The Globe and Mail - 22.02.2020

B12 | REPORTONBUSINESS OTHEGLOBEANDMAIL | SATURDAY, FEBRUARY 22, 2020

RobCarrick’scomments:After five years of stock market ups and downs, low volatility ETFs have shown the ability to lose less in down markets and still deliver competitive returns overall.

The real test, of course, will be the next big stock market correction. Low vol funds are too new to have gone through the 2008-09 crash. The hedged version of this fund is ZLH.

Pricier than other S&P 500 funds, but the total return structure (changes in share price reflect a total return based on moves in the underlying index and dividends) makes it TFSA-friendly. Dividends from

U.S. stocks are subject to a withholding tax in a TFSA. With HXS, there are no dividends to be taxed. The comparatively high fee is connected to the use of derivatives to mimic the return of the

S&P 500 – individual stocks are not held.

The cheapest ETF on this list. You can't really go wrong with VFV if you want to cover off the U.S. market in your portfolio with one ETF. For hedging, look at VSP.

The wait continues for VUN to show investors the benefit of including small- and medium-size companies instead of just the behemoths found in a basic S&P 500 fund. VUN’s portfolio actually

has seven times as many stocks as its sibling, VFV. The hedged version of VUN is VUS.

Vanguard has the pricing edge on S&P 500 ETFs, but XUS is still a fine choice for U.S. exposure. For a hedged version, check out the far larger XSP.

This is why ETF investing is so great: ZSP gives you the 500 largest, most liquid U.S. stocks in a single easy-to-buy package that costs next to nothing to own. The less popular hedged version is ZUE.

XMU has the second-best five-year returns on this list, which is surprising because this is a low volatility fund. Note that tech has the top weighting. Utilities are a classic low volatility sector.

Tech, not so much.

Stand-out returns generated by using a screening process that zeroes in on stocks with a high return on equity, stable earnings growth and low debt. The beta shows a high level of volatility compared

with the broad market and suggests investors should not regard “high quality” as any sort of buffer against a stock market correction. Also, a decline in the tech sector could really hurt this fund.

The strong performance of this fund is underplayed a bit by the fact that it uses currency hedging and therefore has given up the extra returns enjoyed in recent years by unhedged funds. The unhedged

version of this ETF, ULV.C, lacks a five-year track record and thus isn’t yet eligible for inclusion in this guide.

Based on an index that gives higher weightings to lower risk stocks. High fee, strong results. Can the two continue to co-exist?

MARKET DATA

ASOFFEB.18

Fund

Ticker

(TSX)

Assets

($ mil.)

MER

(%)

TER

(%)

Price

($)

Div.yield

(%) Distributions

No.of

holdings

Topsector

weightings (%) 1 -year 3 -year 5-year

3 -year

beta

Launchdate

JOHNSOPINSKI/THE GLOBEANDMAIL,SOURCE: ROB CARRICK; ETF COMPANYWEBSITES; GLOBEINVESTOR.COM; TMXMONEY

TOTALRETURNS

TOJAN.31(%)

(mm-dd-yyyy)

BMOLowVolatilityU.S.Equity ETF ZLU 1 ,77 6 0 .33 0 .01 41. 67 1 .2 Quarterly 104 Utilities25.5 23.7 1 3.7 11. 60 .28 03 -19- 2013

Financials 15

Cons.staPles 15

BMO MSCIUSAHigh QualityIndexETF ZUQ 349 0 .3 404 5. 40 0 .7 Quarterly 12 6Tech 4729 .7 19 1 5.3 1 .11 11-0 5 - 2014

Healthcare 1 7

Cons.staPles 11 .5

BMO S&P 500IndexETF ZSP 7,77 00490. 09. 18 1.^4 Quarterly 5 06 Tech2 4 .5 22. 114 .7 1 2.8 0 .99 11-14- 2012

Healthcare 14

Financials 1 2.5

CIFirstAssetMSCIUSALow Risk

WeightedETF

RWU.B 40 0. 67 0. 0424 .3 0 1 .2 Quarterly 149 Utilities25 25 15 13 0 .38 02 -0 5 - 2014

Financials2 1 .5

Real estate 17.5

Horizons S&P 500IndexETF HXS 988 0 .11 0.3 086 .5 4 n/a None n/a Tech2 4 22. 114 .7 1 2.8 0 .99 11- 3 0- 2010

Healthcare 14

Financials 13

InvescoS&P 500LowVolatility

IndexETF–CADHedged

ULV.F 353 0 .3 40. 024 7. 14 1 .7 Monthly 100 Utilities2 9 22. 11 3. 911. 10 .28 01- 2 4- 2012

