John Bogle, Vanguard Group founder and the father of the indexing concept, takes a highly academic route to his conclusion that no one can predict the future performance of any stock-fund manager. So in the end, market results are the best you can hope for — market results being those of the overall market as represented by some index.
If you accept this premise, it’s a short leap to the conclusion that the cost of investing is perhaps the most important influence on results in an equity portfolio. Among the lowest-cost index funds that track the broad, large-capitalization Canadian market is iShares Core S&P/TSX Capped Composite Index ETF (TSX—XIC). This exchange-trade fund, or ETF, tries to match the return of the index with the same name. The Index is comprised of the largest (by market capitalization) and most liquid securities listed on the Toronto Stock Exchange.
With a low management fee of just 0.05 per cent, this ETF has done an excellent job at nearly capturing the Index’s return. These past 10 years, for example, it has delivered a compound annual return of 9.32 per cent, just short of the Index’s return of 9.34 per cent.
ETF is a top-quartile performer
Performance compared to managed fund has also been quite favorable. For the 10 years, the fund has performed in the top quartile of the Canadian equity category.
In recent years, however, comparisons have become less favorable. In the most recent five-year period, the ETF ranks in the second quartile of the category. Over three years, it ranks in the third quartile. And in the past year, it ranks in the second quartile.
As for year-by-year performances over the past 10 years, the fund has performed in the top quartile in five years, the second quartile in two years, the third quartile in two years and the bottom quartile in one year.
The ETF, however, is heavily weighted with financial and resource stocks. The fund’s industry breakdown is as follows: financials, 34.6 per cent; energy, 24.6 per cent; materials, 11.5 per cent; industrials, 8.3 per cent; consumer discretionary, 5.6 per cent; telecommunications, 4.4 per cent; health care, 2.8 per cent; consumer staples, 2.5 per cent; technology, 2.0 per cent; other, 2.0 per cent; and utilities, 1.8 per cent. Buy the ETF as part of a diversified, global portfolio.
iShares Core S&P/TSX Capped Composite Index is a buy if you want a low-cost, diversified Canadian ETF and you can tolerate medium investment risk.
Canadian Mutual Fund Adviser, MPL Communications Inc.
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