# Broad Market Index ETF versus Dividend ETF



## joncnca (Jul 12, 2009)

someone asked this question on another thread, which was similar to one i had in mind, but no one continued with the discussion as it wasn't completely related to the original thread topic.

where can i get more info regarding the decision to maintain a couch potato-like portfolio using a broad based etf like ZCN or XIU or a dividend ETF like XDV or CDZ. the gap between dividend yield is narrowing. and someone might suggest having both types of ETFs, but that takes away from the simplicity of couch potato-ing.

any thoughts?

thanks.


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## arrow1963 (Nov 22, 2011)

joncnca said:


> someone asked this question on another thread, which was similar to one i had in mind, but no one continued with the discussion as it wasn't completely related to the original thread topic.
> 
> where can i get more info regarding the decision to maintain a couch potato-like portfolio using a broad based etf like ZCN or XIU or a dividend ETF like XDV or CDZ. the gap between dividend yield is narrowing. and someone might suggest having both types of ETFs, but that takes away from the simplicity of couch potato-ing.
> 
> ...




My favorite Canadian resource on the subject is this thread from FWF:

http://www.financialwebring.org/forum/viewtopic.php?f=29&t=115400

My summary (though there are conflicting opinions within):

- Dividend investing is an indirect way to get at the value premium
- The returns on the value premium have been historically great this past 10 years (resulting in outperformance for many modelled strategies)
- The odds of Canadian dividend and value funds providing excess returns greater than their additional fees are not good (IMO)

Personally, I'm using ZCN. It's cheap, a widely diversified CDN index fund, and offers a more exposure to the small cap premium than XIU or VCE.


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## larry81 (Nov 22, 2010)

VCE or XIC for your canadian exposure.

If you are old and need income, add some div exposure.


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## GoldStone (Mar 6, 2011)

arrow1963 said:


> Personally, I'm using ZCN. It's cheap, a widely diversified CDN index fund, and offers a more exposure to the small cap premium than XIU or VCE.


You are fooling yourself if you think that ZCN is widely diversified. Look at the weight of the top 3 sectors: financials, energy and materials. IIRC, it's about 75%. XIU and VCE have the same problem. That's the nature of Canadian market. It's very narrow.


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## andrewf (Mar 1, 2010)

I'm not comfortable having large exposure to just the TSX as it is weighted (by sector). I use a combination of higher international exposure and a Canadian fund that has a more normal sector weighting (by international standards).


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## Belguy (May 24, 2010)

Vce+xdv+cdz


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## arrow1963 (Nov 22, 2011)

GoldStone said:


> You are fooling yourself if you think that ZCN is widely diversified. Look at the weight of the top 3 sectors: financials, energy and materials. IIRC, it's about 75%. XIU and VCE have the same problem. That's the nature of Canadian market. It's very narrow.


You've been leaving this comment all over the forum.

Can you elaborate on what you mean?

Canada has a healthcare system that is largely public. Thus, 'healthcare' is a relatively small component of corporate Canada. Canadian companies don't have comparative advantages in manufacturing or IT. Thus, they comprise a relatively small part of the index.

What is this idealized distribution of corporate activity that we should aspire to as a nation?
What makes it smarter to push more money into underpopulated 'sectors' of the investment landscape?
Are there real diversification benefits?
If there are, and there are many people like you who want to overweight these smaller 'sectors', why wouldn't they be fully valued, or overvalued right now?
How would you buy your Canadian equity exposure? Individual stocks, to access market sectors? Buy less CDN, and more broad American funds? Buy American sector funds that correspond to Canada's deficiencies?


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## HaroldCrump (Jun 10, 2009)

arrow1963 said:


> Individual stocks, to access market sectors?
> Buy less CDN, and more broad American funds?
> Buy American sector funds that correspond to Canada's deficiencies?


All of the above


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## Soils4Peace (Mar 14, 2010)

What about ZCN for inexpensive diversification across most of the market, plus ZLB to diversify away somewhat from financial, energy and materials. ZLB has lower MER than most equity ETFs, except for the broad market ones.


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## arrow1963 (Nov 22, 2011)

Thanks Harold,

Any interest in addressing the 4 ''why" questions, alongside the 1 "how"?


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## Squash500 (May 16, 2009)

joncnca said:


> someone asked this question on another thread, which was similar to one i had in mind, but no one continued with the discussion as it wasn't completely related to the original thread topic.
> 
> where can i get more info regarding the decision to maintain a couch potato-like portfolio using a broad based etf like ZCN or XIU or a dividend ETF like XDV or CDZ. the gap between dividend yield is narrowing. and someone might suggest having both types of ETFs, but that takes away from the simplicity of couch potato-ing.
> 
> ...


