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Income Investing for Canadians: Comparing 3 iShares ETFs

Income Investing for Canadians: Comparing 3 iShares ETFs

It’s not hard to make decisions when you know what your values are.

~Roy Disney

Last week we looked at 3 New ETFs for Canadians. For that article, we focused on iShares ETFs. While doing a little research on the iShares site, I realized that the selection of ETFs for investors looking for income from equities has changed a little since the last time I looked.

If you check out the iShares website, you’ll notice a category of ETFs called “Specialty.” There you’ll find ETFs that track stocks with higher environmental and social standards (XEN), preferred stocks (XPF) and Real Estate Investment Trusts or REITs (XRE).

There are 3 other ETFs in that category, and all of them offer some type of exposure to regular income derived mainly from equities. That had me wondering what the differences were between each of these products. I did a little digging and thought I’d share my findings with you here.

3 Ways to Use iShares ETFs for Equity Income Investing

Why would you need 3 different exchange traded funds to achieve some regular income from stocks? It turns out that each of these 3 ETFs does in fact offer some unique characteristics. Let’s start with a brief description of each and you’ll see what I mean:

XDV: Dow Jones Canada Select Dividend Index Fund

This ETF has been around for quite a while. As the name suggests, it offers exposure to “30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, as selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.” This ETF pays a distribution monthly. It currently yields about 3.6% and carries a management fee of 0.50%.

Dividend-paying stocks have become more popular in the wake of the financial crisis as dividend-paying companies are seen as more stable than some of the high-flying cyclical or growth stocks out there. This ETF includes CIBC, Bonterra Energy, National Bank, TD Bank, Telus, and more. You’re getting exposure to some of the top dividend-paying corporations in Canada. So what’s not to like?

As you may have noticed, XDV is heavily weighted toward the financial sector. The sector composition looks something like this:

Financials – 53%
Telecommunications – 14%
Oil & Gas – 12%
Utilities – 10%

. . . and so on.

If you like dividend income, but you don’t want to be so heavily exposed to the financial sector (or you have exposure there through another investment vehicle), you might want to consider a different ETF or mutual fund.

XTR: Diversified Monthly Income Fund

While XDV is basically invested 100% in stocks, XTR contains about 55% stocks and 45% bonds. Comprised mostly of other iShares funds, it’s top holdings are as follows: XRE, XDV, XIU, XPF, XHY, XLB, and more. So you can see there are ETFs that cover REITs, preferred shares, high yield bonds, government bonds and corporate bonds in there, as well as exposure to the TSX 60 (XIU) and dividend-payers through XDV, which we profiled above.

There seems to be a bit of overlap in some of the funds given that some of the companies in XRE and XIU will also be included in XDV. There’s also some overlap in the bond component of the fund. If anything, this highlights the difficulty income investors have in coming up with a comprehensive fund.

It’s worth noting that the current version of XTR is quite different from the original, which was comprised of Canadian income trusts. The ETF was forced to change its composition with the change in tax laws surrounding income trusts that came into effect at the beginning of 2011. While REITs were left untouched by the new legislation, many other trusts had to convert to corporations or otherwise alter their structure.

Perhaps the most attractive feature of XTR is its yield. At about 5.75% at the time of writing, it’s extremely compelling when compared to other ETFs and fixed income products. It pays the distribution monthly, and carries a management fee of 0.55%.

The top sector weighting for XTR is still the financials, but at 31%, it’s not quite as concentrated as XDV. It’s more difficult to actually differentiate the sector composition of this ETF because it primarily contains other ETFs and there is, as mentioned, some overlap among them.

XEI: S&P/TSX Equity Income Index Fund

This is the most recent offering. XEI began trading on April 12, 2011 and basically contains 100% equities. There are some REITs in there as well, but it doesn’t contain a bunch of other funds. Of the 75 holdings, the sector breakdown looks like this:

Financials – 30%
Energy – 30%
Telecommunications – 19%
Utilities – 11%

. . . and so on.

Again, you can see the concentration in financials and energy that just seems to go hand in hand with investing in the Canadian equity markets. Still, the focus on financials isn’t quite as intense as it is for XDV. The top holdings for XEI include Telus, TransCanada, BCE, Rogers, several of the big banks, as well as some energy trusts like Crescent Point Energy and Penn West Petroleum.

It’s hard to determine an accurate yield for this ETF yet because it’s so new, but BlackRock did just announce a monthly cash payment of $0.05073/share for the month of May. If my math is correct (and I’m sure someone will correct me if it’s not) that works out to a yield of about 3% or so with the price hovering around $20.50 per share. The annual management fee for this ETF is 0.55%.

Which One Should You Choose?

Of course, there’s no correct answer. As with all investment products, your choice depends on numerous factors. You could choose all of the above, none of the above or any combination of the funds that fits for you. Some investors prefer to construct their own portfolio of income-producing equities and skip ETFs and mutual funds (and the fees associated with them) altogether.

If you have the time, money and knowledge to construct your own portfolio of individual stocks, that’s a fine alternative. But if you’re just starting out with investing or you don’t yet have a lot of capital to put to work, ETFs can be a great way to get started. You can buy and sell them just like stocks on the TSX. Just be aware that some of them are more liquid than others. It’s probably wise for beginners to choose a well-established ETF with a reasonably high daily volume.

It’s also important to note that each trade you execute will cost you. Depending on the brokerage you’re using, you could pay anywhere from $4.95 to $30 or more to buy or sell shares in an ETF. If you’re contributing a set amount monthly, your trading costs can add up quickly.

Would you find these ETFs useful? Do you have any experience with any of them?


  1. howard

    Hi i use the xtr and fie for income and can trade them free at scotia bank. Great income i just reinvest the income and keep smiling.

  2. James

    No, no. The yield on XTR is very misleading. This is an “income fund” that pays out a larger distribution than it actually earns through its underlying investments. Much of what you get paid is actually your own capital (return of capital) which depletes the value of the fund over time.

    Even if you reinvest the distributions, you’re not actually getting anything like the 5.77% it says on their web site; the actual yield is 3.70% (as of February 5, 2013) — that’s what the fund earns from the underlying investments.

    In a flat market, value will leak out of XTR and the share price will steadily decline.

    Income funds like XTR can make their distribution arbitrarily high by returning more of the original capital… it doesn’t mean anything. They could create a 20% distribution yield, and it would still only be earning 3.70% with all of the rest of it being return of capital.

  3. Arun

    XTR and XRE in my portfolio for more than 2 years and collecting almost 6% and 4.5% distribution respectly year over year. I like these ETFs because of their instant diversification.

    I guess investors like the new asserts allocations of XTR because the price is moving up in the recent months.

    Best Regards,

  4. Bob Gregory

    One has to be very careful about what is the true return from income funds. XTR is a good example of very misleading returns. The claimed 5.7 % return is actually 3.7% with the balance being your own capital being returned to you so each year your fund’s capital is reduced. This fund should be clearly advertised as giving about a 3.7% return!!
    As always buyer beware, if it looks too good it is probably wrong.

  5. Saud

    I think xtr is a good option for those income seeking investors who want to redeem capital appreciation without selling their etfs…what u guys think?

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