In this post, we review the market index ETFs that have performed best in the last 52 weeks. At the very beginning, we will define what an index ETF is. Then we will explain why these type of funds are very popular in Canada. The most popular indices on the market and their characteristics will be reviewed. Merits of this type of investment strategy versus an actively managed mutual fund. Finally, a comparison will be made between these funds based on performance, management fees and returns.
What is an index fund?
There are several types of ETFs. And index ETFs are the most popular in the financial markets. In fact, the first ETF to be launched on the North American stock exchange was an index ETF. Index ETFs offer exposure to a large number of securities and sometimes to a whole stock market at a very low cost. Their main objective is to acquire, on your behalf, all securities that constitute a specific index in order to obtain the same return of the index minus management fees.
Why do investors like index ETFs?
Index ETFs are in direct competition with growth mutual funds. The latter charge a management fee of more than 2% and can even reach 4%. When banks marketed mutual funds, they insisted on active and professional management. The goal of the managers was to beat the benchmark (which is usually the index). Over time, it became clear that the overwhelming majority of fund managers fail to beat the benchmark.
As Warren Buffet has said many times, “Beating the index in the long run is very difficult even for professionals.” A manager can beat the index in the short term, but to beat it in the long run, he must be able to anticipate the market for 10 years!
Frequently tracked indexes
S.P. 500 Index
The S&P 500 Index, or the Standard & Poor’s 500 Index, is a market-capitalization-weighted index of the 500 largest publicly-traded companies in the U.S.
The S&P 500 is an excellent index because most of its constituents are large established US corporations. It’s well diversified across various sectors of the US economy. The index is widely regarded as the best gauge of large-cap U.S. equities. It can be easily used to express an opinion on the US economy in general. In other words, if you are bullish on the performance of the American economy in the long term, it’s probably the best index for you.
All ETFs that replicate the performance of the S.P. 500 index will have the same securities in their assets and at about the same proportions as the index itself.
The Nasdaq 100
The Nasdaq-100 is one of the world’s preeminent large-cap growth indexes. It includes 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.
This index is dominated by companies in the Information Technology sector.
An index of the 60 largest companies on the Toronto Stock Exchange. This index is dominated by the energy and finance sectors.
Currency risk coverage
When the manager has to replicate a U.S. index such as the S.P. 500 or the Nasdaq 100. It must acquire these assets in U.S. dollars. So, on a fairly regular basis, the fund has to convert the funds available in Canadian dollars into U.S. dollars. These conversions may be beneficial or have a negative impact depending if the Canadian dollar has appreciated or depreciated.
Many investors want to reduce this risk. To meet their needs, the majority of ETFs that reproduce a U.S. index offer a “hedged” version of their funds and sometimes another version that is traded only in U.S. dollars. Coverage acts as a kind of insurance. See the scenarios presented below:
|Scenario 1: Value of Canadian|
|Scenario 2: Value of Canadian |
|Non hedged ETF||Index return |
Minus foreign exchange loss
Plus foreign exchange gains
|Hedged ETF||Index return||Index return|
|US $ ETF||Index Return |
The investor chooses when to convert
|Index Return |
The investor chooses when to convert
Comparison table: Assets under management and management fees
|HXQ-U Horizons Nasdaq 100 Index USD||275||0.25|
|XQQ Ishares Nasdaq 100 Index||1,476||0.35|
|QQC-F Invesco QQQ Index||406||0.32|
|ZQQ BMO Nasdaq 100 Hedged To CAD Index||1,419||0.35|
|HXT-U Horizons S&P TSX 60 Index USD||1,943||0.03|
|THU TD S&P 500 CAD Hedge Index||29||0.08|
|HXS-U Horizons S&P 500 Index USD||1,867||0.10|
|HSH Horizons Sp500 CAD Hedged Index||213||0.10|
|ZSP-U BMO S&P 500 Index USD||1,889||0.08|
|VSP Vanguard S&P 500 Index CAD Hdg||1,653||0.08|
|ZUE BMO S&P 500 Hedged CAD||1,415||0.08%|
|XSP Ishares Core S&P 500 CAD Hdg||7,357||0.10%|
- XSP Ishares Core S-P 500 CAD Hdg is by far the most popular index ETF in Canada with over 7 billion assets under management;
- ETFs that replicate the Nasdaq 100 cost more than ETFs that replicate the S.P. 500;
Comparative table: Currencies, indices and hedges
|HXT-U||USD||S&P TSX 60|
Comparative table: Performance
|52 W |
Source: Barchart.com, it’s important to note that performance can change significantly from one day to the next, so it’s best to check the courses in real time for the latest information. All figures were collected on April 28, 2021.
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