Horizon’s AlphaPro and BetaPro ETF products have hitherto had little appeal to the long-term, buy-and-hold passive investor crowd. But, the introduction of the Horizon AlphaPro S&P/TSX 60 Equal Weight Index ETF (TSX: HEW) that tracks the S&P/TSX 60 Equal Weight Index (EWI) may change that. Unlike the more widely-known S&P/TSX 60 Index, which weights the constituent securities based on their market capitalization, the S&P/TSX 60 EWI gives equal weighting to each of the 60 stocks in the index. Therefore, HEW competes with the very popular 900-pound Gorilla in the ETF space — the iShares S&P/TSX 60 Index Fund (TSX: XIU). Let’s take a look at how HEW stacks up against XIU.
- HEW eliminates the potential problem of XIU having outsized exposure to a single stock. XIU’s top 10 holdings currently make up 45.1% of the index. That’s not as bad as Nortel alone making up more than 30% of XIU’s value around 2000 but today, four banks alone account for 22% of XIU. In HEW, on the other hand, any one stock accounts for just 1.66% of the index.
- HEW is better diversified than XIU. XIU has a 78.4% weighting to just three sectors — financials, energy and materials. HEW’s weighting to these three sectors is much less at 64.1%. The equal weight index has a higher allocation to Consumer Discretionary, Consumer Staples and Utilities.
… but with higher costs and higher turnover…
- More expensive. HEW’s Management Fee is 0.5% plus operating expenses compared to a MER of just 0.17% for XIU.
- HEW will experience more turnover since the portfolio will be rebalanced to equal weighting every quarter. XIU, on the other hand, is rebalanced only when the underlying index changes. Therefore, HEW will likely incur a higher tax hit than XIU.
- Standard & Poor’s own (admittedly, rather limited) data suggests that there is little to choose between the traditional and equal-weighted flavours of the index. While the equal-weighted index sported slightly better returns and lower risk in the recent past, the slight advantage could be easily eroded by higher fees and higher turnover.
- As HEW was launched just today, it is hard to judge how well the ETF will track the underlying S&P/TSX 60 Equal-Weighted Index in the future. The prospectus (available here on SEDAR) mentions that HEW will not track the S&P/TSX 60 EWI perfectly but it would be interesting to see how much higher tracking error is in light of higher transaction costs, taxes and expenses.
Though HEW is an interesting and unique addition to the Canadian ETF landscape, I don’t see a compelling reason to rush to embrace it. Since I hold XIU in our taxable accounts, switching will involve taking a significant capital gains hit. Investors who don’t have that problem may also want to wait until HEW has a established track record that shows that the benefits outweigh the expected hit from higher fees, higher turnover and higher expenses.