividend funds and bond funds. The first instalment appeared Nov. 9 and you can read it here). Look for further chapters in this space in the weeks and months to come.
Here is an explanation of the terms you’ll find 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 an ongoing basis; as with virtually all funds, published returns are shown on an after-fee basis.
Trading expense ratio (TER): The cost of trading commission racked up by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index; add the TER to the MER for a fuller picture of a fund’s cost. Note: Most U.S.-market ETFs do so little trading that their TERs round down to zero. Full year 2012 numbers are presented here.
Dividend yield: Mainstream indexes can be a source of dividend income
Average daily trading volume: Trading of less than 10,000 shares per day on average tells you an ETF isn’t generating much interest from investors.
Distribution frequency: How often are dividends paid out?
Top three sector weightings: U.S. market ETF are typically dominated by sectors that are under-represented in the Canadian market, notably technology and health care.
Top three stocks: Another view on what’s inside an ETF.
Launch date: Shows you how long an ETF has been around.
A final note about hedging: ETF that are hedged typically have the term “CAD hedged” in their name, with CAD being an investment industry short-form for the Canadian dollar.
Click here for a printable excel table.
ETFs are a low-fee version of mutual funds that trade like a stock. Traditionally, ETFs tracked major stock and bond indexes; today, many funds follow more obscure indexes or have a manager who picks stocks. To invest in ETFs, you need a brokerage account. For help on that, consult my latest ranking of online brokers (read it here).
The Globe and Mail ETF Buyer’s Guide will cover a variety of asset class, including Canadian, U.S. and international equity, dividend funds and bond funds. The first instalment appeared Nov. 9 and you can read it here). Look for further chapters in this space in the weeks and months to come.
Here is an explanation of the terms you’ll find 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 an ongoing basis; as with virtually all funds, published returns are shown on an after-fee basis.
Trading expense ratio (TER): The cost of trading commission racked up by the managers of an ETF as they shuffle the portfolio to keep it in line with a target index; add the TER to the MER for a fuller picture of a fund’s cost. Note: Most U.S.-market ETFs do so little trading that their TERs round down to zero. Full year 2012 numbers are presented here.
Dividend yield: Mainstream indexes can be a source of dividend income
Average daily trading volume: Trading of less than 10,000 shares per day on average tells you an ETF isn’t generating much interest from investors.
Distribution frequency: How often are dividends paid out?
Top three sector weightings: U.S. market ETF are typically dominated by sectors that are under-represented in the Canadian market, notably technology and health care.
Top three stocks: Another view on what’s inside an ETF.
Launch date: Shows you how long an ETF has been around.
A final note about hedging: ETF that are hedged typically have the term “CAD hedged” in their name, with CAD being an investment industry short-form for the Canadian dollar.
Click here for a printable excel table.
Fund
|
Assets ($-mil)
|
MER (%)
|
TER (%)
|
Recent Price ($)
|
Dividend Yield (%)
|
Average daily trading volume/past 30 days
|
Top Three Sector Weightings
|
Top Three Holdings
|
Rtn. (%) 1-yr
|
Rtn. (%) 3-yrr
|
Rtn. (%) 5-yr
|
Comments
|
|---|---|---|---|---|---|---|---|---|---|---|---|---|
BMO Dow Jones Industrial Average Hedged to CAD Index ETF (ZDJ-T)
|
151
|
0.26
|
0
|
27.46
|
1.9
|
6,284
|
Industrials
Technology Financials |
Visa Inc.
IBM Corp. Goldman Sachs |
26.3
|
15.5
|
n/a
|
Are
you sure you want the Dow Jones industrial average instead of the much
more diversified S&P 500? If so, this ETF is the only game in town
as far as TSX-listed ETFs go.
|
BMO Low Volatility U.S. Equity ETF (ZLU-T)
|
12.2
|
0.34
|
0
|
17.44
|
1.7
|
1,561
|
Health care
Cons. Staples Utilities |
Autozone
Dollar Tree Family Dollar Stores |
n/a
|
n/a
|
n/a
|
Bears
watching as an option for investors who want U.S. exposure with less
volatility than the broader market. Theoretically, low volatility should
mean less extreme highs and lows. Would you be happy lagging the
markets on the upside in exchange for missing the worst of a pullback?
