XIC vs. XIU

Written by Vicky @ Vix Money

Even though I have chosen to hold XIC in my portfolio to represent the Canadian equities portion, I have debated whether or not XIU could be used instead. So which one is better?

XIU, iShares S&P/TSX 60 Index Fund, was introduced on September 28, 1999, and seeks to replicate the 60 largest and most liquid securities listed on the S&P/TSX 60 Index.

Which companies are represented in XIU?

In Canada, the main sectors that are represented are the financial industry, the energy sector, and the materials sector. This is reflective in XIU as almost 78% (as of April 23, 2012) of the fund’s holdings are in these sectors, compared to XIC’s 77% (as of April 23, 2012). If you are checking out the analysis I previously completed for XIC, please note the difference in the dates. Overall, the numbers are NOT THAT different, but please be aware of it.

The following is a list of the top 10 holdings of the fund (as of April 23, 2012):


Royal Bank of Canada 7.70%
TD Bank 7.09%
Bank of Nova Scotia 5.83%
Suncor Energy Inc. 4.58%
Barrick Gold Corp. 3.71%
Bank of Montreal 3.58%
Potash Corp. of Saskatchewan Inc. 3.44%
Canadian National Railway Co. 3.32%
Canadian Natural Resources Ltd. 3.27%
Goldcorp Inc. 3.04%

The top 10 holdings for XIU are IDENTICAL to the top 10 holdings for XIC. So what are the differences between the two?

  1. Altogether, the top 10 holdings account for approximately 46% of XIU’s portfolio, compared to only 33% of XIC’s portfolio.
  2. XIC currently holds 254 companies while XIU holds 60 companies.
  3. Holdings in both XIC and XIU are weighted based on their market capitalization, but the main distinction between the two is that the holdings in XIC are capped. In other words, any one holding in XIC cannot exceed 10% of the total holdings.

Based on these differences, XIC takes this round. You get over 4 times as many companies, which increases your diversification while simultaneously minimizing the risk associated with your portfolio, and the 10% holdings cap helps prevent a large concentration of a single stock in the portfolio.

Management Expense Ratio (MER)

This is one of the biggest arguments for owning XIU! Boasting an enviable MER of 0.17%, XIC’s 0.26% is almost 0.10% higher. Although, for me, it is ONLY 0.10% (we’re talking $10 per year if your ETF portfolio is $10K and holds only XIC), XIU still wins this round hands down.

Tracking Error and Return

The purpose of XIU, like other index funds, is to replicate the returns of a benchmark index. In this case, XIU is designed to replicate the performance of the S&P/TSX 60 Index. Therefore, the primary goal of the fund manager is to minimize the difference between the fund return and the index return. In order to determine how successful a fund manager is in accomplishing this goal, you have to look at the tracking error. Ideally, you want to purchase ETFs that have the lowest tracking error record.

The following shows the annual returns (in percentages) of XIU compared to its benchmark index; you can see that the fund managers have been doing very well in keeping the tracking error low.

XIU tracking error

Tracking Error of XIU

Based on the tracking error, although both are pretty close, XIU definitely takes this round due to XIC’s tracking error difference in 2005. But how do the returns themselves compare between the two ETFs?

XIU vs XIC annual returns

XIU vs XIC annual returns

Way too close to tell! Another way of looking at it is this: say you invested $10,000 into each ETF at the beginning of 2002 and left it to the end of 2011. At the end of 2011, the portfolio containing XIU will be worth approximately $18,967 and the portfolio containing XIC will be worth approximately $19,146. A difference of a whopping $179! Although this round was EXTREMELY close, XIC squeaks by and takes this round.

Distributions

The following is a summary of the distributions for the two ETFs during the past 5 years:


XIC

XIU

Difference

2011

0.46126

0.44231

0.01895

2010

0.46603

0.44562

0.02041

2009

0.45833

0.42690

0.03143

2008

0.55486

0.62068

(0.06582)

2007

1.00801

0.41424

0.59377


In general, XIC’s distributions are a bit higher than XIUs, so XIC takes this round as well.

Dividend Yield

To compare different ETFs, you may want to compare their dividend yields. This is especially important to those who are seeking high dividend yields to replicate their income stream. The current dividend yields for these ETFs can be found on Yahoo Finance and other financial websites.

Using Yahoo finance, the current dividend yield of XIC (as of February 29, 2012) is 2.31%, while XIU’s current dividend yield is 2.45% (as of February 29, 2012). Wait a minute! Didn’t we just determine that XIC won in the distribution area?

