As a Canadian investor evaluating HXT, anticipate an investment strategy meticulously designed to replicate the performance of the S&P/TSX 60™ Index (Total Return), net of expenses. This ETF strategically aligns with the large-cap segment of the Canadian equity market, offering a comprehensive snapshot of its dynamics.
The allure for investors lies in the advantages of an index approach. HXT employs a systematic method, mirroring the Index’s movements, thereby providing a passive investment avenue. This approach brings forth inherent cost efficiencies, as it minimizes the need for active management and associated fees.
Furthermore, by choosing HXT, investors gain exposure to a diversified portfolio of large-cap stocks, mitigating company-specific risks. This diversification aligns with a prudent risk management strategy, particularly pertinent in the ever-evolving landscape of the Canadian equity market.
The S&P/TSX 60™ Index is a benchmark meticulously crafted to gauge the performance of the large-cap segment within the Canadian equity market. Comprising 60 of the most prominent and liquid stocks listed on the Toronto Stock Exchange, this index reflects the pulse of the nation’s corporate giants.
The S&P/TSX 60™ Index, with its focus on the largest and most liquid stocks in the Canadian equity market, offers several distinct advantages that set it apart from other options.
Advantages
Stability through Large Caps: The concentration on large-cap stocks inherently brings a level of stability. These companies are often well-established, with proven track records and financial strength. This can be appealing to investors seeking a degree of reliability and lower volatility in their portfolio.
Quality Stocks: Large-cap stocks in the S&P/TSX 60™ are typically leaders in their respective industries. These companies often exhibit characteristics such as stable earnings, strong fundamentals, and a history of successful performance. This focus on quality can be attractive to investors looking for a long-term, fundamentally sound investment strategy.
Liquidity: Given that the S&P/TSX 60™ Index includes some of the most actively traded stocks on the Toronto Stock Exchange, it ensures high liquidity. This liquidity can be advantageous for investors, as it facilitates ease of buying and selling shares without significantly impacting market prices.
Simplicity: The index’s focus on the top 60 stocks simplifies the investment process for those who prefer a straightforward approach. It’s a concentrated portfolio that allows investors to easily grasp the core holdings without delving into a multitude of smaller companies.
Historical performance – HXT vs XIU, XIC, VCN and ZCN
Examining the net assets of the listed Canadian ETFs provides valuable insights into their scale and investor confidence. XIU.TO stands out with the highest net assets at $10.94B. XIC.TO follows closely with $8.49B, showcasing a robust presence in the market. ZCN.TO holds $7.02B in net assets, indicating a significant investment pool. VCN.TO, with $5.48B, and HXT.TO, with $3.31B, exhibit slightly smaller but still substantial asset bases.
In this post, we’ll go over the best growth ETFs offered by BMO. Our analysis focuses on long-term performance. Only ETFs with a sustained historical performance over a period of 5 years were considered. For each ETF, we will analyze strategy, performance, management fees and volatility.
Source: TD Market research , MER: Management expense ratio is the total charges charged by the fund including administration and management fees. Beta (60 months): is a measure of volatility. The higher the Beta, the more risky the title. A Beta of 1 means the stock has the same volatility as the market.
BMO’s Best Equity ETFs highlight ZQQ (BMO Nasdaq 100 Equity) as the top performer over the last decade, primarily attributed to the dominance of FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google), which collectively constitute nearly a third of the Nasdaq 100. ZQQ boasts the highest annualized average performance over a 5-year span, coupled with a modest volatility of 1.28. This makes ZQQ particularly attractive for long-term investors seeking a well-performing portfolio of high-quality securities with substantial growth potential. Notably, ZQQ provides excellent exposure to the technology sector in its sector allocation.
ZQQ has assets under management of $ 1.57 billion. It is one of the most popular funds in Canada.
ZUQ (BMO MSCI US High Quality) and ZGQ (BMO MSCI World High Quality) have showcased strong performances, sharing a common stock selection methodology. Unlike traditional index replication, these funds implement a pre-selection process, specifically choosing securities based on criteria related to yield and liquidity. Both ZUQ and ZGQ are well-suited for long-term equity investments, offering diversified portfolios. Their risk/return ratio is attractive, marked by a Beta of less than 1.
ZSP and ZSP-U (BMO S&P 500 Index ETF) emerge as the top choices for investors seeking low-cost index funds. Tracking the S&P 500 Index, a robust representation of the US economy, these ETFs stand out for their minimal management fees. ZSP is unhedged against currency risk, while ZSP-U is exclusively purchasable in US dollars. The decision between hedged, unhedged, or US dollar funds hinges on individual expectations regarding exchange rates, with long-term impacts on exchange losses or gains typically proving minimal.
ZBK (BMO Equal Weight US Banks) provides exposure to the US banking sector, albeit with a Beta of 1.47 over the past 5 years, indicating a volatility level almost one and a half times higher than the market. With assets under management totaling $880 million, ZBK remains a significant player in this segment.
ZID (BMO Indian Equities) focuses on Indian companies, offering a valuable avenue for diversification within an existing portfolio by tapping into the potential of a promising emerging market. While relatively smaller in size with $107 million in assets under management, ZID provides investors with exposure to the opportunities presented by the Indian market.
BMO Nasdaq 100 Equity Hedged to CAD seeks to replicate, to the extent possible, the performance of an index of securities of companies listed on the NASDAQ, net of expenses. ZQQ ranks first in our ranking of the best BMO ETFs to hold for long term.
The ZQQ is hedged for currency risk.
The Nasdaq-100 is one of the world’s leading large-cap growth indices. It includes 100 of the largest national and international non-financial companies listed on the Nasdaq by market capitalization.
This index is dominated by companies in the technology sector.
The BMO MSCI USA High Quality seeks to replicate, to the extent possible, the performance of the MSCI USA Quality Index, net of expenses. The index is 100% invested in the United States.
The fund selects the securities according to the criteria below:
The BMO MSCI World High Quality ETF seeks to replicate, to the extent possible, the performance of the MSCI All Country World High Quality Index, net of expenses. ZGQ is a global ETF. While ZUQ invests mainly in the American market.
The fund selects the securities according to the criteria below:
The BMO Indian Equity ETF provides exposure to the Indian market which is one of the most promising emerging markets. The fund acquires certificates (ADRs) from major Indian companies listed on the Toronto, London and New York stock exchanges (NYSE and NASDAQ).
The BMO Equal Weight US Banks ETF has been designed to replicate, to the extent possible, the performance of the Solactive Equal Weight US Bank Index, net of expenses. The Fund invests and holds the constituent securities of the index in the same proportion as that reflected in the index.
ZBK’s sector allocation is 100% in the financial sector.
The BMO S&P 500 ETF seeks to replicate, to the extent possible, the performance of the S&P 500 Index, net of expenses. ZSP invests in the constituent securities of the index and holds these securities in a proportion equal to that which they represent in the index.
ZSP-U is a Canadian ETF however it only trades in US $.
ZSP is a Canadian ETF that trades in Canadian $ and is not hedged against currency risk.