No currency hedging.
|
BMO S&P 500 Hedged to CAD Index ETF (ZUE-T)
|
474.9
|
0.23
|
0.01
|
27.61
|
1.7
|
22,936
|
Technology
Financials Health care |
Apple
Exxon Mobil |
30.9
|
17.1
|
n/a
|
Check
out the one-year numbers for this ETF and its sibling, the unhedged
ZSP. They're a clear illustration of how unhedged ETFs will outperform
those with hedging when the Canadian dollar falls like it has in the
past year. Of course, the opposite will happen when our dollar rises.
Note: Vanguard's hedged S&P 500 ETF is cheaper.
|
BMO S&P 500 Index ETF (ZSP-T)
|
726.9
|
0.17
|
0
|
21.2
|
1.5
|
136,231
|
Technology
Financials Health care |
Apple
Exxon Mobil |
38.7
|
n/a
|
n/a
|
BMO's
pricing tucks in just a bit below Vanguard's for this type of fund, but
iShares has the lowest fees. Fees are even cheaper for U.S.-listed
S&P 500 ETFs, but you'll be dinged by your broker's foreign exchange
charges when you buy them.
|
First Asset Morningstar U.S. Momentum Index ETF (CAD Hedged) (YXM-T)
|
14.6
|
0.6*
|
n/a
|
10.61
|
n/a
|
9,091
|
Cons. Discret.
Cons. Staples Energy |
Rite Aid
Nu Skin Enterp. Web MD Health |
n/a
|
n/a
|
n/a
|
Tracks
a new index of large, liquid stocks selected for their positive
momentum in earnings and price. Back testing shown on the First Asset
website suggests much better returns than the S&P 500 over time, but
smart investors will wait for real-world results before deciding
whether to jump in.
|
First Asset Morningstar U.S. Value Index ETF (CAD Hedged) (XXM-T)
|
25
|
0.6*
|
n/a
|
10.67
|
n/a
|
8,863
|
Cons. Discret.
Cons. Staples Energy |
Men's Warehouse
Hewlett Packard Omnivision |
n/a
|
n/a
|
n/a
|
The
tamer sibling of YXM focuses on big companies that are considered "good
value" based on factors like low price-earnings and price-to-cash flow
ratios. As with YXM, this ETF would seem to be more of a complement to
an S&P 500 ETF than a substitute.
|
Horizons S&P 500 Index ETF (HXS-T)
|
75.7
|
0.17
|
0.28
|
31.33
|
none
|
35,341
|
Technology
Financials Health care |
Apple
Exxon Mobil |
35.8
|
18.9
|
n/a
|
Consider
this ETF if you're investing in a TFSA or non-registered account, where
your dividends would be subject to a U.S. withholding tax. This ETF
provides a total return for the S&P 500, which means share prices
rise and fall by the change in the index plus dividends. No dividends
are paid in cash to unitholders. The high TER here reflects the cost of
the derivative-based structure - the fund does not hold actual stocks.
Hedging was used on this ETF until March 31, 2013, and then
discontinued.
|
iShares MSCI USA Minimum Volatility Index Fund (XMU-T)
|
24.2
|
0.34
|
0
|
25.4
|
1.7
|
2,761
|
Software
Pharma Food & Beverage |
ADP
Merck Wal-Mart |
29.7
|
n/a
|
n/a
|
Competes
against the identically priced ZLU, but with an index methodology that
produces different top holdings and sectors. One to watch if you want a
more docile take on the U.S. market.
|
iShares Nasdaq 100 Index Fund (CAD-Hedged) (XQQ-T)
|
34.8
|
0.39
|
0
|
28.94
|
1.5
|
3,212
|
Technology
Cons. Services Health care |
Apple
Microsoft |
32.1
|
n/a
|
n/a
|
For
investors who want a TSX-listed way to buy the tech-heavy Nasdaq 100
index with currency hedging. PowerShares offers a cheaper but less
popular fund of this type (see below).
|
iShares S&P 500 Index Fund (CAD-hedged) (XSP-T)
|
1,979
|
0.25
|
0
|
20.7
|
1.5
|
266,256
|
Technology
Financials Health care |
Apple
Exxon Mobil |
30.5
|
17.2
|
16.2
|
The
oldest TSX-listed ETF focusing on the U.S. market is also the largest
and most heavily traded by far. Most investors would do just fine with
Vanguard's cheaper hedged S&P 500 offering.
|
iShares S&P 500 Index Fund (XUS-T)
|
67
|
0.14
|
0
|
24.01
|
0.6
|
12,160
|
Technology
Financials Health care |
Apple
Exxon Mobil |
n/a
|
n/a
|
n/a
|
The
low-cost leader among TSX-listed S&P 500 ETFs that don't use
currency hedging. If you want a REALLY cheap S&P 500 fund and don't
care about hedging, check out the U.S.-listed Vanguard S&P 500 ETF
(VOO), with a fee of just 0.05 per cent.
