When I first started to write about money management, mutual funds were the primary choice of many investors. They were widely available and offered portfolio diversification at what seemed a reasonable cost at the time.
They became so popular that for several years my annual Buyer’s Guide to Mutual Funds would shoot to the top of the best-seller lists as soon as the latest version was released in the fall.
But nothing lasts forever. Investors gradually discovered that high sales commissions and annual management charges were eating away at their funds’ profitability. Meanwhile, financial institutions were complicating matters by issuing several different versions of the same fund. A units, C units, F units, I units, etc. left investors confused and frustrated.
Thirty-five years ago, in March, 1990, Canada gave birth to the world’s first exchange-traded fund (ETF), the Toronto 35 Index Participation Units (TIPS). It tracked the performance of the largest 35 stocks on the TSX.
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Unlike mutual funds, ETFs trade on a stock exchange and can easily be bought or sold with a phone call. Their management fees are generally lower – sometimes much lower – than those charged by mutual funds, leaving more profit for investors. Brokers quickly saw the advantage, and some offered discounted or even zero commissions on ETF trading.
At the outset, most ETFs were passively managed, meaning they tracked a specific index. That made them easy to understand. As for diversification, they offered the same advantages as mutual funds.
The mutual fund industry, which sold its products mainly through commissioned salespeople, fought back. It introduced deferred sales charge (DSC) funds, which gave investors the impression they could buy at zero commission. It took years for people to understand the negative effects of this illusion – and for securities regulators to take action to curb it. On June 1, 2022, sales of DSC funds were banned in Canada.
Still, while the advantages of ETFs were obvious, no one seriously expected them to challenge the dominance of mutual funds. They were seen as a fringe product.
Even today, mutual funds dominate in terms of assets under management. As of the end of June, the Securities and Investment Management Association (SIMA) reported that Canadian mutual fund assets totalled $2.34-trillion. ETFs were at $592.2 billion.
But here’s something interesting. Mutual fund net sales in June were $1.4-billion. The total for ETFs was $7.2-billion – more than four times higher and up 70 per cent over the same time last year. Canadians are voting with their wallets.
That’s not an outlier. Year-to-date net sales totals for mutual funds to June 30 were $17.1-million. The ETF total was $55.8-million. In the same period of 2024, ETF net sales were $32.4-million. Mutual funds recorded net redemptions of $4-million. The trend line is clear.
The downside is that the growth in ETF demand is bringing its own complications. There were 231 Canadian ETFs launched in 2024, bringing the total at year-end to 1,542. And that only covers those that are based in this country. Anyone with a brokerage account has access to the thousands of U.S.-based ETFs that trade daily. Since many ETF investors are do-it-yourselfers, that’s a lot to keep track of.
As with mutual funds, breaking down ETFs into categories and investing based on your personal goals can help zero in on which ones to consider.
Here’s my approach to categorizing ETFs:
- Low risk. These are places to hide your money if the pillars of the financial system are under attack. This category includes money market funds, short-term bond funds and high-interest ETFs.
- Fixed income: The focus is on cash flow from fixed-income securities such as bonds or, rarely, preferred shares.
- Balanced. These ETFs offer a mix of equities, fixed income and cash. Asset-allocation ETFs could be slotted in this group, although they are more aggressively managed.
- Equity income. The main purpose is to generate cash flow by investing in stocks. Includes dividend and covered call option ETFs.
- Equity growth. The goal is capital gains, achieved through stock market appreciation. Includes index ETFs, pure equity ETFs and low-volatility funds.
- Specialty: These funds invest in specific market sectors such as energy, agriculture, banks, resources, utilities, information technology, cryptocurrencies, gold, etc.
- Leveraged: For gamblers only. These funds allow you to take long or short leveraged positions on movements in various commodities such as oil, natural gas, silver, gold or indexes like Nasdaq. They can generate huge gains – or equally huge losses.
The focus of my newsletters is low- to medium-risk ETFs. We don’t recommend leveraged ETFs.
Because most ETFs consist of a basket of securities based on the fund’s mandate, it’s rare to find one that posts an unusually high return over a long period. A diversified portfolio makes it almost impossible to match or exceed the sky-high gains we have seen recently from stocks such as Nvidia and Celestica. An ETF that generates an average annual gain of 10 per cent over 10 years is doing very well.
