Canadian investors who want to passively track our equity markets through ETFs have two choices – the iShares CDN Large Cap 60 Index Fund (XIU) or the iShares CDN Capped Composite Index Fund (XIC). As the name suggests, the XIU tracks the performance of a capitalization-weighted index of 60 large, liquid stocks that trade on the TSX. The MER for the ETF at 0.17% is the lowest for a Canadian equity fund. The XIC tracks the performance of the broader TSX Composite index, which is composed of more than 250 stocks, and is slightly more expensive, charging a MER of 0.25%.
Either ETF would be a fine choice for the Canadian equity portion but, in my opinion, the XIC is a slightly better choice as it tracks a broader index and the weight of a single stock is capped at 10%. The XIC allows passive investors to avoid the “Nortel effect” or concentration in a single stock. Recall that in 2000, at its 52-week high, Nortel (TSX: NT) alone accounted for 34.2% of the TSE 300 Index. On the downside, the XIC is far less liquid and the bid-ask spread could be as much as 10 times larger when compared to XIU. However, this shouldn’t be a huge concern for long-term, buy-and-hold investors as the cost will be negligible when spread over the entire holding period of XIC, which could be decades.
XIC was introduced to track the capped version of the Large Cap 60 Index but in the fall of 2005, the mandate for the fund was changed to track the TSX Capped Composite Index. XIC is the appropriate benchmark for tracking the performance of active management, whether it is mutual funds or a portfolio of Canadian stocks.
S&P/TSX 60 Factsheet from Standard & Poors.
S&P/TSX Capped Composite Index Factsheet from Standard & Poors.
Standard & Poors versus Active (SPIVA) reports.
Shakespeare’s Primer — Canadian Content chapter.
Note: Don’t forget to enter your name in the draw for one copy of The Intelligent Portfolio. Entries will be accepted until 8 P.M. EDT on Friday, July 11, 2008.