What are we looking for?
Top-performing Canadian-listed U.S. & global dividend ETFs
The screen
Whether it’s the tax advantages offered by Canadian dividend payers, or the idea that consistent dividend payers offer stability and are generally less volatile, Canadian investors have a long-standing love affair with dividends. For those who invest for the latter reasons, today’s screen looks across two new dividend-focused mutual fund and ETF categories recently defined by the Canadian Investment Funds Standards Committee. The new categories comprise funds that have exposure to U.S. and global stocks, with qualifying criteria ensuring that the dividend yields on the funds are 15 per cent above widely used U.S. and global large-cap equity index benchmarks. The U.S. dividend and income category houses 28 ETFs, while the global dividend and income category houses 16 ETFs, noting that the categories also include many mutual funds. To look for top-performing ETFs in these newly formed categories, I used Morningstar Direct to screen for ETFs that earned a Morningstar Rating for Funds of four or five stars within these two categories.
The Morningstar Rating for funds (or “star rating”) is an objective backward-looking measure of a fund’s risk-adjusted total return relative to category peers. There are a couple of elements to the rating that make it particularly useful for investors. First, the rating considers after-fee total returns. Given that fees are the single consistent detractor of fund performance over time, this is an imperative consideration. Second, the methodology uses a unique application of utility theory to adjust for risk. Simply put, investors don’t put equal weight on upside risk and downside risk (which is what the most common measure of risk, standard deviation, does). In other words, an investor might be indifferent between a moderately risky fund generating a 12-per-cent return, and a riskless fund generating an 8-per-cent return. The Morningstar Rating for funds takes this concept into account to adjust for risk. Though the rating is backward-looking, our data show that on aggregate, five-star funds have outperformed four-star funds, which have outperformed three-star funds, etc., in periods after receiving the rating, particularly in the Canadian-domiciled mutual fund and ETF space. As such, the star rating serves as a great starting point for further research.
What we found
The ETFs that qualified in the screen are listed in the table accompanying this article, alongside categories, MERs, trailing performance, inception dates and ratings. Also included in the table is an indication of whether the fund is actively managed or uses a systematic/rules-driven method to gain exposure to dividends (formally known as “smart” or “strategic” beta). Investors are urged to first look at the category to which each fund belongs, given that the rating is meant to measure performance against category peers.
This article does not constitute financial advice, it is always recommended to conduct one’s own independent research before buying or selling any of the funds or ETFs mentioned in this article.
Ian Tam, CFA, is director of investment research for Morningstar Canada.
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Ian Tam, CFA