The awesomeness of ETFs has its limits.
Exchange-traded funds are a simple, low-cost, transparent way to build portfolios for all kinds of people and all kinds of investment goals. Justifiably, ETFs are steadily grinding away at the mutual-fund industry’s dominance in retail investing. Are ETFs always a better choice than a comparable mutual fund for the do-it-yourself investor?
Let’s tackle this question with a faceoff between the biggest Canadian dividend fund and the biggest Canadian dividend ETF: RBC Canadian Dividend versus the iShares Canadian Select Dividend Index ETF (XDV).
To ensure an accurate comparison, we’ll use the Series D version of RBC Canadian Dividend. Standard mutual funds include the cost of investment advice and service in their fees; series D funds strip out most of these costs because they’re designed for self-directed investors. ETFs have no advice fees built into their cost of ownership.
The point of the dividend fund faceoff is to encourage investors to be open minded about finding the best fund options. Anyone who thinks ETFs are a no-brainer choice at all times will definitely want to read on.
Fund basics
RBC Canadian Dividend is a no-load mutual fund, which means there are no commissions to buy or sell. As an ETF, XDV trades like a stock. If you use an online broker, that means commissions as high as $9.99 per trade.
Series D mutual funds are strictly for DIY investors, which means they’re available only through RBC Direct Investing and other online brokers that carry a range of Series D funds.
Both XDV and RBC Canadian Dividend have long histories for investors to inspect. The original RBC Dividend opened in 1993 and the Series D version came along in 2007. If you combine all versions of RBC Canadian Dividend, you get total assets of $17.9-billion. Series D assets make up just a small part of that total.
XDV is close to half as expensive to own as RBC Canadian Dividend. But in ETF-land, XDV is on the pricier side for Canadian dividend funds. RBC Canadian Dividend Series D’s MER of 1.05 per cent compares with 1.76 per cent for the more popular Series A version.
For a full fee picture, the trading expense ratio for both funds is included in the accompanying chart. The TER is the fee associated with the cost of buying and selling stocks in a fund. Add the TER to the MER for a full fee accounting.
Portfolio
RBC Canadian Dividend is run by a team of portfolio managers who choose stocks, while XDV tracks an index of dividend stocks. Both portfolios share a heavy weighting in financial stocks, notably banks.
One difference between the two portfolios is foreign content – XDV has none, while RBC Canadian Dividend has 2.2 per cent exposure to U.S. markets and 1.5 per cent exposure to international markets. In recent years, U.S. stocks have been very strong performers.
The different yields and performance numbers for these two funds suggest they may suit different types of investors – XDV for income seekers and RBC Canadian Dividend for total return investors who emphasize growth.
Annualized total returns
With two veteran funds like these, there’s an opportunity to view the consistency of returns over both the short and long term. Performance in 2008 was included here because it was a remarkably bad year – the worst of the global financial crisis. The S&P/TSX Composite Index fell 33 per cent on a total return basis (dividends plus share price changes) in 2008.
Distributions
Another feature of XDV that will appeal to income investors is the fact that it makes monthly payments, while RBC Canadian Dividend pays quarterly.
The chart shows distributions over the past three years and includes the extent to which a return of capital has been part of these payouts. A return of capital is not taxable in the year you receive it, but it does reduce your cost base for an ETF. That means a bigger capital gain when you sell. Note: It’s typical for ETFs of any type that pay regular income to have a return of capital component in distributions.