ZSP-U vs ZSP which one to choose
If you are uncertain between a hedged, unhedged or US $ ETF, please refer to the table below:
Scenario 1: Value of Canadian $ appreciated
Scenario 2: Value of Canadian $ depreciated
Non hedged ETF
Index return Minus foreign exchange loss
Index return 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
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.
ZSP-U Portefeuille
Weight (%)
Name
Sector
5.98%
APPLE INC
Information Technology
5.54%
MICROSOFT CORP
Information Technology
2.30%
AMAZON.COM INC
Consumer Discretionary
1.73%
BERKSHIRE HATHAWAY INC
Financials
1.63%
ALPHABET INC
Communication Services
1.57%
UNITEDHEALTH GROUP INC
Health Care
1.46%
JOHNSON & JOHNSON
Health Care
1.45%
ALPHABET INC
Communication Services
1.42%
EXXON MOBIL CORP
Energy
1.23%
JPMORGAN CHASE & CO
Financials
BMO investorline review
BMO Bank of Montreal offers a wide variety of different ETFs. It is in fact one of the largest issuers of exchange-traded funds in Canada. BMO’s brokerage service is offered under the BMO InvestorLine.
According to the Milliondollarjourney website, BMO investorline offers several advantages:
BMO investorline pros
• Best broker / bank;
• One of the best brokerage platform;
• App on phone is one of the best in the market;
• BMO is a major bank in Canada;
• Multiple resources to educate clients;
BMO investorline Cons
• Relatively high transaction costs compared to online brokers such as Questrade and Qtrade
RBNK ETF is a dividend ETF ideal for investors looking for both growth and dividend in the Canadian banking industry. The RBC Canadian Bank Yield Index Exchange seeks to replicate the Solactive Canada Bank Yield Index. The latter is focused only on the Canadian banking industry. This ETF is more suited for long term investors with medium to high risk tolerance.
The Solactive Canada Bank Yield Index follows the price changes of the six biggest Canadian banks. Each company’s weight in the index is based on how much it pays in dividends, which is updated regularly. To be included in the index, a company needs to have a certain value in the stock market. If there aren’t enough qualifying companies, the six largest ones are picked based on their stock market value.
The selected companies are ranked by their indicated dividend yield, and the two companies with the highest yield receive a weight of 1/4. The third and fourth companies each receive a weight of 1/6, and the remaining two companies each receive a weight of 1/12.
– Total return: Though the focus here is on the dividend yield, you have to keep in mind the total return. The profit or loss we make on any investment combines both dividend income and capital gain or loss. Looking at the long-term performance of the fund is crucial. An ETF that provides a good capital appreciation with a high dividend yield is preferable.
–Diversification: A diversified ETF is always a safer option. Some high yield ETFs are sector-specific (Financials, Energy or Gold). The ones focused on Energy and Gold have had an inferior long-term performance and carry high volatility risk.
–Volume and liquidity of the ETF. The higher the asset under management, the lower the trading costs of the ETF (difference between the bid and ask price).
In today’s exploration, we’ll delve into the Vanguard FTSE Global All Cap ex Canada Index ETF, better known as VXC. This ETF is a gateway for Canadian investors to access international markets, excluding Canada. Let’s unpack the specifics of VXC, including its composition, benefits, and key figures like the number of stocks, MER, and capitalization details.
VXC ETF at a Glance
VXC, offered by Vanguard, is designed to mirror the FTSE Global All Cap ex Canada Index. It includes a vast array of stocks from both developed and emerging markets across the globe, barring Canadian ones. Here’s a closer look at its characteristics:
Number of Stocks: 11,453, offering wide-ranging exposure across different sectors and countries.
Management Expense Ratio (MER): 0.22%, ensuring a cost-effective investment solution for those seeking global exposure.
Portfolio Composition VXC ETF
The ETF’s portfolio is well-diversified, not just by geography but also by market capitalization:
Large Cap: 67.96%
Medium/Large Cap: 3.92%
Medium Cap: 13.83%
Such diversification ensures that investors have significant exposure to established companies while still capturing the growth potential of medium-sized enterprises.
Geographic Breakdown
VXC’s investments span across various regions, providing a balanced mix of developed and emerging markets:
North America: 62.74%
Europe: 16.24%
Pacific: 10.91%
Emerging Markets: 9.84%
This geographic distribution helps mitigate risks associated with any single region.
Sector Allocation
The fund’s sector allocation further highlights its diversity, with significant investments in high-growth areas:
Technology: 24.36%
Consumer Discretionary: 14.24%
Industrials: 14.06%
Financials: 13.59%
Health Care: 11.06%
This sectoral spread ensures that investors are well-positioned to benefit from growth across a broad spectrum of industries.
With its broad international exposure, low costs, and diverse portfolio, VXC is an attractive option for Canadians looking to invest globally. As always, consider how VXC fits into your broader investment strategy and ensure it aligns with your financial goals.
Keep following for more insights that make the complex world of finance more accessible and manageable. Happy investing!
Q&A
What ETFs are in VXC?
VXC doesn’t contain other ETFs; it directly holds a diverse range of individual stocks from global markets, excluding Canada.
Is VXC a good ETF?
VXC can be a good choice for investors seeking broad global exposure and diversification outside of Canada, with a low-cost structure.
What does VXC track?
VXC tracks the FTSE Global All Cap ex Canada Index, representing a wide array of stocks from developed and emerging markets, excluding Canadian stocks.
In this post, we will be reviewing the 10 best dividendETF in Canada. We included in our list all ETFs whether they invest in Canadian, American or Global markets. We compared these ETFs based on the dividend yield, performance over a 5 years period and volatility. For each ETF, we provide the funds’ objective and holdings. Finally, we will also discuss tax implications for holding Canadian ETFs that invest globally.
Source: TD Market research, AUM Asset under management, MER Management expense ratio
– XDVIshares Canadian Select Dividend Index is the most popular dividend ETF in Canada with over 1.7 B in assets. While, XEIIshares S&P TSX Comp High Div Index and VDY Vanguard FTSE CDN High Dividend Yld Index stand out with their low MER.
– Most of the popular dividend ETFs in Canada are invested in Canadian companies. In fact, Canadian dividend ETFs are great but they tend to be over exposed to the Energy and Financial sector due to the nature of the Canadian economy. Please review below the sector allocation for each ETF to get a better picture.
Table 2: Best Dividend ETFs: Performance comparison
– ZWP BMO Europe High Dividend Covered Call ETF and ZWC BMO CDN High Dividend Covered Call ETF both use covered calls strategy. They both pay a little bit over 6% in dividend which is great. But, investors should know that a portion of these payouts are dividends, the other portion are options’ premiums. In fact, because both of these ETFs write covered calls dynamically, they generate additional income through option premiums in certain conditions.
This strategy overall has a negative impact on the performance of these ETFs. When you are writing covered calls, you are in essence giving up on the upside potential of the stocks you own with the purpose of preserving capital. ZWC had a better performance than ZWP.
– FIE is an excellent choice in terms of dividend yield (close to 6%). Also, it has a great performance. The only drawbacks are its allocation (100% in the Canadian financial sector) and its relatively high MER.
