Exchange-traded funds, such as iShares S&P/TSX 60 Index, have their advantages and disadvantages. But if you’re content with returns that are generally no better, or no worse than the market, here’s a core ETF for your portfolio.
Fully-managed equity funds have a slight advantage over passive exchange-traded equity funds in a falling market. That’s because most hold some cash, while few index ETFs hold any. When prices fall, cash adds value to any portfolio, if only by not subtracting value.
That’s something to think about in today’s markets, when many observers are questioning when the inevitable market correction will occur.
Index ETFs, on the other hand, at least those with low management fees, have the offsetting advantage of low cost. They also offer the promise of tracking ‘the market’. They remove any guesswork as to stock selection. If you want the benefits of share ownership without the worry or effort of trying to pick future winners, index ETFs can make sense.
If you’re building a portfolio of ETFs, then iShares S&P/TSX 60 Index (TSX-XIU) is a good place to start. This ETF tries to match the return of the S&P/TSX 60 Index after expenses. The Index is comprised of 60 of the largest (by market capitalization) and most liquid stocks of the S&P/TSX Composite Index.
If you’ve held this ETF these past 10 years, you have reason to be pleased. After all, its compound annual growth rate of 8.6 per cent over this time ranks in the top quartile of the Canadian equity category.
But results have been less compelling in more recent periods. For example, in the past one- and five-year periods, this ETF was a third-quartile performer. And it has managed a second-quartile performance over the past three years.
Results, however, have been fairly strong in most years of the past decade. Over this time, the ETF has performed in the top half of the category in seven years.
Meanwhile, its volatility has been moderate, with a volatility rating of six out of a maximum rating of 10.
Of course, another drawback of investing in an ETF is that its manager has no flexibility to adjust its industry-sector weightings should the need arise. In the case of S&P/TSX 60 Index, its sectors are intended to mirror sector weights of the S&P/TSX Composite Index.
Currently, nearly three-quarters of the portfolio is concentrated in just the financial and resource sectors. This makes it imperative to purchase this ETF only as part of a larger equity portfolio that includes exposure to well-diversified foreign ETFs or mutual funds. That way you can obtain better sector balance.
This ETF’s management expense ratio is 0.15 per cent.
iShares S&P/TSX 60 Index ETF is a long-term buy if you want to replicate the growth of the Canadian large-cap market and you can tolerate medium to high risk.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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