An overlooked dividend ETF with surprisingly strong returns
In the 1990s, the world of investing was dominated by mutual funds. These funds, with their safety in numbers approach, were the go-to choice for investors who valued stability over individual stock ownership. Despite some years of net redemptions, mutual funds still hold the title of largest in terms of assets under management (AUM), sitting at a staggering $2.53 trillion. This is largely due to their role as the core investment for most employer pension plans.
However, the rise of Exchange-Traded Funds (ETFs) has been nothing short of remarkable. According to Investment Executive, Canada alone boasts around 1,700 ETFs, with an estimated 1.4 new ones launching daily. The AUM for ETFs has skyrocketed to $713 billion, and this growth shows no signs of slowing down.
The allure of ETFs is easy to understand. They offer high transparency, low management fees, and seamless trading. Some brokers even provide free ETF trades, making them accessible to a wide range of investors. But with this accessibility comes a crucial question: what should investors buy?
ETFs come in various forms, each catering to different investment strategies. Core ETFs, for instance, track major indexes like the TSX/S&P 500 or the S&P 500. Sector ETFs, on the other hand, specialize in specific economic areas, such as technology or utilities. Geographic ETFs allow investors to diversify across continents or individual countries. Covered call ETFs enhance income at the cost of potential capital gains, while cash-type and leveraged ETFs offer unique risk-return profiles.
The U.S. ETF market, in particular, is vast, with approximately 4,800 funds holding a staggering $10 trillion in assets. This diversity presents investors with a wide array of options to choose from.
One sector that has been thriving despite political headwinds is green energy. Despite Donald Trump's efforts to stifle the green revolution, the BMO Clean Energy Index ETF ZCLN-T has outperformed, gaining 30% year-to-date. Similarly, energy-based ETFs and those focused on Canadian banks have also shown strong performance.
For investors seeking a broader focus, dividend ETFs are a popular choice. Most major ETF providers offer at least one dividend fund, and many have multiple options. These funds typically invest in blue-chip stocks and excel during bear market conditions. However, the challenge lies in the small size of Canada's stock market and the limited number of quality dividend payers, leading to similar securities in most dividend ETFs.
Amidst this clutter, one dividend ETF stands out as an often-overlooked gem: the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV-T). This ETF, with a price of $44.20 and an annual payout of $1.404, offers a yield of 3.18%. It is designed to replicate the performance of the MSCI Canada High Dividend Yield 10% Security Capped Index, focusing on securities with strong overall financials, above-average dividend yields, strong balance sheets, and less volatile earnings.
The performance of XDIV-T is truly impressive. In the year ending May 31, the fund gained 40.85%, and it boasts a five-year average annual compound rate of return of 17.98%. What's even more remarkable is its ability to generate a small profit in 2022, a challenging year for the stock market.
The fund's portfolio is dominated by financial giants Royal Bank and TD Bank, each holding 9.59% of assets under management. Sun Life and Manulife also have significant positions, collectively accounting for 17.62% of the portfolio. The energy sector is well-represented with Canadian Natural Resources and Suncor, holding 15.89% of assets. Approximately 47% of the portfolio is in financials, and 29% is in energy.
The current monthly distribution is $0.117 per unit, translating to an annual payout of $1.404, or a forward yield of 3.18% at the current price. It's important to note that the distribution rate is adjusted every three months, so the payout is not guaranteed.
The main risk associated with XDIV-T is market risk. While the fund invests in leading companies, heavy exposure to the financial and energy sectors could significantly impact performance if either sector faces a downturn.
In conclusion, the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV-T) is a strong candidate for investors seeking a well-performing dividend ETF. Its impressive performance, diverse portfolio, and moderate risk profile make it a compelling choice in the ever-evolving world of investing.
