It pays to keep an eye on an exchange-traded fund’s volatility as well as on its performance. That can affect your comfort level with your investments. And you may prefer an ETF with low volatility to one with slightly higher past returns.
We recommend dividend exchange-traded funds, or ETFs, that concentrate on high-yielding common shares. These ETFs are, in fact, usually large-cap equity ETFs. And they have a significant advantage over other Canadian equity ETFs. They enjoy equity-like returns with below-average volatility.
If you’re like many investors, you may find the volatility of stock markets — at least once in a while — too hard on your nerves — and on your sleep habits. If this describes you, a dividend ETF may be just what you need.
Low volatility makes this ETF appealing
As you would expect, returns tend to increase, over time, with increased risk. And for many, volatility defines risk. But one ETF stands out for its strong long-term gains and lower volatility. We’re talking about iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX—CDZ).
This ETF aims to track the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses. To qualify, securities must: a) be common stock or income trusts listed on the Toronto Stock Exchange and in the S&P Canada Broad Market Index; b) have increased ordinary cash dividends for at least five consecutive years; and c) have a minimum $300 million market capitalization.
Dividend Aristocrats, which was started in 2006, has a compound annual growth rate of 6.6 per cent for the past seven years. That ranks the ETF in the top quartile of all funds in the Canadian dividend and income equity category. The ETF was also a top-quartile performer in each of the past three- and five-year periods, though its performance in the last year has dropped to a bottom-quartile position.
A drawback of this ETF is that it has not been a consistently strong performer relative to its peers in the category. Over its seven years, the ETF has performed in the top quartile in three years, the third quartile in two years, and the fourth quartile in two years.
But its low volatility should appeal to ETF investors looking for a more comfortable ride. The S&P/TSX Capped Composite Index has a three-year volatility rating of six out of a maximum rating of 10. The Dividend Aristocrats ETF, by contrast, has a lower rating of four.
Lower volatility, of course, is usually associated with lower risk. And so also is diversification. In this regard, Dividend Aristocrats is well diversified. In contrast to the broader S&P/TSX Index, the ETF is not heavily weighted with financial and resource stocks.
Then too, the ETF’s relatively low management expense ratio, or MER, which is 0.66 per cent, holds appeal. That compares quite favorably to the median Canadian dividend and equity income fund’s MER of 2.40 per cent.
The ETF has paid a monthly distribution that totals $0.88 in the past year. That’s a yield of 3.3 per cent on the fund’s recent share value of $26.37.
Recommendation:
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF is a buy for investors who want long-term growth and income, and who can tolerate low to medium risk.
Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846
Canadian Mutual Fund Adviser •8/26/14 •