The second instalment of The Globe and Mail ETF Buyer's Guide covers what could be the most confusing category of them all for investors.
All the usual criteria apply when researching TSX-listed exchange-traded funds covering the U.S. stock market - including fees, the index being used and the diversification being offered. The extra step with U.S. equity funds concerns currency hedging.
A quick primer on hedging: It eliminates distortions to index returns caused by fluctuations in the Canadian dollar against the U.S. buck, while also adding a bit to an ETF's fees in some cases, and contributing to tracking error. That's where an ETF's returns veer from the ideal path of index returns minus fees. If you forgo the hedge, you lose out when our dollar rises and benefit when it falls. The purpose of this guide isn't to recommend hedging or not - that's your call. It's to round up ETF options for investing in the U.S. market and help you make an informed choice.
Here's an explanation of the terms you'll find in the ETF Buyer's Guide:
Assets: Gives you a sense of how interested other investors are in a fund; smallest funds may be candidates for delisting.
Management expense ratio (MER): The main cost of owning an ETF on an ongoing basis; published returns are shown on an after-fee basis.
Trading expense ratio (TER): The cost of trading commission racked up by the managers of an ETF as they keep the portfolio in line with a target index; add TER to the MER for a fuller picture of a fund's cost. Full year 2012 numbers are presented here.
Average daily trading volume: Trading of less than 10,000 shares per day on average tells you an ETF isn't generating much interest from investors.
Distribution frequency: How often are dividends paid out?
Top three sector weightings: U.S. market ETF are typically dominated by sectors under-represented in the Canadian market.
(For a fuller version of this column go to tgam.ca/DxVz)
SELECTED U.S. EQUITY EXCHANGE-TRADED FUNDS: THE NITTY-GRITTY
|Recent||Div.||Avg. dly.||Top Three||(to Nov. 30)|
|Assets||MER||TER||Price||Yld.||trad. Vol./||Distrib.||Sector||Top Three||1-yr||3-yr||5-yr||Launch|
|Fund||Sym.||($-mil.)||(%)||(%)||($)||(%)||past 30 dys||Freq.||Weightings||Holdings||% rtn.||% rtn.||% rtn.||Date|
|BMO Dow Jones I.A. Hdgd to CAD Index ETF||ZDJ||151||0.26||0||27.46||1.9||6,284||QTRLY||Industrials||Visa Inc.||26.3||15.5||n/a||29/05/2009|
|Comments: Are you sure you want the Dow Jones Industrial Average instead of the much more diversified S&P 500? If so, this ETF is the only game in town as far as TSX-listed ETFs go.|
|BMO S&P 500 Index ETF||ZSP||726.9||0.17||0||21.2||1.5||136,231||QTRLY||Technology||Apple||38.7||n/a||n/a||14/11/2012|
|BMO's pricing tucks in just a bit below Vanguard's for this type of fund, but iShares has the lowest fees. Fees are even cheaper for U.S.-listed S&P 500 ETFs, but you'll be dinged by your broker's foreign exchange charges when you buy them.|
|BMO S&P 500 Hedged to CAD Index ETF||ZUE||474.9||0.23||0.01||27.61||1.7||22,936||QTRLY||Technology||Apple||30.9||17.1||n/a||29/05/2009|
|Check out the one-year numbers for this ETF and its sibling, the unhedged ZSP. They're a clear illustration of how unhedged ETFs will outperform those with hedging when the Canadian dollar falls like it has in the past year. Of course, the opposite will happen when our dollar rises. Note: Vanguard's hedged S&P 500 ETF is cheaper.|
|BMO Low Volatility U.S. Equity ETF||ZLU||12.2||0.34||0||17.44||1.7||1,561||QTRLY||Health care||Autozone||n/a||n/a||n/a||19/03/2013|
|Cons. staples||Dollar Tree|
|Bears watching as an option for investors who want U.S. exposure with less volatility than the broader market. Theoretically, low volatility should mean less extreme highs and lows. Would you be happy lagging the markets on the upside in exchange for missing the worst of a pullback? No currency hedging.|