If you recall, current dividend yield is based on current share price. Even though XIC’s distributions are generally higher than XIU’s distributions, XIC’s share price is higher than XIU’s share price as well, hence the higher dividend yield for XIU. XIU take this round!

Battle Results

It’s been a pretty tight battle, with the final tally being … 3-3.  :)

Let’s see, what else can I look at? Well, the volume of XIU is almost 10 times the volume of XIC, so XIU is definitely more liquid, so when you’re trading, the bid-ask spread should be lower. But I personally don’t think this is as important, as I believe it would be negligible in the long term. And the 3-3 score assumes that every feature I looked at is equitable, which isn’t necessarily true as everyone has different priorities in respect to their investment style.

Ultimately, I think that either ETF would be a great part of your portfolio! I personally choose to invest in XIC over XIU because I like the diversification it provides (254 companies vs. 60 companies), which provides exposure to the smaller companies in Canada. I have to admit that I am definitely relieved that the analysis shows that the returns between the two are pretty comparable, as I was concerned that XIU’s lower MER would be reflected in a larger return for XIU. I’m willing to pay the extra 0.10% in MER for the additional diversification, but if XIC was consistently underperforming XIU, then I’d have to make the switch. Fortunately, that isn’t the case!

What do you think readers? Am I missing anything that can be used to distinguish between these two ETFs? Are there any other criteria you use when determining which ETF to purchase for your portfolio?

17 Responses to “XIC vs. XIU”

  1. Doug

    May 02. 2012

    Great compare of 2 ETF’s, Thanks Vix

    Reply to this comment
  2. Doug

    May 02. 2012

    Great compare of 2 ETF’s, Thanks Vix

    Reply to this comment
  3. Vicky

    May 02. 2012

    Thanks for dropping by Doug!

    Reply to this comment
  4. Vicky

    May 02. 2012

    Thanks for dropping by Doug!

    Reply to this comment
  5. My Own Advisor

    May 03. 2012

    Great work Vicky!

    I own XIU in my RRSP. I figure if the biggest 60 companies in Canada aren’t making money, nobody is. :)

    Love the low fee.

    Keep up the great work on DN, I will definitely include this one in my roundup!

    Reply to this comment
    • Vix Money

      May 04. 2012

      Thanks MOA! Biggest 60 companies in Canada are definitely influential, but I keep hoping that we might have some little ones that surprise everyone! Thanks for the support!

      Reply to this comment
  6. My Own Advisor

    May 03. 2012

    Great work Vicky!

    I own XIU in my RRSP. I figure if the biggest 60 companies in Canada aren’t making money, nobody is. :)

    Love the low fee.

    Keep up the great work on DN, I will definitely include this one in my roundup!

    Reply to this comment
    • Vix Money

      May 04. 2012

      Thanks MOA! Biggest 60 companies in Canada are definitely influential, but I keep hoping that we might have some little ones that surprise everyone! Thanks for the support!

      Reply to this comment
  7. Liquid

    May 03. 2012

    Great post Ms. V. They’re both really great ETFs and it’s hard for me to decide which one is better. But I think I like XIU a little bit more because I’m a bigger fan of the S&P/TSX 60 index than the broader S&P/TSX index.

    Reply to this comment
    • Vix Money

      May 04. 2012

      Hey Liquid! When you say that you like XIU better, does that mean you actually hold it? :) I’ll keep purchasing XIC for now so i can take advantage of the new shares that the dividend payouts will purchase for me (more shares = more dividends = more new shares). But I definitely like XIU as well, and will consider adding it to my portfolio in the future.

      Reply to this comment
  8. Liquid

    May 03. 2012

    Great post Ms. V. They’re both really great ETFs and it’s hard for me to decide which one is better. But I think I like XIU a little bit more because I’m a bigger fan of the S&P/TSX 60 index than the broader S&P/TSX index.

    Reply to this comment
    • Vix Money

      May 04. 2012

      Hey Liquid! When you say that you like XIU better, does that mean you actually hold it? :) I’ll keep purchasing XIC for now so i can take advantage of the new shares that the dividend payouts will purchase for me (more shares = more dividends = more new shares). But I definitely like XIU as well, and will consider adding it to my portfolio in the future.

      Reply to this comment
  9. Max Thunder

    Apr 27. 2014

    XIC mer fees are down to 0.05% since the 24th of March 2014. The choice between XIC and XIU became a lot easier!!!

    Reply to this comment

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