Real estate 21

Financials 16 .5

iSharesCoreS&P 500IndexETF XUS 2,232 0 .10 0 55.53^1.^4 Semi-annual 5 06 Tech2 4 .5 22 14. 61 2.8 1. 02 04-10- 2013

Healthcare 14

Financials 1 2.5

iSharesEdgeMSCIMinVolUSAIndexETF XMU 497 0 .33 06 2.53^1.^4 Quarterly 208 Tech 18 23.8 1 5.8 1 3. 40 .41 0 7 - 2 4- 2012

Financials 16

Cons.staPles 12

VanguardS&P 500IndexETF VFV 2,8 00 0. 08 0 79. 43 1 .5 Quarterly 508 Tech2 4 22. 114 .8 1 2. 90 .99 11-0 2 - 2012

Healthcare 14

Financials 1 2.5

VanguardU.S.Total MarketIndexETF VUN 2,3 00 0 .16 0 61.7 1 1. 4 Quarterly 3,566 Tech23 20 .7 14 1 2.3 1 .01 0 8 -0 2 - 2013

Financials 19 .5

Consumersvcs. 1 3.5

THE GLOBEANDMAILETF BUYER’S GUIDE,VOL.3–U.S.EQUITY FUNDS

T

here were no bad choices for
ETF investors in the U.S. eq-
uity category last year.
Every single exchange-traded
fund listed in the U.S. equity
instalment of the 2020 Globe and
Mail ETF Buyer’s Guide made be-
tween 20 per cent and 30 per cent
in the 12 months to Jan. 31, and the
three- and five-year returns were
all in double digits.
Want a likely path to investing
disappointment? Buy a U.S. equi-
ty ETF based on those backward-
looking return numbers. Dig in to
the other data in the Buyer’s
Guide if you want to understand
how these ETFs might behave in
the future.
Check the weighting in tech
stocks, for example. If this high-
flying sector falters, a tech-heavy
ETF would be vulnerable.
Check the fees – the drag on re-
turns caused by fees is much more
tangible in weak or down markets
than in years when everyone
makes double-digit returns.
Also check the beta for each
ETF in the guide. Beta measures
an ETF or stock’s tendency to
move around in price compared
with a benchmark index, in this
case the S&P 500.
If you’re looking for a low vola-
tility ETF to take the edge off a fu-
ture stock market downturn, beta
is an important indicator of a

fund’s tendency to do what the in-

dex does.

ETFs included in this guide

have at least a five-year track re-

cord and can be considered for

core U.S. exposure, which means

they could be your one and only

U.S. equity fund.

Most funds in this edition of

the Buyer’s Guide do not use cur-

rency hedging, which gives you

the returns of the underlying

portfolio with no distortions

caused by currency fluctuations.

With hedging, your U.S. returns

won’t be undermined when our

dollar rises, nor will they be en-

hanced when the dollar falls.

Unhedged funds do better

when our dollar is falling and lag

when the dollar rises.

Unhedged funds have had the

edge in recent years because of

weakness in the Canadian dollar

compared with the U.S. buck.

Some investment pros believe

there’s no point in hedging if you

have a long time horizon.

Here’s a look at some of the

terms used in the ETF Buyer’s

Guide:

Assets:Shown to give you a

sense of how interested other in-

vestors are in a fund; the smallest

funds may be candidates for

delisting.

Management expense ratio

(MER):The main cost of owning

an ETF on a continuing basis; as

with virtually all funds, published

returns are shown on an after-fee

basis.

Trading expense ratio

(TER):The cost of trading com-

missions racked up by the manag-

ers of an ETF; add the TER to the

MER for a fuller picture of a fund’s

cost. Most of the U.S. equity ETFs

included here don’t do enough

trading to generate much of a TER.

Distribution frequency: If

you’re primarily focused on divi-

dend income, note that few U.S.

equity ETFs make monthly divi-

dend payments. Many other types

of ETFs do pay monthly. Also note

the low yields of these funds.

Number of holdings:Gives

you an indication of whether a

fund offers broad stock market

coverage, or holds a more concen-

trated portfolio that may behave

differently than benchmark in-

dexes.

Sector weightings:Included

to help you verify how well a U.S.

equity ETF will diversify your Can-

adian holdings with exposure to

sectors such as tech and health

care.

Three-year beta:A bench-

mark stock index always has a be-

ta of 1.0. A lower beta means less

volatility on both the up and

down side.

Launch date:The older an

ETF is, the more likely it is that you

can look back at a history of re-

turns through good markets and

bad.

2020ETFBuyer’sGuide:BestU.S.equityfunds

Digintounderstand

howtheseETFsmight

performafterayear

ofgangbusterreturns

ISTOCK

ROB
CARRICK

OpINION