– VDY Vanguard FTSE CDN High Dividend Yield Index has overall the best characteristics for a dividend ETF (yield around 4%, great performance, Beta lower than 1 and low MER especially VDY) . VDY is over exposed to the Canadian Financial and Energy sector. XEI from iShares is also another great option.
– VGG Vanguard US Dividend Appreciation is a great option if you are to looking for dividend from US based companies. This an ideal investment in a registered account to avoid the 15% withholding tax.
Considering volatility, performance and MER, my number one choice for a the best canadian dividend ETF would VDY from Vanguard. It has a low MER and a lower volatility than the market. It offers an interesting yield and a great performance for its category. My second choice would be XEI from iShares.
FIE Ishares CDN Financial Monthly Income is a excellent choice if you are bullish on the financial sector and don’t mind higher volatility than average.
ZWP BMO Europe High Dividend Covered Call ETF and ZWC BMO CDN High Dividend Covered Call ETF offer high dividend yield. On the other hand long term performance is not there. The covered call strategy seem to impact negatively long term performance. As I mentioned above, Performance should be the first criteria when selecting a dividend ETF.
How to choose the best dividend ETF
Performance and sector allocation
It’s a no brainer. Performance matters when selecting the best dividend ETF. A steady performance indicate the portfolio includes quality stocks such as Bluechips. But, one need to keep an eye on volatility and sector weighting. Regarding volatility, you want an interesting performance with the lowest possible volatility. This insures you are maximizing your returns for the risk you are taking.
Sector weighting is as important too. You need to understand where your money is invested and your portfolio’s overall exposure. Having a balanced portfolio across various industries is critical to reduce risk.
Yield
I can’t stress enough. Total return is more important than dividend yield. This is true for stocks and ETFs. A dividend yield is an annual percentage calculating the amount received by the investor for a year. It does not take in consideration capital loss or appreciation. So, you could own an investment that has a positive dividend yield and a negative total return.
If income generation is paramount to you. You need to select first ETFs that have high total returns. Then within these ETFs identify the ones that pay a steady and decent dividend overtime.
Volatility
We use the 5 years Beta as a measure of volatility. A beta of 1 mean your investment is as risky as the overall market. When selecting an investment, the desired Beta is the lowest possible.
Tax implications for Global ETFs
There are so many possible structures for an ETF. Below, we will discuss mainly three common structures:
Type 1: Canadian ETFs that invest in US or international stocks directly. There is 15% withholding tax that will impact the fund’s return;
Type 2: Canadian ETFs that invest in US ETFs which invests in US stocks. There is 15% withholding tax that will impact the fund’s return;
Type 3: Canadian ETFs that invest in US listed ETFs which invest in international stock. This is the structure that’s the least interesting for investors from a taxation perspective. 2 Taxes will be applied by the foreign country first and then the US.
XDV is the first in our list of Best dividend ETFs in Canada. The iShares Canadian Select Dividend Index ETF provides long-term capital growth by investing in 30 high yielding Canadian companies in the Dow Jones Canada Total Market Index.
XDV dividend ETF Holdings and sector allocation
Company Name
Allocation
Canadian Imperial Bank of Commerce
8.7%
Bank of Montreal
6.4%
Canadian Tire Corp Ltd Class A
6.3%
Royal Bank of Canada
6.2%
BCE Inc
5.0%
TC Energy Corp
4.8%
Labrador Iron Ore Royalty Corp
4.7%
Bank of Nova Scotia
4.6%
The Toronto-Dominion Bank
4.3%
National Bank of Canada
4.2%
Please consult issuers’ website for up to date data
Sector Classs
% Allocation
Financial Services
55.5%
Comm. Services
11.7%
Utilities
11.5%
Please consult issuers’ website for up to date data
DXG – Dyn Ishares Active Global Dividend ETF
The second ETF in our list of best dividend ETF in Canada is a global ETF. DXG is an actively managed fund. The fund invests primarily in a diversified portfolio of equity securities of businesses located around the world that pay or are expected to pay a dividend or distribution. These securities are selected actively based on size, profitability and liquidity. 56% of the funds holdings are invested in US companies, this is why it’s part of our list of the best US Dividend ETFs in Canada.
This ETF is ideal for investors seeking a dividend income from an international basket of large caps. The fund is well diversified across a variety of sectors mainly Technology, Industrials, Consumer discretionary and Health care.
DXG Dividend ETF Holdings
Company Name
Allocation
Ashtead Group PLC
6.2%
Hoya Corp
5.8%
LVMH Moet Hennessy Louis Vuitton SE
5.7%
Facebook Inc Class A
5.4%
Capital One Financial Corp
5.2%
Alphabet Inc Class A
5.2%
Salesforce.com Inc
4.9%
NVIDIA Corp
4.8%
Edwards Lifesciences Corp
4.7%
CanadaBNP Paribas Act. Cat.A
4.3%
Please consult issuers’ website for up to date data
Sector breakdown
Type
Fund
United States
62.3
International
35.8
Please consult issuers’ website for up-to-date figures
Sector breakdown
Sector
% Allocation
Financial Services
21.7%
Technology
17.8%
Consumer Cyclical
15.0%
Comm. Services
10.5%
Please consult issuers’ website for up-to-date figures
XEI – iShares Core S&P/TSX Composite High Dividend Index ETF
This ETF objective is to replicate the performance of the S&P/TSX Composite High Dividend Index ETF. The fund’s objective is long term capital growth by investing in Canadian companies operating across diversified sectors. XEI pays a monthly dividend income which can be appealing for investor who are looking for a frequent payout.
Please consult issuers’ website for up to date data
Sector allocation
Sector
% Allocation
Financial Services
29.7%
Energy
26.6%
Comm. Services
14.1%
Utilities
12.4%
Please consult issuers’ website for up to date data
VDY – Vanguard FTSE Canadian High Dividend Yield Index ETF
FTSE Canadian High Dividend Yield Index ETF tracks the performance of the FTSE Canada High Dividend Yield Index, which consists of Canadian stocks having a high dividend yield. Due to the nature of the Canadian market, this fund has large portion of its investment portfolio in Energy and Financials.
VDY Dividend ETF holdings
Company Name
Allocation
Royal Bank of Canada
14.2%
The Toronto-Dominion Bank
12.0%
Enbridge Inc
8.1%
Bank of Nova Scotia
7.5%
Bank of Montreal
6.5%
Canadian Imperial Bank of Commerce
4.9%
TC Energy Corp
4.7%
BCE Inc
4.5%
Canadian Natural Resources Ltd
4.2%
Please consult issuers’ website for up to date data
Please consult issuers’ website for up to date data
ZWP – BMO Europe High Dividend Covered Call ETF
The BMO Europe High Dividend Covered Call ETF (ZWP) has been designed to provide exposure to a dividend focused portfolio. These dividend paying companies are selected based on:
dividend growth rate,
yield,
payout ratio and liquidity.
What’s unique about this ETF is that it uses covered calls to protect against downside risk. This being said, the covered call strategy provides limited downside protection. Also, when you write a covered call, you give up some of the stock’s potential gains. These ETFs will tend to have a higher yield and a lower performance.