 Right now I'm totally in favor of investing in the XDV. Why would you want to invest in stocks that are tanking right now (for example...ABX and SLW). Therefore I've purposely stayed away from the XIU, XIC etc and I'm making a better return with the XDV then with the more broad based Canadian ETFS.


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## GoldStone (Mar 6, 2011)

arrow1963 said:


> You've been leaving this comment all over the forum.


Yes, because I see one novice investor after another making the same mistake.

a. They allocate too much to Canada. I've seen portfolios that allocate as much as 30%, 40% or even 50% to Canada.
b. They think that XIU, VCE or ZCN are broadly diversified. They fail to recognize lack of sector diversification.



arrow1963 said:


> Canada has a healthcare system that is largely public. Thus, 'healthcare' is a relatively small component of corporate Canada. Canadian companies don't have comparative advantages in manufacturing or IT. Thus, they comprise a relatively small part of the index.
> 
> What is this idealized distribution of corporate activity that we should aspire to as a nation?


This is irrelevant. We (individual investors) cannot restructure Canadian economy. It is what it is.

The issue is portfolio structure, not the structure of economy.



arrow1963 said:


> What makes it smarter to push more money into underpopulated 'sectors' of the investment landscape?
> Are there real diversification benefits?


You don't have to overweight smaller sectors. A simple solution is to keep your Canadian allocation in check. Remember, Canadian market represents just 4% of the world market cap. If you stay close to the market cap target, you don't have to do anything else about poor sector diversification. It's okay to overweight Canada a bit because it's our domestic market. I don't have any problem with 10% weight.

If you decide to allocate a lot more than that, poor sector diversification of XIU/VCE/ZCN becomes a bigger issue.

Take a look at the top 3 sectors. Each sector has some very acute risks.

1. Financials are heavily exposed to Canadian real estate situation and Canadian consumer debt. 
2. Energy sector is exposed to oil and gas prices, US energy boom, landlocked position of oil sands, lack of pipeline capacity, and many others.
3. Materials sector is affected dramatically by the world commodity prices.

Note that you don't have to take a side on any of those issues.

1. You don't have to decide whether we have a housing bubble or not.
2. You don't have to make a call on whether US energy boom will kill oil price the same way it killed gas price.
3. You don't have to decide whether gold is going to $800 or $1800.

All you have to do is recognize that these are serious risks. It's not a sound investment policy to bet big on just 3 sectors.



arrow1963 said:


> How would you buy your Canadian equity exposure? Individual stocks, to access market sectors? Buy less CDN, and more broad American funds? Buy American sector funds that correspond to Canada's deficiencies?


Older investors with large portfolios can do all of the above. 

Young investors with small portfolios have very little flexibility. Small portfolio size is a constraint. For them, the key is to not overweight Canada.


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## humble_pie (Jun 7, 2009)

comment seen on a recent UK Telegraph article about investment choices:



> stuff all that , where s the column with who is best in the sack ? likes it up the tradesmans etcetcetc . that the trouble with this bloody european union too much bickering about cash and not enough drinking and debauchery . where the fun you europhiles ?


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## GoldStone (Mar 6, 2011)

That is a fair comment, HP. Europe, Japan, China et al are basket cases in their own right.


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## arrow1963 (Nov 22, 2011)

Thanks for engaging Goldstone,

Why should I care about 'market sectors'? Someone (arbitrarily) identifies 10 segments of the economy, groups companies into them, and then we say that they should be somewhat equal? (Looking at the VCE sectors below) Why isn't 'banking' a sector? Where is 'real estate', or 'agriculture', or 'transportation'? Why is 'telecommunications' separate from IT, or from 'Utilities'? Aren't 'energy' and 'materials' both comprised of bringing stuff out of the ground? 1 sector, or 2 sectors?

I'm guessing that the argument will be that distinct 'sectors' do exist, that their values move somewhat independently over time and that there is a diversification benefit to holding them in equalized proportions. I'd question whether or not that benefit exists (above increased fees and transaction taxes), especially if the sectors are highly correlated with the market on the whole.

