Best In Class ETFs

At the end of 2011, there were 227 Canadian ETFs (source: Strategic Insight). The Canadian ETF Association reports that there are nearly 700 as of February 2018. During that time, the number of sponsors has expanded significantly and we are closing in on 30 companies providing ETFs. As a result, significant overlap exists between offerings and it can be difficult to discern which are superior. Assigning otherwise similar ETFs to Best In Class, Viable Alternatives, and Inferior Offerings rankings is an attempt to sift through the offerings and find the most attractive funds. Within each ETF category, funds will be assigned based on:

  1. Index Construction – ETFs tracking indices that best pursue that assumed aim of the category are ranked most highly by this measure. Indices will be primarily considered with the long term buy and hold investor in mind.
  2. Cost – Lower fees are preferred, but fees extending beyond the stated management fee are considered. These include but are not limited to the total MER, tax efficiency, and index tracking difference.
  3. Liquidity – Given two ETFs tracking the same index with the same fees, one with higher assets and volume and one with lower assets and volume, the one with the higher assets and volume is considered superior. Buying and selling this fund should be possible at a tighter spread and closer to NAV and the likelihood of future management fee decreases due to improved scale should be higher.

Category: Passive Canadian Equity

Within the framework of the Best In Class categorization, the passive Canadian equity category is judged as follows:

  1. Index Construction – Given the viewpoint of the long term buy and hold investor, the S&P/TSX Capped Composite Index looks better than the current alternatives. For a more detailed discussion, please read XIU May Be the Biggest and Oldest, but XIC and ZCN Are the Best Passive Canadian Equity ETFs.
  2. Cost – The modal management fee of 0.05% suggests that fees are not an issue in this category. Given the straightforward tracking of market cap weighted indices, trading and tax efficiency is assumed to be comparable across offerings.
  3. Liquidity – Several offerings are in the “three commas club”, and most should be sufficiently liquid.

Investors have plenty choice in getting passive exposure to Canadian stocks. The following list categorizes the available ETFs from best to worst. The Best In Class deserve strong consideration for your next passive Canadian equity dollar. The Viable Alternatives are quite good, typically only modestly weaker in one way or another. There is little reason to buy Inferior Offerings given the framework employed. Overall, the passive Canadian equity ETF category is quite robust. Even holding one of the Interior Offerings is no reason for alarm, but these investors may want to consider allocating future cash to an ETF further up the list.

Best In Class

Ticker: ZCN
Name: BMO S&P/TSX Capped Composite Index ETF
Index Tracked: S&P/TSX Capped Composite Index
Management Fee: 0.05%
Inception: 5/29/2009
By tracking a capped broad index that covers 250 companies reaching the vast majority of Canadian equity market capitalization at a rock bottom fee of 5 basis points, this ETF is as good as it gets for passive Canadian equity exposure.

Ticker: XIC
Name: iShares Core S&P/TSX Capped Composite Index ETF
Index Tracked: S&P/TSX Capped Composite Index
Management Fee: 0.05%
Inception: 2/16/2001
Interchangable with ZCN and carrying all the same benefits, but ZCN has managed to track the S&P/TSX Capped Composite Index slightly better.

Viable Alternatives

Ticker: XIU
Name: iShares S&P/TSX 60 Index ETF
Index Tracked: S&P/TSX 60 Index
Management Fee: 0.15%
Inception: 9/28/1999
The largest and most liquid passive Canadian ETF. But a narrow focus on 60 stocks and higher fees make a difficult arguement over ZCN and XIC for buy and hold investors.

Ticker: HXT
Name: Horizons S&P/TSX 60 Index ETF
Index Tracked: S&P/TSX 60 Index
Management Fee: 0.03%
Inception: 9/14/2010
Swap-based passive large-cap Canadian equity exposure. For investors who may benefit from the swap structure, this offering may be superior (Horizons touts the advantages and addresses counterparty risks here). A fee waiver of 0.04% is currently reducing the full management fee of 0.07%, making this the cheapest ETF on the list.

Ticker: VCN
Name: Vanguard FTSE Canada All Cap Index ETF
Index Tracked: FTSE Canada All Cap Index
Management Fee: 0.05%
Inception: 8/2/2013
This ETF has reached critical mass and offers exposure to the FTSE Canada All Cap Index at an attractive cost. At 210 holdings, the tracked index lacks some of the depth of the Best In Class ETFs.

Inferior Offerings

Ticker: RCAN
Name: RBC Canadian Equity Index ETF
Index Tracked: FTSE Canada All Cap Domestic Index
Management Fee: 0.05%
Inception: 9/18/2017
The fees are low and the index is solid – this ETF may emerge to be a Viable Alternative as the asset base grows and liquidity improves.

Ticker: QCN
Name: Mackenzie Canadian Equity Index ETF
Index Tracked: Solactive Canada Broad Market Index
Management Fee: 0.05%
Inception: 1/24/2018
Matches the Best In Class in fees but low assets are unattractive from a liquidity standpoint. One positive differentiator is the index this fund tracks, which has a wider reach than the S&P/TSX Capped Composite. Given higher volume and liquidity, this fund could grow to become one of the Viable Alternatives.

Ticker: VCE
Name: Vanguard FTSE Canada Index ETF
Index Tracked: FTSE Canada Index
Management Fee: 0.05%
Inception: 11/30/2011
Similar to XIU but with a lower fee. High concentration in financials and energy is a consequence of passively investing in the Canadian market, but this fund has an extra-high concentration in the two sectors as compared to the other ETFs in the list.

Ticker: QCE
Name: Mackenzie Canadian Large Cap Equity Index ETF
Index Tracked: Solactive Canada Large Cap Index
Management Fee: 0.05%
Inception: 1/24/2018
Matches the Best In Class in fees but a narrow focus, low assets, and lack of a compelling reason to favour Solactive Canada Large Cap Index mean there are better options.

Ticker: TTP
Name: TD S&P/TSX Capped Composite Index ETF
Index Tracked: S&P/TSX Capped Composite Index
Management Fee: 0.07%
Inception: 3/22/2016
Update (9/19/2018): TD Asset Management announced today that on or about November 20, 2018” TTP will follow the Solactive Canada Broad Market Index and be renamed to TD Canadian Equity Index ETF. This is the same index currently tracked by QCN. TD will also lower the management fee from 0.07% to 0.05%, presumably because the Solactive index is cheaper to license. The fee cut is welcome and matches most other comparable offerings. The ETF will keep the same ranking however, as it will become essentially a twin of QCE.
The slightly higher management fee is puzzling given that better alternatives tracking the same index already exist. Low assets and volume further limit the attractiveness of this ETF.

 

This analysis is not meant to be taken as investment advice. Please conduct due diligence on any ETF investment you are considering, including but not limited to a review of the prospectus, underlying benchmark methodology (if applicable), portfolio characteristics, holdings, performance since inception, role in your existing portfolio, and outlook for future performance.