ZWP Dividend ETF Holdings
Company Name
Allocation
Roche Holding AG
4.0%
Nestle SA
4.0%
Novartis AG
4.0%
GlaxoSmithKline PLC
4.0%
Sanofi SA
3.8%
TotalEnergies SE
3.7%
Unilever PLC
3.7%
Enel SpA
3.7%
Please consult issuers’ website for up to date data
Geographic allocation
Countries
Weight
Switzerland
23.66%
Germany
24.24%
United Kingdom
18.76%
France
16.72%
Other (multiple countries)
16.62%
Please consult issuers’ website for up-to-date figures
Sector allocation
Type
Fund
Information Technology
6.22
Industrials
12.18
Consumer Discretionary
11.56
Consumer Staples
11.78
Health Care
16.56
Financials
14.79
Materials
9.48
Communication
8.10
Energy
3.89
Utilities
3.66
Please consult issuers’ website for up-to-date figures
CDZ – S&P/TSX Canadian Dividend Aristocrats Index Fund
The S&P/TSX Canadian Dividend Aristocrats includes only large companies that are part of the TSX and who have increased their dividend consistently for at least 5 years period. This fund has been around for a while now.
CDZ Dividend ETF holdings
Company Name
Allocation
Keyera Corp
3.2%
SmartCentres
3.0%
Pembina Pipeline Corp
2.9%
Enbridge Inc
2.9%
Canadian Natural Resources Ltd
2.5%
Power Corporation of Canada
2.5%
Fiera Capital Corp
2.2%
Exchange Income Corp
2.2%
Great-West Lifeco Inc
2.2%
Please consult issuers’ website for up to date data
Sector allocation
Type
Fund
Financials
28.33
Energy
14.88
Industrials
11.80
Real Estate
10.93
Utilities
10.77
Consumer Staples
7.03
Communication
6.47
Materials
3.51
Consumer Discretionary
3.25
Health Care
1.92
Please consult issuers’ website for up-to-date figures
FIE – Ishares CDN Fin Monthly Income
Ishares CDN Fin Monthly Income seeks to maximize total return and to provide a stable stream of monthly cash distributions. FIE has a high exposure to the financial sector.
Please consult issuers’ website for up to date data
Sector allocation
Type
Fund
Banks
44.96
Insurance
30.24
Diversified Financials
8.48
Energy
5.01
Utilities
4.50
Real Estate
2.81
Telecommunications
1.12
Transportation
0.73
Food & Staples Retailing
0.57
Cash and/or Derivatives
0.41
Please consult issuers’ website for up-to-date figures
VGG – Vanguard US Div Appr and VGH – U.S. Dividend Appreciation Index ETF (CAD-hedged)
VGG is index fund (passively managed). The fund currently seeks to track the performance of the NASDAQ US Dividend Achievers Select Index. The latter is comprised of a select group of securities with at least ten consecutive years of increasing annual regular dividend payments.
Index funds can be great especially from an MER perspective. VGG offers an exposure to large number of established US corporations, mostly Bluechips such as Microsoft, Walmart…etc.
VGG Dividend ETF Holdings
Company Name
Allocation
Microsoft Corp
4.5%
JPMorgan Chase & Co
3.9%
Johnson & Johnson
3.8%
UnitedHealth Group Inc
3.3%
Visa Inc Class A
3.2%
The Home Depot Inc
3.1%
Procter & Gamble Co
3.0%
Comcast Corp Class A
2.3%
Please consult issuers’ website for up-to-date figures
Geographic allocation
Country
Fund
USA
100.0%
Sector allocation
Sector
Fund
Industrials
21.8%
Consumer Discretionary
16.6%
Health Care
15.4%
Financials
13.9%
Technology
13.0%
Consumer Staples
10.3%
Utilities
3.8%
Basic Materials
3.0%
Telecommunications
2.2%
Other
0.0%
Real Estate
0.0%
Energy
0.0%
Total
100.0%
Please consult issuers’ website for up-to-date figures
ZWH – BMO US High Dividend Covered Call ETF
ZWH has been designed to provide exposure to a dividend focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors. The Fund utilizes a rules-based methodology that considers the following criteria:
dividend growth rate,
yield,
payout ratio,
liquidity.
What’s unique about this ETF is that it uses covered calls to protect against downside risk. This being said, the covered call strategy provides limited downside protection. Also, when you write a covered call, you give up some of the stock’s potential gains. These ETFs will tend to have a higher yield and a lower performance.
ZWH Dividend ETF Holding
Company Name
Allocation
Apple Inc
4.2%
Microsoft Corp
4.2%
Coca-Cola Co
4.1%
AbbVie Inc
4.1%
The Home Depot Inc
4.1%
Procter & Gamble Co
4.1%
Pfizer Inc
4.0%
Please consult issuers’ website for up to date data
Geographic allocation
Country
Fund
USA
100.0%
Please consult issuers’ website for up-to-date figures
Sector allocation
Sector
Fund
Information Technology
22.61%
Industrials
8.39%
Consumer Discretionary
10.06%
Health Care
12.40%
Financials
15.50%
Materials
4.36%
Communication
9.58%
Consumer Staples
7.35%
Energy
3.86%
Utilities
3.84%
Real estate
2.05%
Please consult issuers’ website for up-to-date figures
Disclaimer
The data on this website is for your information only. It does not constitute investment advice, or advice on tax or legal matters. Any information provided on this website does not constitute investment advice or investment recommendation nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or units in any of the investment funds or other financial instruments described on this website. Should you have any doubts about the meaning of the information provided herein, please contact your financial advisor or any other independent professional advisor.
What is a bond ETF?
In the world of Canadian income investing, a bond ETF takes center stage. This exchange-traded fund zeroes in on building a diverse portfolio of bonds. Picture bonds as IOUs—investors lending to governments or corporations. When you invest in a bond ETF, it’s like snagging shares of a fund that holds a mix of different bonds. In this post, we will cover all questions concerning Bond ETFs and present the Best Bond ETFs in Canada.
Why do income-focused investors love bond ETFs? Well, it’s all about the dual magic of income and diversification. These ETFs offer a ticket to a wide array of bonds, spreading the risk net across various issuers and maturity timelines. You can find bond ETFs tailoring their focus to different bond indices, whether it’s government bonds, corporate bonds, municipal bonds, or bonds with specific maturity ranges. Perfect for the savvy Canadian income investor looking to navigate the bond market without diving into individual bonds.
Short term or Long term maturity Bond ETFs, which one to choose?
Characteristic
Short Maturity Bond ETFs
Long Maturity Bond ETFs
Duration of Bonds
Typically 1 to 5 years
Often exceeds 10 years
Interest Rate Sensitivity
Less sensitive to rate changes
More sensitive to rate changes
Risk Profile
Lower risk, more stable
Higher risk, greater volatility
Income Yield
Lower yields
Higher yields
Investor Profile
Capital preservation, lower risk
Income-seeking, higher risk tolerance
Suitability in Rising Rates
Preferred due to lower sensitivity
May result in higher losses due to sensitivity
Investors choose between short and long maturity bond ETFs based on their risk preferences, income needs, and views on interest rate movements. Short-term bonds offer stability and lower risk, while long-term bonds may provide higher yields but come with increased interest rate sensitivity.