What level of sectoral diversification is desirable? If I look at VCE:

Sector weighting
As of close 30-04-2013
Sector	VCE 
Financials 38.4%	
Energy 24.8%	
Materials 14.5%	
Industrials 6.3%
Consumer discretionary 4.3%
Consumer staples 3.4%
Health care 2.9%	
Telecommunication services	2.5%	
Utilities 1.5%	
Information technology 1.4%

What 'should' those numbers be? I don't have an opinion, and thus I'm willing to accept whatever distribution market capitalization provides. 

Lastly, there are a number of reasons why investors opt to have a home country bias, including avoiding currency risk in investing and because many countries have advantageous tax laws for local investors (including dividend tax credits, and the negative effects of foreign withholding taxes). You're railing against home country bias more than anything else, but you haven't addressed the arguments for it, and whether or not the value of diversifying internationally overcomes the increased level of taxation.

The sector bias in the TSX lies alongside these other issues, and if your primary complaint is that investors allocate too much money into Canada, it doesn't follow that a market cap fund is necessarily the wrong way to get Canadian exposure.


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## humble_pie (Jun 7, 2009)

a prime argument against 90% geographic diversification outside canada is that multinationals are multinational & some canadian multinationals are among the best in the world. 

an investor can gain exposure to US market growth & strength via CN rail, for example. This is a US rail company, 2nd largest in the US of A after union pacific, although CN's nominal head office does happen to be situated in montreal quebec.

same story with thomson reuters, valeant pharmaceutical, bombardier, scotiabank, td bank, bmo, barrick, goldcorp, most big energy, all big miners, all big forest products. A large part or even all of their business is conducted outside canada.

yet these companies deliver frequent local news, transparency, canadian financial reporting standards - in some cases not as good as US standards but certainly better than some overseas head office countries - plus the gold-standard bonus which is canadian dividend tax credits. All of these are highly valuable benefits for canadian investors.

there are certain portfolio managers who diversify by sector & not by the whimsy of where a company's head office happens to be located. Thus multinational ITs are grouped together, oilcos are grouped, banks are grouped, etc. This makes sense to me.

here in cmf forum, there are some who opine that global markets are not correlated. There are also some who believe that, roughly speaking, world markets are correlated now & have been for some time. I belong to the latter camp.


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## favelle75 (Feb 6, 2013)

If I wanted to stay in CDN currency, but get more exposure outside of Canada within the TSX, what are some good ETF's to be looking at? As it is now, I only have ZUT and ZDV in my portfolio, looking to add 2 more ETF's if possible.


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## humble_pie (Jun 7, 2009)

favelle75 said:


> If I wanted to stay in CDN currency, but get more exposure outside of Canada within the TSX, what are some good ETF's to be looking at? As it is now, I only have ZUT and ZDV in my portfolio, looking to add 2 more ETF's if possible.



i'd say scrap the etfs & go buy the multinational exposure in carefully-selected individual company stocks


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## marina628 (Dec 14, 2010)

31% of my entire stock portfolio is in Canadian bank stocks .That may give some of you a heart attack but I travel a lot and everywhere I go I see Scotia Bank ,CIBC ETC. I recently came into a lot of cash and sitting on it while I decide what to do with it but I am fairly confident when I deploy that cash into the markets I will still have 30% Canadian Financials.


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## humble_pie (Jun 7, 2009)

marina628 said:


> 31% of my entire stock portfolio is in Canadian bank stocks



same here, almost exactly to the percentage point. Not including some MFC, some POW & some ING that i acquired, little by little, in a few dithering steps. 

i sell calls & puts on the bank shares like a steam engine. Always have, always will. There were some unpleasant moments in the spring of 2009 when the puts went deep-into-the-money. As i recall i was on the hook to buy plenty high-priced canadian bank stocks at a time when market prices of the stocks were at least 1/3 below strike.

but i'm the original INGA. INeverGetAssigned. I danced around nimbly & everything turned out hunkydory.


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## marina628 (Dec 14, 2010)

I am still finding my way but comfortable with risk as you all know


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## GoldStone (Mar 6, 2011)

arrow1963 said:


> Why should I care about 'market sectors'?


1. Each sector comes with its own special risks. Banking/mortgages, Energy/oil prices, Mining/metal prices, etc. I wrote about this in my previous reply to you.

2. Sectors are prone to bubbles & busts, more so than market as a whole.

Overconcentration in Technology ended badly in 2000.
Overconcentration in Financials ended badly in 2008.
Overconcentration in Mining ended badly in 2013.

