Life is the sum of all your choices.
If Camus was right, and life really is just a tally of all your choices, then perhaps the same can be said for your investment returns. These days, there’s no shortage of choices facing investors. In fact, many have argued that we have too many choices.
Exchange traded funds (ETFs) have been steadily gaining in popularity over the past decade or so, and it now seems like a new batch is released several times a year. While those who argue enough is enough definitely have a case, the Canadian markets have some peculiarities that have not been adequately addressed by issuers of ETFs – until recently.
Many Canadians prefer to invest in domestic companies listed on the TSX for a variety of reasons:
- No nasty exchange rate surprises: If you invest in U.S. ETFs or equities/funds from other countries, you are taking all of the normal risks associated with your investment vehicle of choice, but you may also find that your returns fluctuate due to the effects of changes in the value of the Canadian dollar relative to the currency in which your investment is held.
- Familiarity: There’s a certain comfort that comes with investing in brands like Canadian Tire or CN Rail that we may encounter or interact with regularly.
- Patriotism: Some of us just like to support our own domestic corporations.
Still, many investment advisors warn against concentrating too heavily on the Canadian market. They point out that those who buy an index ETF like the XIU (iShares S&P/TSX 60 Index Fund) are not as diversified as those who invest in index funds or ETFs with more global exposure. Here are a few things to remember about the Canadian stock market as represented by the TSX Composite Index:
- It’s Small: The Canadian economy is only about one tenth the size of that of the United States, so the index that tracks our economy is by definition a lot less representative of the global marketplace.
- Overweight Financials, Energy and Materials: The financial sector makes up almost 30% of the TSX composite index, while energy and materials respectively comprise about 25% and 20% of the index. That leaves only 25% representation for all of the other sectors combined – hardly a diversified index.
- Underweight Health Care, Utilities and Technology: While there are many other sectors which are not adequately represented in the TSX composite index, these 3 sectors often play a strategic role in portfolio allocation. Health care and utilities tend to be favoured as defensive plays in a shaky economic environment because of these types of services are necessary even in a recession. These companies also tend to pay dividends, which some investors find very comforting. Technology is a sector that investors interested in growth tend to prefer, but aside from Research In Motion, Canada is not exactly a hotbed of tech companies.
BlackRock Canada, which runs the iShares selection of ETFs, recently announced several new ETF product offerings in Canada. For today, we’ll just focus on the three that address sectors that are under-represented in the TSX composite index:
XHC: iShares S&P Global Health Care Index Fund (Canadian Dollar-Hedged)
This ETF gives you exposure to the global health care sector, with U.S.-based corporations representing about 60% of the index. Now you can have exposure to companies like Johnson & Johnson, Novartis, Roche, Merck, Glaxosmithkline, and Sanofi-Aventis without the currency risk. The management fee for this ETF is 0.63%.
XUT: iShares S&P/TSX Capped Utilities Index Fund
This is a collection of Canadian utility companies. If you would like some exposure to a number of Canadian utilities, but don’t have the capital to buy them individually, you can give this ETF a try. It’s top holdings include dividend-paying favourites like Fortis, Transalta, Emera, and Canadian Utilities. The annual management fee for this one is 0.55%.
XQQ: iShares Nasdaq 100 Index Fund (Canadian Dollar-Hedged)
Here’s your chance to get a piece of Apple, Microsoft, Oracle, Google, Intel and many other top tech names without the currency risk. With annual management fees of 0.35%, this ETF offers Canadians growth at a reasonable price – unless, of course, you think these companies are already fairly valued, or over-valued. 😉
I should note that these new iShares products are not the first to address the peculiarities of the Canadian markets. BMO has offered ETFs that track each of these sectors for some time now: ZUT is an equal weight utilities ETF, ZUH is a Canadian dollar hedged U.S. healthcare ETF, and ZQQ is a Canadian dollar hedged ETF that tracks the Nasdaq 100. All of these still trade with light volume, and it remains to be seen whether the iShares brand will generate more liquidity or not.
Decisions, Decisions . . .
While it can be nice to have more choices for your investment strategy, it always pays to think about whether these new products are a good fit for your particular portfolio or investments. Sometimes more choices can just make things more complicated than they need to be. It all depends on your individual portfolio size and strategy .
It’s also important to look at volume. New ETFs usually take some time to gather a following and establish a track record. Sometimes it’s worth it to let these new offerings age a little before you add them to your collection. Otherwise, you might find yourself in a position where you want or need to sell into a very illiquid market. And that can be costly.
Would you consider using these ETFs in your portfolio?