Bonds, essentially debt securities, are subject to market fluctuations, particularly in the face of changing interest rates. When interest rates rise, the prices of existing bonds tend to decrease. This is because newly issued bonds offer higher yields, making existing lower-yielding bonds less attractive. This price volatility can be unsettling for some investors.
However, the attractiveness of bonds lies in their regular interest payments, often referred to as coupon payments, and the promise of the return of the principal amount at maturity. These characteristics provide a level of stability and predictability, offering investors a stream of income and a known redemption value at the end of the bond’s term.
Now, enter bond exchange-traded funds (ETFs). These are investment funds that hold a portfolio of bonds, providing investors with a convenient way to gain exposure to the bond market. Bond ETFs offer several advantages, including low costs and diversification. The low costs result from the fund structure and the fact that ETFs typically track an index rather than relying on active management.
Diversification is another key benefit of bond ETFs. By holding a variety of bonds in their portfolio, these funds spread risk, reducing the impact of the poor performance of any single bond. This diversification can enhance the stability of returns compared to holding individual bonds.
However, it’s crucial to note that bond ETFs lack a maturity feature. Unlike holding an individual bond until maturity and receiving the principal amount back, ETFs do not have a fixed maturity date. This characteristic means that investors won’t necessarily receive the face value of the bonds in the ETF when they sell their shares.
Bond ETFs are particularly well-suited for long-term investors who are looking for a balance between regular income, potential capital appreciation, and a degree of risk mitigation through diversification. By providing exposure to a broad range of bonds, these ETFs can navigate various interest rate environments, potentially outperforming the returns of keeping funds in idle cash over the long term.
In essence, while individual bonds come with the promise of a fixed return of capital, bond ETFs offer a dynamic and diversified approach to bond investing, making them an attractive option for investors with a longer time horizon.
ZAG ETF Review – BMO Aggregate Bond Index
BMO Aggregate Bond Index ETF (ZAG) is a prominent player in the Canadian investment landscape, managing a substantial $6,279 million in assets. Renowned for its expansive size and liquidity, ZAG strategically allocates its holdings across Canadian federal and provincial government bonds, as well as investment-grade corporate bonds, providing investors with a broad market exposure.
With a targeted weighted average duration of approximately 7.4 years, ZAG exhibits a balanced strategy that considers potential returns while managing interest rate risk. The fund’s notable characteristics include a high dividend yield of 3.56% and an impressively low Management Expense Ratio (MER) of 0.09%, making it an attractive option for investors seeking both income generation and cost efficiency.
Underlining its commitment to quality, ZAG maintains an exceptional credit rating, with 89% of its assets invested in bonds rated A or better. Government entities dominate the fund’s portfolio, with the federal government representing 37% of assets and provincial governments at 34%. This strategic allocation contributes to the fund’s stability and reliability.
XBB ETF Review – iShares Core Canadian Universe Bond Index ETF
iShares Core Canadian Universe Bond Index ETF (XBB) tracks the FTSE Canada Universe Bond Index, offering a diverse portfolio of high-quality Canadian bonds. With a 7.5-year average duration, XBB has a slightly higher expense ratio than ZAG but maintains cost-effectiveness. Strong in credit quality, it yields 3.01%, ranking mid-tier among Canadian bond ETFs.
XBB shines in credit quality, allocating a significant 39% of assets to AAA-rated bonds.
VAB ETF Review – Vanguard Canadian Aggregate Bond Index ETF
Launched in 2011, the Vanguard Canadian Aggregate Bond Index ETF (VAB) is a standout in the Canadian bond market, amassing nearly $4 billion in assets. This ETF employs a passive strategy, tracking the Bloomberg Global Aggregate Canadian Float Adjusted Bond Index and investing in investment-grade bonds across Canada. What sets VAB apart is its low 0.09% Management Expense Ratio (MER), an impressive 3.55% distribution yield, and a commitment to excellent credit quality. Notably, VAB’s MER is tied for the lowest on this list. The fund’s weighted average duration aligns with its counterparts at 7.4 years, providing a balanced approach.
XSB ETF Review – iShares Core Canadian Short Term Bond Index ETF
iShares Core Canadian Short Term Bond Index ETF (XSB) excels as a Canadian bond ETF, tracking the FTSE Canada Short Term Overall Bond Index with a 3-year average maturity. Its short-term focus shields against losses in rising rates, evident in 2022. With a low 2.48% yield, XSB is a resilient, low-cost, and income-focused choice for long-term investors.
For income-focused investors in Canada, bond ETFs bring several advantages to the table. These pros encompass diversification benefits, enhanced liquidity, ease of trading on the Canadian stock exchanges, and potentially lower costs compared to managing individual bonds. Bond ETFs also provide a streamlined avenue to access various segments of the Canadian bond market, such as government, corporate, and municipal bonds. The transparency in ETF holdings and the ability to trade throughout the day align well with the preferences of income-seeking investors.
Bond ETF Cons for Canadian Income Investors:
While bond ETFs hold appeal, it’s imperative for Canadian income investors to be aware of potential drawbacks. These cons may involve sensitivity to interest rate fluctuations, impacting bond prices. Market volatility can also influence the value of the ETF. Notably, bond ETFs might not suit investors with specific needs tied to individual bond maturity dates. A thorough understanding of these cons is crucial for income investors in Canada to make informed decisions.
Should Canadian Income Investors Consider Bond ETFs?
Determining the suitability of bond ETFs for Canadian income investors hinges on factors like investment objectives, risk tolerance, and investment horizon. Bond ETFs can be an attractive option for those seeking income, diversification, and relative stability in their portfolios. However, considering Canada’s economic landscape, including interest rate expectations and market dynamics, is essential. Evaluating the pros and cons, within the context of individual circumstances, will guide Canadian income investors in deciding whether bond ETFs align with their income-focused investment strategy.
Many Canadians prefer investing in ETFs because of their low management fee and diversification. ETFs now exist for every asset class and sector. The dilemma is to choose the right ones to build your portfolio. The all-in-one ETFs respond directly to this need. By buying one ETF, the investor can have exposure to various types of assets. It does not require rebalancing because the ETF manager takes care of this for you. These features make all-in-one ETFs the best ETF in Canada in 2024.
So, it’s simply a matter of choosing one and holding onto it. The all-in-one ETFs are marketed based on the investors’ tolerance to risk. There are 3 main types: Conservative, Balanced or Growth. The percentage allocation is pretty consistent across issuers except for Horizons all in one which has an oddly different allocation for each profile risk. The balanced portfolio would be ideal for passive investors looking for a steady income of both dividends and interest earned on fixed-income products.
Note: If you not yet familiar with ETF’s, please review our previous post ‘What’s an ETF‘
i-Shares they pioneered the all in one ETF offering in Canada since 2007;
Bank Of MontrealBMO;
Horizons;
Vanguard
When comparing historical performance, please pay attention to the allocation Equities/Bonds because it might be different from one issuer to another for the same profile. Horizons for example has an odd allocation. The Horizons conservative portfolio is 50% Equities which not the norm for such type of portfolios.
How to choose the best All in one ETF portfolio?
