Canadian investors are often homebodies, but it pays to cross-border shop.
Because the domestic market is small and laden with financial and resource stocks, U.S. companies can provide easy diversification. Rather than buying individual stocks, dividend exchange-traded funds can be a less-risky way to play the U.S. market. These ETFs can provide access to a plethora of consumer, technology and health-care stocks not readily available in Canada. They can track either the big blue chips or smaller growth companies with dividends. And they can provide a revenue stream, even during a market downturn.
We asked three experts for their top picks among U.S. dividend ETFs listed in Canada or the United States.
Tyler Mordy, president and chief investment officer of Forstrong Global Asset Management Inc. in Toronto
Fund: Vanguard Dividend Appreciation ETF (VIG-NYSE)
Management expense ratio (MER): 0.10 per cent
Wednesday's close: $82.18 U.S. a unit
52-week range: $47.70 to $82.65 a unit
Distribution yield, according to Bloomberg: 2.18 per cent
This ETF, which owns U.S. companies that have increased dividends annually for the past 10 years, is one of the largest and cheapest dividend funds among its peers, Mr. Mordy says. This ETF does not generate an overly high dividend yield, but its holdings are tilted toward higher-quality companies, he adds. Industrials, consumer goods and consumer staples names make up the largest sector weightings. Top holdings include Microsoft Corp., Coca-Cola Co. and Johnson & Johnson. The risk to the ETF comes from potentially more jittery markets as corporate earnings come under increasing pressure due to weak oil prices, a strong U.S. dollar and rising wages, he says.
Fund: Vanguard High Dividend Yield ETF (VYM-NYSE)
MER: 0.09 per cent
Wednesday's close: $70.40 U.S. a unit
52-week range: $48.05 to $70.66 a unit
Distribution yield: 3.14 per cent
This very low-fee ETF, which tracks high-yielding U.S. stocks, is suitable for income-hungry investors, Mr. Mordy says. "Bond yields worldwide are at, or near, historic lows. Equities now have higher yields than bonds in most markets." The ETF's biggest weightings are in the consumer goods, financials, and technology sectors. Top names include Microsoft Corp., Exxon Mobil Corp. and General Electric Co. The ETF, however, also holds some energy companies that have high yields because their shares were beaten up during the oil price crash, he says. Their dividend payments could become constrained if their cash flows deteriorate from slumping energy prices and revenue.
Daniel Straus, ETF analyst with National Bank Financial, Toronto
Fund: iShares U.S. High Dividend Equity ETF CAD-Hedged (XHD-TSX)
MER: 0.33 per cent
Wednesday's close: $26.07 Canadian a unit
52-week range: $21.92 to $26.12 a unit
Distribution yield: 3.01 per cent
This high-yielding U.S. stock ETF is among the cheapest from about 20 offerings listed in Canada, Mr. Straus says. The ETF screens for stocks that have robust dividends as well as companies with strong balance sheets and other indicators of financial health, he adds. Major sector weightings include energy, consumer staples and health care. Top holdings include Exxon Mobil Corp., Verizon Communications Inc. and Johnson & Johnson. If the U.S. greenback rises relative to the Canadian dollar, the currency hedging would prevent the ETF from benefiting from that gain, he says. In that case, investors would be better off owning XHU, the unhedged U.S. dividend ETF.
Fund: WisdomTree U.S. MidCap Dividend ETF (DON-NYSE)
MER: 0.38 per cent
Wednesday's close: $87.77 U.S. a unit
52-week range: $58.53 to $87.87 a unit
Distribution yield: 2.72 per cent
This ETF tracks U.S. mid-sized companies that are in the "sweet spot" because of their focus on the domestic market versus larger, multinational firms, Mr. Straus says. The global economy "still looks shaky" amid slower growth, while the U.S. economy should outpace the rest of the world, he suggests. "The ETF is the way to play that theme, but with a dividend tilt." Financial, consumer discretionary and utilities are the top sector weightings. Top holdings include Oneok Inc., Mattel Inc. and Frontier Communications Corp. With a mid-cap focus, this ETF can "show higher degrees of volatility," he says. Rising interest rates could also prompt some investors in utility stocks to turn to higher-yielding bonds.
Denise Davids, ETF analyst at HollisWealth Inc. in Toronto
Fund: BMO U.S. Dividend ETF (ZDY-TSX)
MER: 0.33 per cent
Wednesday's close: $24.54 Canadian a unit
52-week range: $20 to $25.13 a unit
Distribution yield: 2.76 per cent
This fund, which tracks U.S. companies paying dividends for more than three years, is suitable for investors seeking a sustainable yield, Ms. Davids says. "It is also one of the lowest-cost Canadian-listed U.S. dividend ETFs." This fund's top weighting is in the defensive, utilities sector versus information technology in the broad-based U.S. equity ETFs, she noted. Major holdings in ZDY ETF include Oneok Inc., NRG Energy Inc. and Spectra Energy Corp. This unhedged ETF is suitable for investors who don't expect the Canadian dollar to rise against the U.S. greenback, she added. "Investors who believe the U.S. dollar will appreciate relative to the Canadian dollar should look to ZUD, the hedged version of this ETF."
Fund: iShares Select Dividend ETF (DVY-NYSE)
MER: 0.39 per cent
Wednesday's close: $82.60 U.S. a unit
52-week range: $48 to $82.87 a unit
Distribution yield: 3.21 per cent
This fund is not the cheapest U.S. dividend ETF, but it tracks companies with growing payouts and has an attractive yield, Ms. Davids says. "Dividend growth is generally a sign that a company feels confident enough about its ability to generate profits that it is able to increase dividends." The focus on companies with conservative payout ratios (percentage of earnings that a company pays out in dividends) increases the likelihood of a sustainable yield, she adds. Top holdings include Lockheed Martin Corp., CME Group Inc. and Chevron Corp. "It is best to hold this ETF in an RRSP, as investors would be exempt from paying U.S. withholding taxes on dividends."