That said, an occasional ETF may post high double-digit returns, for a short time, but don’t expect that to continue forever.
Following are updates on three ETFs recommended by my Internet Wealth Builder newsletter that are doing very well this year.
Top-performing ETFs
iShares S&P/TSX Global Gold Index ETF (XGD-T)
Originally recommended on July 27/00 at $24.12. Closed Friday at $35.58.
Background: This ETF tracks the performance of the index of the same name, less expenses. It invests in mining and royalty stocks, rather than bullion itself.
Performance: The fund was up almost 68 per cent year-to-date as of Aug. 14, but these are exceptional times for gold. The five-year average annual rate of return to July 31 was only 6.34 per cent, so the big gains are very recent.
Portfolio: Holdings include some of the world’s top gold producers/streamers, including Newmont, Barrick, Franco-Nevada, Wheaten Precious Metals, and Agnico Eagle. There are 46 stocks in the portfolio.
Key metrics: The fund was started in March, 2001, and has $2.6-billion in assets. The MER is 0.61 per cent.
Distributions: Payments are made quarterly – and they vary. The June payout was $0.143 per unit. Over the past 12 months, investors have received distributions totalling about $0.44, for a yield of 1.2 per cent.
Outlook: Gold is in a strong uptrend, and the mining stocks are close behind.
VanEck Uranium and Nuclear ETF (NLR-N)
Originally recommended on June 17/24 at US$81.75. Closed Friday at US$115.76.
Background: This ETF tracks the performance of the MVIS Global Uranium & Nuclear Energy Index. The index includes companies involved in uranium mining and the building and maintenance of nuclear power facilities, as well as those that supply equipment and services to the industry.
Performance: This ETF started the year slowly but began to surge in late April. The units are up about 43 per cent for the year.
Key metrics: The fund was launched in August, 2007, and has US$2.2-billion in assets under management. The net expense ratio is 0.56 per cent.
Portfolio: The fund holds 28 stocks, with the top five holdings accounting for nearly 40 per cent of the assets. The top position is Constellation Energy, which accounts for 7.94 per cent of the assets. Canada’s Cameco Corp. is No. 2, with 7.09 per cent of the portfolio. Overall, Canadian companies make up more than 16 per cent of the portfolio.
Distributions: The fund makes one distribution a year, in December. Last year’s payment was US$0.61 per unit.
Tax implications: Distributions are treated as foreign income and are taxable unless the units are held in a retirement account, such as an RRIF. TFSAs do not qualify for a tax exemption.
Risk: High. Many companies in the portfolio, including the Canadian holdings, are sensitive to movements in uranium prices. In 2024, uranium prices dropped by a third.
Summary: This fund is for aggressive investors who want some exposure to the nuclear industry.
Amplify Video Game Leaders ETF (GAMR-N)
Originally recommended on Nov. 21/17 at US$46.93. Closed Friday at US$93.69.
Background: This ETF focuses on the burgeoning video game industry. The fund invests in global companies in the video-gaming value chain, including game development, publishing, mobile and online games, GPUs, development platforms, supporting software, hardware, peripherals and the metaverse.
Performance: We took half profits on this investment in February, 2021, for a capital gain of 128.6 per cent. The units then went into a deep slump, dropping to the US$50 range in late 2022. They were still trading below US$60 in late March when they began a strong rally that has carried the ETF to its current price. It’s ahead about 43 per cent this year.
Key metrics: The fund was launched in March, 2016. It currently has about US$48-million in assets under management and an expense ratio of 0.59 per cent.
Portfolio: There are 21 holdings in the portfolio. The biggest bets are on Advanced Micro Devices (12.62 per cent), Nvidia (10.8 per cent), Meta Platforms (9.74 per cent), Microsoft (9.45 per cent) and Tencent Holdings (9.38 per cent). Together, those companies account for 52 per cent of the total assets.
Distributions: The fund expects to make just one distribution this year, at the end of December. Based on history, it will be small. The main attraction of this fund is its capital gains potential.
Risk: Historic performance suggests investors should view this fund as high-risk, although its top holdings are performing well at present.
Summary: A good choice for investors seeking capital gains potential.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.