You have first to determine your risk profile. Risk profile is established by answering two questions:
The term: are you saving for the long term? Or short term?
What is your risk tolerance? Every ETF can go up and down in value. What percentage variation can you live with.
Based on your answers, the tool will propose the best allocation among stocks, bonds and short-term reserves.
Conservative portfolio
Fixed income will dominate the portfolio at 60% or more (with the exception of Horizons’). Meaning your investments will be mostly in Bonds. Bonds are much safer than stocks but they don’t usually offer much return. This portfolio is perfect for some one whose financial objective is short term or who is risk averse. Your portfolio will still have between 20-40% exposure to stocks which allows for some modest growth with a moderate risk overall.
Balanced profile
A balanced portfolio is an investment that combines stocks and bonds. In general, 60% will be invested in the stock market (. While the remainder (40%) will be invested in fixed income investments. This portfolio seeks to combine both growth potential by holding stocks and the safety associated with holding bonds.
Growth portfolio
A growth fund is a diversified portfolio of stocks that has capital appreciation as its primary goal. This is ideal for investors who have a long term objective such as building a retirement fund. The fund will invest at least 80% in Stocks. Generally for these type of funds, providing a dividend income is a secondary objective.
Horizons offers 3 all-in-one ETFs. The breakdown they offer for each portfolio is diversified and covers several types of assets (US, Canadian, Developed and Emerging Markets Equities).
For the Bond component, Horizons is less diversified. The exposure is only through two funds.
Horizons’ management fees are among the lowest in the market.
Vanguard are the pioneers of all-in-one ETFs. The breakdown they offer for each portfolio is diversified and covers several types of assets (US, Canadian, Developed and Emerging Markets Equities). The fixed income offering covers both the North American and global bond markets.
The management expense ratios are competitive.
For the equity component, Vanguard allocates 40% of the portfolio in the US market in VEQT Vanguard All-Equity. This percentage is lower than that used by Horizons and iShares for their all-in-one 100% Equity ETFs. Exposure is through the Vanguard US Total Market Index ETF. It would have been probably better to use 2 or more index funds to cover the US market. Even in strategic terms, the presence of more US index funds would allow managers more flexibility (Variety in size (Large, Mid and Small) and type of index Nasdaq 100 vs S&P500). Exposure to the Canadian market is achieved with an index fund that covers the entire Canadian market (Vanguard FTSE Canada All Cap Index ETF).
For the bond component, Vanguard uses three funds (Canada, United States and Rest of the World). The most significant exposure is in Canadian bonds.
iShares offers several choices to investors in its line of all-in-one ETFs. The breakdown for each portfolio is diversified and covers several types of assets (US, Canadian, Developed and Emerging Markets Equities). The fixed income supply is restricted to North American markets.
For the Equity component, Vanguard uses a single fund to track the performance of the US market, namely the ISHARES CORE S&P TOTAL U.S. STOCK. It would have been probably better to use 2 or more index funds to cover the US market. Even in strategic terms, the presence of 2 or more index funds will allow managers more flexibility (variety in size (Large/mid/small caps and type of index Nasdaq100 vs S&P500). Exposure to the Canadian market is through ISHARES S&P/TSX CAPPED COMPOSITE.
For the bond component, iShares uses three funds that cover the Canadian and American markets. The most significant exposure is to Canadian bonds.
BMO offers three all-in-one ETFs. The breakdown for each portfolio is diversified and covers several types of assets (US, Canadian, Developed and Emerging Markets Equities). The fixed income offering is diversified and covers both the North American and global bond markets.
For the equities breakdown, exposure to the US market is made with 3 funds (mainly the BMO S&P 500 INDEX ETF, BMO S&P US MID CAP INDEX ETF and BMO S&P US SMALL CAP INDEX ETF).
For the bond component, iShares uses three funds that cover the Canadian, American and global markets.
Please consult issuer’s website for most current breakdown
Vanguard Balanced – VBAL
Name
Weight
Vanguard US Total Market Index ETF
24.90%
Vanguard Canadian Aggregate Bond Index ETF
23.50%
Vanguard FTSE Canada All Cap Index ETF
18.00%
Vanguard FTSE Developed All Cap ex North America Index ETF
12.50%
Vanguard Global ex-US Aggregate Bond Index ETF CAD-hedged
9.10%
Vanguard US Aggregate Bond Index ETF CAD-hedged
7.10%
Vanguard FTSE Emerging Markets All Cap Index ETF
4.90%
Please consult issuer’s website for most current breakdown
Vanguard Growth – VGRO
Name
Weight
Vanguard US Total Market Index
33.10%
Vanguard FTSE Canada All Cap Index
24.20%
Vanguard FTSE Developed All Cap ex North America Index
16.60%
Vanguard Canadian Aggregate Bond Index
11.70%
Vanguard FTSE Emerging Markets All Cap Index
6.40%
Vanguard Global ex-US Aggregate Bond Index CAD-hedged
4.50%
Vanguard US Aggregate Bond Index CAD-hedged
3.50%
Please consult issuer’s website for most current breakdown
Vanguard All-Equity – VEQT
Fund
Vanguard US Total Market Index ETF
41.50%
Vanguard FTSE Canada All Cap Index ETF
30.10%
Vanguard FTSE Developed All Cap ex North America Index ETF
20.50%
Vanguard FTSE Emerging Markets All Cap Index ETF
7.90%
Please consult issuer’s website for most current breakdown
All in one ETFs vs Robo-advisors
In comparison with Robo-Advisors, All-In-one ETFs can be seen as an alternative to robo-advisors, which are automated investment platforms that use algorithms to build and manage investment portfolios for clients. While both All-In-One ETFs and robo-advisors aim to provide investors with low-cost, diversified investment options, there are some key differences between the two.
First, the level of customization available to investors. Robo-advisors typically offer investors a range of pre-built portfolios that are designed to meet different risk profiles and investment objectives. While investors can choose from these pre-built portfolios, they generally have less control over the specific investments held in their portfolio.
In contrast, All In One ETFs provide investors with exposure to a broad-based portfolio of global equity securities. While investors do not have control over the specific holdings in the fund, they benefit from the diversification provided by the fund’s holdings across different countries and industries.
Another key difference between All-In-One ETFs and robo-advisors is the level of fees charged. All-In-One ETFs charge a low management fee of 0.20%, robo-advisors typically charge higher fees, ranging from 0.25% to 0.50% or more. While the fees charged by robo-advisors may include additional services such as financial planning and portfolio rebalancing, they can significantly impact long-term investment returns.
Disclaimer
The data on this website is for your information only. It does not constitute investment advice, or advice on tax or legal matters. Any information provided on this website does not constitute investment advice or investment recommendation nor does it constitute an offer to buy or sell or a solicitation of an offer to buy or sell shares or units in any of the investment funds or other financial instruments described on this website. Should you have any doubts about the meaning of the information provided herein, please contact your financial advisor or any other independent professional advisor.