|
iShares U.S. Fundamental Index Fund (CLU-T)
|
204.6
|
0.72
|
0.01
|
24.55
|
0.9
|
11,823
|
Financials
Cons. Services Industrials |
Exxon Mobil
Bank of America GE |
34.4
|
17.5
|
17.7
|
Expensive
as ETFs go, but the returns have been huge. Uses an indexing process
where stocks are weighted using factors beyond size, including revenues,
dividends, book value and cash flow. Not a small ETF, but clearly
hasn't gained the wide market acceptance of more traditional S&P 500
funds.
|
PowerShares FTSE RAFI U.S. Fundamental (CAD hedged) Index ETF (PXU-T)
|
99.3
|
0.57
|
0.01
|
28.22
|
1.2
|
2,682
|
Financials
Energy Cons. Discret. |
Exxon Mobil
Bank of America GE |
34.8
|
n/a
|
n/a
|
Tracks the same index as CLU, but charges less in fees and thus has delivered a bit more in returns.
|
PowerShares QQQ (CAD hedged) Index ETF (QQC-T)
|
12.2
|
0.34
|
0.03
|
30.61
|
0.8
|
1,307
|
Technology
Cons. Discret. Health care |
Apple
Microsoft |
32.2
|
n/a
|
n/a
|
The
U.S.-listed version of this fund is one of the most popular ETFs of
all. It trades under the symbol QQQ and the cost to own it is just 0.2
per cent.
|
PowerShares S&P 500 High Beta (CAD Hedged) Index ETF (UHB-T)
|
3.4
|
0.4
|
0.08
|
27.19
|
0.5
|
1,846
|
Financials
Energy Cons. Discret. |
PulteGroup
Vertex Pharma Genworth Financial |
43.3
|
n/a
|
n/a
|
Whoa.
Massive one-year returns that came in a fast-rising market. But what
happens when stocks go south? Don’t buy until you know the answer.
|
PowerShares S&P 500 Low Volatility (CAD Hedged) Index ETF (ULV-T)
|
59.7
|
0.36
|
0.02
|
25.31
|
2.2
|
5,251
|
Utilities
Cons. Staples Financials |
Johnson & Johnson
McDonald's Sigma-Aldrich |
21
|
n/a
|
n/a
|
This
third option for low volatility investing in the U.S. market has been
around long enough to produce a one-year return. Notice how much less it
made than S&P 500 ETFs; that may be your price for owning "safer"
stocks.
|
Vanguard S&P 500 ETF (CAD-hedged) (VSP-T)
|
35
|
0.18
|
0
|
31.95
|
1.6
|
8,721
|
Technology
Financials Health care |
Apple
Exxon Mobil |
30.5
|
n/a
|
n/a
|
Unlike BMO and iShares, Vanguard prices its hedged and unhedged S&P 500 ETF the same.
|
Vanguard S&P 500 ETF (VFV-T)
|
211.2
|
0.18
|
0
|
34.11
|
1.6
|
13,736
|
Technology
Financials Health care |
Apple
Exxon Mobil |
38.7
|
n/a
|
n/a
|
Not the cheapest, but still a good low-fee option for the investor who isn't interested in hedging.
|
Vanguard U.S. Total Market Index ETF (CAD-hedged) (VUS-T)
|
186
|
0.17
|
0
|
36.39
|
1.5
|
13,517
|
Financials
Technology Cons. Services |
Apple
Exxon Mobil |
31.6
|
n/a
|
n/a
|
VUN with currency hedging.
|
Vanguard U.S. Total Market Index ETF (VUN-T)
|
27.9
|
0.17
|
n/a
|
27.08
|
1.2
|
13,505
|
Financials
Technology Cons. Services |
Apple
Exxon Mobil |
n/a
|
n/a
|
n/a
|
This
ETF's broader exposure to the U.S. market is reflected in the fact that
there are roughly 3,500 stocks in the portfolio, compared to 500 for
the S&P 500. A U.S.-listed version of this fund trades under the
symbol VTI and has a fee of just 0.05 per cent.
|
* Note: These are management fees, which will be slightly lower than the MER once it’s established for these new funds.
Sources: ETF company websites, Globeinvestor.com
Sources: ETF company websites, Globeinvestor.com
Follow Rob Carrick on Twitter: @rcarrick
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