What are we looking for?
Passive funds outperforming their categories this year.
The screen
According to Morningstar’s data, there are now 1,410 ETFs that trade on Canadian exchanges. Less than half (or 513) of these funds are passively managed, highlighting the fact that the Canadian ETF space has evolved far past the basic market-cap-weighted approach for investors to gain broad market exposure. However, the original case for using ETFs is still very much a valid one, despite the arrival of more sophisticated products.
Case in point, of those 513 passive ETFs, 226 of them have beaten their category average (an average of all ETFs and mutual funds, regardless of whether they are actively or passively managed) over the first 11 months of 2023. Clearly, being boring pays off, and it’s certainly easier on the wallet given their low management expense ratios relative to active funds.
Today, I seek funds of this nature that have not only been beating their categories this year, but have done so over a longer history and on a risk-adjusted, after-fee basis. To do this I used Morningstar’s Rating for Funds (informally known as the “star” rating), which measures this over three, five and 10 years – if available – placing more emphasis on recent history. Specifically, I screened only for five-star funds, or those that have outperformed their categories historically. I also placed a screen on funds that Morningstar believes will outperform peers in the future, as denoted by a Morningstar Medalist rating of gold or silver. That rating is based on Morningstar’s assessment of the stewardship qualities of the parent firm, the experience and success of the people managing the investment fund, and the investment process itself.
Only Canadian-domiciled ETFs were considered in this search.
What we found
The funds that qualified in the screen are listed in the table accompanying this article, alongside their management expense ratios, historical performance and ratings. Investors are urged to look first at the category to which a fund belongs, as this not only gives an indication of the asset class and geographic exposure, but also serves as the peer group by which Morningstar’s ratings are meant to measure against.
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