|Horizons S&P 500 Index ETF||HXS||75.7||0.17||0.28||31.33||none||35,341||NONE||Technology||Apple||35.8||18.9||n/a||30/11/2010|
|Consider this ETF if you're investing in a TFSA or non-registered account, where your dividends would be subject to a U.S. withholding tax. This ETF provides a total return for the S&P 500, which means share prices rise and fall by the change in the index plus dividends. No dividends are paid in cash to unitholders. The high TER here reflects the cost of the derivative-based structure - the fund does not hold actual stocks. Hedging was used on this ETF until March 31, 2013, and then discontinued.|
|iShares U.S. Fundamental Index Fund||CLU||204.6||0.72||0.01||24.55||0.9||11,823||QTRLY||Financials||Exxon Mobil||34.4||17.5||17.7||08/09/2006|
|Cons. svcs.||Bank of Amer.|
|Expensive, as ETFs go, but the returns have been huge. Uses an indexing process where stocks are weighted using factors beyond size, including revenues, dividends, book value and cash flow. Not a small ETF, but clearly hasn't gained the wide market acceptance of more traditional S&P 500 funds.|
|iShares S&P 500 Index Fund||XUS||67||0.14||0||24.01||0.6||12,160||SEMI-||Technology||Apple||n/a||n/a||n/a||10/04/2013|
|The low-cost leader among TSX-listed S&P 500 ETFs that don't use currency hedging. If you want a REALLY cheap S&P 500 fund and don't care about hedging, check out the U.S.-listed Vanguard S&P 500 ETF (VOO), with a fee of just 0.05 per cent.|
|iShares S&P 500 Index Fund (CAD-hedged)||XSP||1,979||0.25||0||20.7||1.5||266,256||SEMI-||Technology||Apple||30.5||17.2||16.2||24/05/2001|
|The oldest TSX-listed ETF focusing on the U.S. market is also the largest and most heavily traded by far. Most investors would do just fine with Vanguard's cheaper hedged S&P 500 offering.|
|iShares MSCI USA Minimum Volatility Index Fund||XMU||24.2||0.34||0||25.4||1.7||2,761||QTRLY||Software||ADP||29.7||n/a||n/a||24/07/2012|
|Food & bev.||Wal-Mart|
|Competes against the identically priced ZLU, but with an index methodology that produces different top holdings and sectors. One to watch if you want a more docile take on the U.S. market.|
|PowerShares FTSE RAFI U.S. Fd. (CAD hgd) Indx ETF||PXU||99.3||0.57||0.01||28.22||1.2||2,682||QTRLY||Financials||Exxon Mobil||34.8||n/a||n/a||26/01/2012|
|Energy||Bank of Amer.|
|Tracks the same index as CLU, but charges less in fees and thus has delivered a bit more in returns.|
|PowerShares S&P500 Low Volat. CAD hgd) Indx ETF||ULV||59.7||0.36||0.02||25.31||2.2||5,251||MNTHLY||Utilities||J&J||21||n/a||n/a||24/01/2012|
|This third option for low volatility investing in the U.S. market has been around long enough to produce a one-year return. Notice how much less it made than S&P 500 ETFs; that may be your price for owning "safer" stocks.|
|Vanguard S&P 500 ETF||VFV||211.2||0.18||0||34.11||1.6||13,736||QTRLY||Technology||Apple||38.7||n/a||n/a||02/11/2012|
|Not the cheapest, but still a good low-fee option for the investor who isn't interested in hedging.|
|Vanguard S&P 500 ETF (CAD-hedged)||VSP||35||0.18||0||31.95||1.6||8,721||QTRLY||Technology||Apple||30.5||n/a||n/a||02/11/2012|
|Unlike BMO and iShares, Vanguard prices its hedged and unhedged S&P 500 ETF the same.|
|Vanguard U.S. Total Market Index ETF||VUN||27.9||0.17||n/a||27.08||1.2||13,505||QTRLY||Financials||Apple||n/a||n/a||n/a||02/08/2013|
|This ETF's broader exposure to the U.S. market is reflected in the fact that there are roughly 3,500 stocks in the portfolio, compared to 500 for the S&P 500. A U.S.-listed version of this fund trades under the symbol VTI and has a fee of just 0.05 per cent.|
|Vanguard U.S. Total Market Index ETF (CAD-hedged)||VUS||186||0.17||0||36.39||1.5||13,517||QTRLY||Financials||Apple||31.6||n/a||n/a||30/11/2011|
|VUN with currency hedging.|
|Sources: ETF company websites, Globeinvestor.com|
© 2007 The Globe and Mail. All rights reserved.
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