Written by Vicky @ Vix Money
XIC – iShares S&P TSX Capped Composite Index Fund – was introduced on February 16, 2001, and seeks to replicate the largest and most liquid securities listed on the Toronto Stock Exchange (TSX). It is part of a group of ETFs owned by iShares, and, as of June 11, 2009, is now currently being managed by BlackRock Asset Management Canada Limited. The iShares fund family continues to lead the market amongst all the providers, managing approximately 2/3 of all the money currently invested in the Canadian ETF market. When choosing to invest in XIC, you choose to invest in the long-term capital growth of the largest companies in Canada.
What are the largest companies in Canada?
When you purchase an ETF like XIC, it is good to know what kind of companies you are investing in, as well as the sectors they do business in. This is interesting to know as you want to have diversification in your portfolio, and you do not want to focus too much of your investments in a handful of sectors. Although it does not guarantee against loss, diversification in your portfolio helps you reach your long-term financial goals while simultaneously minimizing the risk associated with it.
In Canada, the main sectors that are represented are the financial industry, the energy sector, and the materials sector. This is reflective in XIC as over 75% (as of March 30, 2012) of the fund’s holdings are in these sectors.
The following is a list of the top 10 holdings of the fund (as of March 30, 2012):
|Royal Bank of Canada||5.58%|
|Bank of Nova Scotia||4.25%|
|Suncor Energy Inc.||3.41%|
|Barrick Gold Corp.||2.90%|
|Potash Corp. of Saskatchewan Inc.||2.62%|
|Bank of Montreal||2.54%|
|Canadian Natural Resources Ltd.||2.44%|
|Canadian National Railway Co.||2.35%|
Some of the companies sound familiar to you? Altogether, the top 10 holdings account for approximately 34% of the fund’s portfolio. In total, XIC currently owns shares in over 250 companies. Imagine what it would cost to buy the shares of all 250 companies individually!
Keep in mind that XIC (unlike XIU) is a cap-weighted ETF. This means that each holding is weighted by their market capitalization, but is limited to a maximum of 10%.
While holdings in both XIC and XIU are weighted based on their market capitalization, the distinction between the two is that the holdings in XIC are also capped. In other words, any one holding in XIC cannot exceed 10% of the total holdings. This helps passive investors prevent a large concentration of a single stock in their portfolio if that stock represents a large chunk of the index.
Which ETF to choose?
Once the decision of investing in the largest companies operating in Canada’s market has been reached, you will then have to decide which ETF to purchase. When making your decision, here are a couple things to keep in mind.
Management Expense Ratio (MER)
One of the biggest reasons to build an investment portfolio containing ETFs is that the costs of owning them are much lower. In Canada, although we do have the most variety of mutual funds offered of any country in the world, we also have the world’s most expensive MERs as well. In Canada, the average MER is around 2.50%, and this does not take into account any additional sales charges that an alarming number of funds also contain. With XIC boasting a MER of only 0.26%, you get almost a 2.25% head start on your portfolio’s return every year when compared to mutual funds. History has shown that only a handful of fund managers can overcome this deficit on a yearly basis, and even less can do this consistently year after year. Hey, every penny saved is nearly two pennies earned!
Tracking Error and Return
The purpose of XIC, like other index funds, is to replicate the returns of a benchmark index. In this case, XIC is designed to replicate the performance of the S&P/TSX Capped Composite 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 XIC compared to its benchmark index. For the most part, you can see that the tracking error is pretty low, with the exception of 2005.
Many investors choose to invest in shares of specific companies based on the dividends that they pay out. Do you still receive dividends if you invest in ETFs? Absolutely! But there is a catch! Every quarter, at the determination of the fund manager, all net taxable income is distributed back to the investor in the form of either cash or reinvestment back into the fund. These distributions include dividends received from the securities held in the fund, and realized capital gains that are generated when the fund buys and sells securities.
The timing of these distributions varies amongst the different ETF products out there. Some pay on an annual basis, while some pay as often as every month. If you intend to build a portfolio that will eventually replicate your salary, you will need to be aware of when these payouts occur. A criterion that some investors use is the timing of these distributions, as you may want the amount staggered throughout the year so it can better match your own expenses.
The most recent distribution paid out in 2012 for XIC was on March 30, 2012 at the rate of 0.13814 per share. If you owned 1,000 shares of XIC on March 23, 2012 (the ex-dividend date), you would have received $138.14 (0.13814 x 1,000 = $138.14). You can view the distributions for XIC from the ishares website.
To compare different ETFs, you may also want to compare their dividend yields. This is calculated as follows:
Current Dividend Yield = Most Recent Full Year Dividend / Current Share Price
In XIC’s case, the current dividend yield is:
2011 Dividend = 0.46126
Share Price as at close on April 2, 2012 = 19.68
Current Dividend Yield = 0.46126 / 19.68 = 0.02344 or approximately 2.34%.
The yield for XIC can be found on Yahoo Finance and other financial websites (already calculated for you!), along with other information such as current price, price ranges, and volume.
Phew, everything (almost) that you wanted to know about XIC in a nutshell! Everyone still with me out there? 🙂
What do you think readers? Is this ETF already part of your portfolio? If not, is this something you would consider adding to supplement your current portfolio?