In this post, we will be sharing BMO Covered call ETF list. We will be comparing 6 of the most popular ETFs in terms of dividends, MER and historical performance. Covered call ETFs are very popular with Canadian investors. Two reasons push investors towards covered call ETFs:
High dividend yield: thanks to the premiums earned when writing call options, the manager under certain conditions can earn premiums and enhance distributions;
Low volatility. Writing a call option is a conservative strategy aimed at reducing volatility;
Great for passive income: if you’re main objective is to achieve high dividend yields and build passive income, then covered call ETFs are a good option. But, remember the high dividend yield comes at a price which very low growth potential.
The ZWB aims to provide exposure to a portfolio of dividend-paying securities (Canadian Banks), while collecting premiums related to call options. The portfolio is chosen on the basis of the criteria below:
• dividend growth rate, yield and payout ratio and liquidity.
ZWB holdings
Name
Weight
BMO Equal Weight Banks ETF
27.2%
Bank of Montreal
12.9%
Canadian Imperial Bank of Commerce
12.7%
Royal Bank of Canada
12.1%
National Bank of Canada
11.9%
The Toronto-Dominion Bank
11.9%
Bank of Nova Scotia
11.4%
Please visit issuers’ website for up-to-date figures – BMO Covered call ETF list
ZWC –BMO CDN High Div Covered Call
The BMO Canadian High Dividend Covered Call ETF (ZWC) has been designed to provide exposure to a dividend focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors.
The fund selection methodology uses 4 factors: – Liquidity; – Dividend growth rate; – Yield and payout ratio.
ZWC is an excellent option for conservative investors looking for a steady income and low volatility. It’s tax-efficient because the dividends are all coming from Canadian companies. The financial sector and Energy represents 53% of the total overall sector allocation.
ZWC ETF Holdings
Company Name
Allocation
Canadian National Railway Co
5.4%
BCE Inc
5.2%
TELUS Corp
5.1%
Enbridge Inc
5.0%
Royal Bank of Canada
5.0%
Canadian Imperial Bank of Commerce
4.9%
Bank of Nova Scotia
4.7%
The Toronto-Dominion Bank
4.6%
Manulife Financial Corp
4.3%
Please visit issuers’ website for up-to-date figures
ZWP – BMO Europe High Dividend Covered Call ETF
The BMO Europe High Dividend Covered Call ETF (ZWP) has been designed to provide exposure to a dividend focused portfolio. These dividend paying companies are selected based on:
dividend growth rate,
yield,
payout ratio and liquidity.
ZWP Dividend ETF Holdings
Company Name
Allocation
Roche Holding AG
4.0%
Nestle SA
4.0%
Novartis AG
4.0%
GlaxoSmithKline PLC
4.0%
Sanofi SA
3.8%
TotalEnergies SE
3.7%
Unilever PLC
3.7%
Enel SpA
3.7%
Please visit issuers’ website for up-to-date figures
Geographic allocation
Countries
Weight
Switzerland
23.66%
Germany
24.24%
United Kingdom
18.76%
France
16.72%
Other (multiple countries)
16.62%
Please visit issuers’ website for up-to-date figures
Sector allocation
Type
Fund
Information Technology
6.22
Industrials
12.18
Consumer Discretionary
11.56
Consumer Staples
11.78
Health Care
16.56
Financials
14.79
Materials
9.48
Communication
8.10
Energy
3.89
Utilities
3.66
Please visit issuers’ website for up-to-date figures
ZWH – BMO US High Dividend Covered Call ETF
ZWH has been designed to provide exposure to a dividend focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors. The Fund utilizes a rules-based methodology that considers the following criteria:
dividend growth rate,
yield,
payout ratio,
liquidity.
ZWH Dividend ETF Holding
Company Name
Allocation
Apple Inc
4.2%
Microsoft Corp
4.2%
Coca-Cola Co
4.1%
AbbVie Inc
4.1%
The Home Depot Inc
4.1%
Procter & Gamble Co
4.1%
Pfizer Inc
4.0%
Please visit issuers’ website for up-to-date figures
Geographic allocation
Country
Fund
USA
100.0%
Please visit issuers’ website for up-to-date figures
Sector allocation
Sector
Fund
Information Technology
22.61%
Industrials
8.39%
Consumer Discretionary
10.06%
Health Care
12.40%
Financials
15.50%
Materials
4.36%
Communication
9.58%
Consumer Staples
7.35%
Energy
3.86%
Utilities
3.84%
Real estate
2.05%
Please consult issuers’ website for up-to-date figures
ZWK -BMO Covered Call US Banks
The BMO Covered Call U.S. Banks ETF (ZWK) is professionally managed by BMO Global Asset Management. The fund has been designed to provide exposure to a portfolio of U.S. banks while earning call option premiums.
The fund invests in 38 US Banks. It’s ideal for investors looking for dividend income. The dividend yield on November 24th was 6.19%!
The fact that the fund uses call options accomplishes two things:
increases the dividend yield;
reduces volatility but also growth potential. So, it’s something to keep in mind.
ZWU is another covered call ETF from BMO. It provides exposure to an equal weight portfolio of utilities, telecoms and pipeline companies. The fund manager will enhance yield by issuing options and collectin
ZWU Holdings
Weight (%)
Name
5.92%
BMO EQUAL WEIGHT UTILITIES INDEX
5.44%
PEMBINA PIPELINE
5.29%
TC ENERGY
5.16%
FORTIS INC/CANADA
5.02%
ENBRIDGE
4.87%
BCE
4.70%
TELUS
4.59%
PPL
4.52%
EXELON
4.46%
ROGERS COMMUNICATIONS
Practice example: covered call strategy
An investor has 100 shares of Company A in his portfolio. Company A’s share is worth $ 30. He anticipates a stagnation or a slight drop in its price and he is ready to sell them at the price of 26 $. He decides to sell a call with the following characteristics:
• Exercise price: $ 26 and Maturity: April
• Option price: $ 4 and Quantity: 100
He collects the following amount: 4 x 100 or 400 $ (premium)
Two cases should be distinguished:
CASE 1: Company A’s share price rose above the breakeven point of $ 30.
The buyer of the option will choose to exercise his right to buy and, as the seller of the call, the seller will have to sell the shares at the strike price.
During this operation:
the seller sold his shares for $ 26, which constitutes an acceptable loss for him.
the seller collected the amount of the premium of $ 4, which helped boost the performance of his investments (yield).
CASE 2: Company A’s share price has fallen below the breakeven point of $ 30.
The buyer of the option will choose not to exercise his right to buy and the seller will not have to sell his shares.
Thanks to this operation, the seller keeps his shares in the portfolio and he collected the amount of the premium which generated an additional return.
In the realm of Exchange-Traded Funds (ETFs), informed decision-making is paramount. In this analysis, we delve into a detailed examination of two prominent players within the Canadian ETF landscape: iShares S&P/TSX 60 Index ETF (TSX:XIC) and Vanguard FTSE Canada All Cap Index ETF (TSX:VCN). These ETFs, each holding significance, beckon investors with the appeal of diversification and potential returns.
Through a thorough evaluation of their strategies, portfolio compositions, and historical performances, we aim to uncover the nuanced differences that characterize these ETFs. Whether you’re an experienced investor refining your portfolio or a newcomer venturing into the world of ETFs, this analysis will provide you comprehensive insights.