3. You reduce portfolio volatility by combining non-correlated assets. Guess what, market sectors are less correlated than countries. Defensive non-cyclical sectors are weakly correlated with the cyclical sectors. Defensive sectors do better in recessions & bear markets. Cyclical sectors do better in expansions & bull markets.

*G&M: Why you should diversify by sector, not region*
http://www.theglobeandmail.com/glob...iversify-by-sector-not-region/article1376750/

I disagree with the article title, by the way. I think you should diversify by both.



arrow1963 said:


> Someone (arbitrarily) identifies 10 segments of the economy, groups companies into them, and then we say that they should be somewhat equal?


1. The sectors are not imaginary or arbitrary. They do exist in the real economy. The top 10 sectors are defined in the industry classification standards developed by the index providers (MSCI, S&P, FTSE).
2. You don't have to keep the weights perfectly equal. It's good enough to avoid major imbalances, such as narrow concentration in 2-3 sectors.



arrow1963 said:


> I'm guessing that the argument will be that distinct 'sectors' do exist, that their values move somewhat independently over time and that there is a diversification benefit to holding them in equalized proportions.


Yes. Again, the weights don't have to be perfectly equal.



arrow1963 said:


> I'd question whether or not that benefit exists (above increased fees and transaction taxes), especially if the sectors are highly correlated with the market on the whole.


1. The top 3 Canadian sectors *are* the whole market.
2. US and International markets are broadly diversified by sector. You don't have to pay increased fees there.
3. The extra fees in Canada are fairly minor. For example:

ZCN management fee is 0.15%. ZLB is 0.35%. A 50/50 mix of ZCN and ZLB is 0.25%.

0.1% extra fee is well worth the price to protect yourself from the risks in the top 3 sectors (IMHO).



arrow1963 said:


> What level of sectoral diversification is desirable? If I look at VCE:
> <snip>
> What 'should' those numbers be?


There is no such thing as ideal sector weights. The issue here is risk management. VCE puts 78% of your eggs in just 3 baskets. 7 other baskets are almost empty. 



arrow1963 said:


> I don't have an opinion, and thus I'm willing to accept whatever distribution market capitalization provides.
> 
> Lastly, there are a number of reasons why investors opt to have a home country bias, including avoiding currency risk in investing and because many countries have advantageous tax laws for local investors (including dividend tax credits, and the negative effects of foreign withholding taxes).


On one hand, you are very flexible about your country weights. 
On the other, you sound very inflexible about sector weights.
I choose to keep an open mind about both. 



arrow1963 said:


> You're railing against home country bias more than anything else, but you haven't addressed the arguments for it, and whether or not the value of diversifying internationally overcomes the increased level of taxation.


I don't have a problem with the home country bias per se. I'm fully aware of the reasons to overweight Canada. I'm pointing at the other side of the medal. Being overweight Canada has some serious pitfalls. Poor sector diversification is a major one.


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## GoldStone (Mar 6, 2011)

HP and Marina:

This is largely an indexing argument. Do you go with market cap or not.

You pick individual stocks. That's a different game altogether.


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## humble_pie (Jun 7, 2009)

ah but goldstone, in the end we are all looking for the same holy grail.

we all want the very best in the sack.

if this happens to be a handful of gilt canadian multinationals, does it matter that nobody has yet bundled em into an etf?


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## doctrine (Sep 30, 2011)

> Why should I care about 'market sectors'?
> What level of sectoral diversification is desirable?
> What 'should' those numbers be?


An interesting strategy is to invest in the largest 2 companies in each sector on the TSX, individually. That would be 20 companies equal weighted. Globe and Mail tracks a portfolio that does that with annual rebalancing, and the results whenever I have seen updates have always been good. Unfortunately there is no ETF which tracks this strategy, but it would not be difficult to do for an individual investor.


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## Four Pillars (Apr 5, 2009)

humble_pie said:


> we all want the very best in the sack.


Yup - that's pretty much what life is all about...


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## james4beach (Nov 15, 2012)

joncnca said:


> where can i get more info regarding the decision to maintain a couch potato-like portfolio using a broad based etf like ZCN or XIU or a dividend ETF like XDV or CDZ. the gap between dividend yield is narrowing. and someone might suggest having both types of ETFs, but that takes away from the simplicity of couch potato-ing.


I don't know of a good resource to go to regarding this, but there have been plenty of discussions along these lines in the forums here and some good debate. Many people disagree on these topics and there's no "right" answer.

