Insights from ETFS; Looking Into 2023

With 2022 behind us, 2023 is likely to bring new and old opportunities, threats, and growth. 2022 taught us the hard way that high growth (with unprofitability) is not always the best-rewarded investment. Diversification across factors, sectors and geographies can result in an overall lower risk profile of a portfolio. The favourable criteria have shifted back to long-term old boring companies with simple, predictable free cash flow generation and shareholder-friendly management teams with secular tailwinds. These companies are the ones that investors can comfortably hold for five or ten years down the road. Below we outline three such Exchange-Traded Funds (ETFs) that offer exposure to companies that reflect the criteria above:

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)

The S&P/TSX Canadian Dividend Aristocrats Index consists of companies in the broad market Canadian index that have consistently increased dividends each year for at least five years. Tracking the index, CDZís constituents are weighted according to their indicated yield. CDZ manages nearly $950 million in assets while offering a twelve-month trailing yield of 3.9 percent. 

Charging a Management Expense Ratio (MER) fee of 0.66 percent, the ETF offers overweight exposure to Financials at 24 percent and Energy at 15 percent. The next three sectors include Utilities at 11 percent, Real Estate at 11 percent, and Industrials at 10 percent. The top five holdings include Slate Grocery Real Estate Investment Trust (REIT), an operator of U.S. grocery-anchored real estate in major U.S. metro markets offering a yield of 7.8 percent, Pembina Pipeline Corp, which operates transportation and storage infrastructure delivering oil and natural gas to and from parts of Western Canada, Enbridge Inc, a multinational pipeline and energy company, Fiera Capital Corp, an asset management firm, and Keyera Corp, one of the largest midstream oil and gas operators in Canada.

iShares Canadian Value Index ETF (XCV)

Tracking the Dow Jones Canada Select Value Index, XCV aims to offer exposure to high dividend-paying companies in Canada that are thought to be undervalued by the market relative to comparable companies. The universe is filtered through screens, including a five-year dividend coverage ratio of greater than or equal to 125 percent and a non-negative trailing 12-month earnings-per-share (EPS). 

XCV manages $117 million in assets and 40 constituents and charges an MER of 0.55 percent. The top five holdings include Toronto Dominion, Royal Bank of Canada, Enbridge Inc, Bank of Montreal and Canadian Natural Resources, a senior Canadian oil and natural gas company. Nearly 55 percent of total assets are allocated to the financial sector and 25 percent to energy, making this a very sector-focused ETF. 

iShares Canadian Fundamental Index ETF (CRQ)

Managing nearly $91 million in assets, CRQ outperformed the CDZ and CRQ on 1-, 3-, 5-, and 10-year total return metrics. The ETF seeks to replicate the FTSE RAFI Canada Index, wherein the constituents are weighted using a composite of fundamental factors, including total cash dividends, free cash flow, total sales, and book equity value. 

Managing nearly 104 holdings, CRQ has amassed total assets of $91 million under management. The ETF charges MER fees of 0.72 percent and offers sector exposure of Financials at 41 percent, Energy at 21 percent, Materials at 10 percent, and Industrials at seven percent. The top five holdings include Royal Bank of Canada, Toronto Dominion, Enbridge Inc, Bank of Nova Scotia, and Suncor Energy, a Canadian integrated energy company specializing in the production of synthetic crude from oil sands.

Disclosure: Authors, directors, partners and/or officers of 5i Research have a financial or other interest in XIT and ZRE.