What’s an Index ETF
There are several types of Exchange traded funds. Index ETFs are the king of the hill. In fact, the first ever ETF introduced to a North American Exchange was an index ETF. Index ETFs offer exposure to a large number of securities. Their main goal is to acquire, on your behalf, all the securities that constitute a specific index in order to achieve the same return of the tracked index minus the fees.
Indeed, they certainly do. Given that Index ETFs hold all the shares of companies within the index. Any dividends paid by these companies are subsequently distributed.
Are you looking to own a slice of the entire Canadian stock market? XIC might be the answer. This fund aims for long-term capital growth by mirroring the performance of the S&P®/TSX® Capped Composite Index after deducting expenses.
XIC brings another compelling reason to the table: low cost. It allows you to participate in the broader market without breaking the bank in terms of fees.
Furthermore, XIC isn’t just another fleeting investment option. It’s designed to serve as a durable, long-term core holding in your portfolio. So, if you’re seeking comprehensive market exposure, minimal costs, and a foundation for the years ahead, XIC could be the ideal contender.
Vanguard FTSE Canada All Cap Index ETF (VCN) – Investment objective
The Vanguard FTSE Canada All Cap Index ETF is on a mission to capture the essence of the Canadian equity landscape. Its goal? To mirror, as closely as possible and before accounting for fees and expenses, the performance of a comprehensive Canadian equity index. This index doesn’t discriminate – it encompasses large, mid, and small-cap publicly traded securities, painting a holistic picture of the Canadian market’s investment returns.
Diving into the specifics, this Vanguard ETF is currently dedicated to tracking the FTSE Canada All Cap Domestic Index, or its future iterations. How does it achieve this? By primarily investing in Canadian stocks spanning a broad spectrum of market capitalizations, ranging from the giants to the emerging contenders.
So, if you’re in search of an ETF that encapsulates the entirety of the Canadian equity landscape and boasts a diversified portfolio of companies, the Vanguard FTSE Canada All Cap Index ETF might be just the investment avenue you’ve been seeking.
Both funds share a similar investment objective, leading to minimal disparities in sector allocation, holdings, and historical performance between XIC and VCN. Given the substantial commonalities, the decision largely hinges on factors such as liquidity and fees. In this context, prioritizing liquidity and lower fees would likely position XIC as the preferred option. However, for those with a strong affinity for Vanguard, VCN remains an excellent selection. It’s important to recognize that either choice effectively fulfills the desired market exposure and can seamlessly integrate within your investment portfolio.
ZWB vs HMAX
Investment Objective
HMAX – Hamilton Canadian Financials Yield Maximizer
HMAX ETF is a new fund offered by Hamilton ETF. The fund invests in the Canadian banking sector. This fund aims to provide an attractive dividend yield (target 13%) using a covered call strategy. The strategy consists of writing call options on (50% of the portfolio) to collect premiums and maximize monthly distributions.
The ZWB ETF aims to provide exposure to a portfolio of dividend-paying securities (Canadian Banks), while collecting premiums related to call options. The portfolio is chosen on the basis of the criteria below:
• dividend growth rate, yield, and payout ratio and liquidity.
Covered call strategy – HMAX vs ZWB; *13% is the target yield
ZWB, representing the BMO Covered Call Canadian Banks ETF, allocates 50% of its portfolio to an out-of-the-money (OTM) option strategy. With this approach, ZWB sells OTM call options on 50% of the stocks in its portfolio. The OTM strategy places a cap on the return of the written positions at the option strike price until the option expires. This conservative strategy is designed to provide investors with a dividend yield ranging from 6% to 7%.
On the other hand, we have HMAX, the Hamilton Canadian Financials Yield Maximizer ETF, which also utilizes a covered call strategy but with a different twist. HMAX allocates 50% of its portfolio to an at-the-money (ATM) option strategy. In this case, HMAX sells ATM call options on 50% of the stocks in its portfolio. The ATM strategy entails selling call options with a strike price close to or equal to the current stock price. This aggressive approach aims to target a more substantial dividend yield of 13%.
The table clearly outlines the distinct attributes of each ETF, including their respective portfolio allocations, option strategies, and dividend yields. While ZWB follows a more conservative OTM strategy, offering a moderate dividend yield of 6% to 7%, HMAX embraces a higher-risk ATM strategy, potentially providing investors with an attractive dividend yield of 13%.
What’s the difference between ATM, ITM and OTM options
Table
Strategy
Premium or option price
Risk
Reward
ITM (In the money call option) Stock price > Strike price
High
High
High
OTM (Out of the money call option) Stock price < Strike price
The table presents a comparison of different call option strategies based on their premium or option price, as well as the associated risk and reward profiles. These strategies include ITM (In the money call option), OTM (Out of the money call option), and ATM (At The Money call option).
ITM (In the money call option):
When the stock price is greater than the strike price, the call option is considered “in the money.” This strategy offers a higher premium or option price, which means it can be relatively more expensive to purchase. However, the increased premium comes with potentially high risk and high reward. Investors opting for ITM call options are exposed to higher risk due to the substantial investment required upfront. On the other hand, the potential for significant rewards is also high if the stock price continues to rise, making it an attractive choice for those seeking substantial gains.
OTM (Out of the money call option):
When the stock price is lower than the strike price, the call option is considered “out of the money.” The OTM strategy offers call options at a cheaper premium or option price, making it more affordable for investors. However, the risk associated with OTM call options is relatively low. This is because the chances of the option expiring worthless are higher, as the stock price needs to surpass the strike price to become profitable. Consequently, the potential reward is also lower compared to ITM call options.
ATM (At The Money call option):
ATM call options come into play when the stock price is equal to the strike price. This strategy offers a medium-level premium or option price, making it a balanced choice between the high premium of ITM and the low premium of OTM call options. Similarly, the risk and reward profiles are also medium, striking a balance between the potential for gains and the chances of option expiring worthless.
Portfolio allocation – ZWB vs HMAX
ETF
Big Can Banks
Insurance
Asset Management
HMAX
76.4%
14.9%
10%
ZWB
100%
–
–
The table provides a clear breakdown of the asset allocation within two Canadian ETFs: HMAX and ZWB. Both ETFs focus on the financial sector, offering investors exposure to various segments of the industry, including big Canadian banks, insurance companies, and asset management firms.
HMAX (Hamilton Canadian Financials Yield Maximizer ETF):
HMAX allocates its portfolio predominantly to big Canadian banks, accounting for 76.4% of its assets. This heavy concentration in the banking sector reflects the fund’s emphasis on major financial institutions in Canada. Additionally, HMAX allocates 14.9% of its assets to insurance companies, indicating a well-diversified approach within the financial sector. Moreover, HMAX dedicates 10% of its assets to asset management firms, further broadening its exposure to various financial industry segments.
ZWB (BMO Covered Call Canadian Banks ETF):
In contrast to HMAX, ZWB focuses exclusively on big Canadian banks, representing 100% of its asset allocation. This indicates a more concentrated approach within the financial sector, with a sole emphasis on Canadian bank stocks. By exclusively focusing on banks, ZWB aims to provide investors with exposure to this specific segment of the financial industry, offering opportunities for income generation through its covered call strategy.