Dividend stocks and dividend funds / ETFs have been very popular through this current stretch of post-crisis ZIRP (zero interest rate policy). They have demonstrated amazing performance in the last 4 years, but going back further, it's not a sure thing that they will outperform at all. This article says that dividend stocks are inferior, with poor long term returns
http://seekingalpha.com/article/1041571-higher-dividend-stocks-are-inferior

My view is that an indexer is best off with the main TSX 60 or Composite index (XIU or ZCN), if we're talking about your core Canada stock investment. My reasons:
1. This index has strong long-term performance
2. The TSX has a pretty good dividend yield, so you've got yield too
3. There's no solid reason to think that high-div stocks will outperform long term
4. Holding the TSX index is the cheapest (low fee) way to go. Look at CDZ's MER.

There is a "special case" for dividend ETFs. Some people absolutely want the higher cashflow from the investment portfolio. A perfectly good way to do this is to regularly sell off some of your shares (e.g. sell some XIU) but for people who don't want to sell shares, for whatever reason, the dividend ETFs provide a convenient way to generate cashflow.

But for example let's say you were thinking of using the dividend ETF and reinvesting, DRIP'ing dividends. Now I would say this is silly... the only good purpose for the dividend ETFs is to get that cashflow. If you're not going to tap into the cashflow, by reinvesting distributions, then you might as well buy the regular index


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## spinmastersean (May 19, 2013)

*help!!*

Hi Arrow,

hoping you log on today.
I read some of your posts and was like I like him 

I want to buy some mutual funds but need help big time!!
at first I was like ok i'm going to go all bonds (Rbc bond fund)
now i'm like what if interest rates rise... will I lose $ on the net asset value... but the yield will increase too?? overall = loss?

now i'm like all stocks / dividend paying stocks (rbc income equity fund)

I don't know what to do!!


my time frame is about 2-3 years but I can always hold longer / shorter if needed and i'm just looking at rbc funds
thanks


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## arrow1963 (Nov 22, 2011)

Hi Sean,

From the sounds of your post, I don't think you're ready yet to make a decision on where your money should go.

If the money is needed in 2 years or so, it might not be worth it to invest in equity markets. It's boring, but a high interest savings account might be best.

As far as resources for building up knowledge, I'd start with:

http://canadiancouchpotato.com/couch-potato-faq/
"Millionaire Teacher" by Andrew Hallam
The "Moneysense Guide to the Perfect Portfolio"
http://www.moneysense.ca/2011/11/29/moneysense-guide-to-the-perfect-portfolio-2/

The last book (Moneysense) could be really useful for you, because it goes into the hows and why's of actually buying mutual funds and ETFs in Canada. Most people here are comfortable with their online brokerage account, but it can be daunting for someone who hasn't done this before. I know I've had to help a couple of family members to get started online, but once they've started, they don't want to go back to dealing with 'the nice lady at the bank'.


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## spinmastersean (May 19, 2013)

The last book (Moneysense) could be really useful for you



Reading this now - I'm on page 16.
Really interesting
Can't wait to read the rest of it and then do some research
Thanks.


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## spinmastersean (May 19, 2013)

Hi Arrow,

I was comparing RBC funds to other indexes and other funds and it all seems really similar.
I think I have my investment choices picked now - is there a way I can message just you to run them by you?
Thanks.


Fund Name YTD	2012	2011	2010	2009	2008	2007	2006
RBC Bond Fund 1.68	3.81	8.45	6.4	10.99	-0.05	1.46	3.17
TD Canadian Bond - I 0.54	3.48	8.4	6.25	9.76	2.56	1.78	2.55
XBB - DEX Universe Bond Index Fund 3.26	9.38	6.36	4.98	6.13	3.3	3.79

RBC Global Corporate Bond Fund 1.8	8.79	6.21	6.8	12.67	0.61	3.47	1.91
XCB - DEX All Corporate Bond Index Fund 5.7	7.51	6.58	15.1 -0.62	1.19	

RBC Canadian Equity Fund 1.43	6.06	-11.28 16.1 30.09 -33.84 9.37 17.54
XIU - S&P/TSX 60 Index Fund 7.87	-9.23 13.6 31.5 -31.08 10.93 18.93
TD Canadian Index - I 2.57 6.3	-9.4	16.53 34 -33.45 9 16.4


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## Belguy (May 24, 2010)

ZEF worth considering for a small holding, say 5 per cent, in a diversified fixed income allocation.

http://www.etfs.bmo.com/bmo-etfs/glance?fundId=80000

There are also several unhedged emerging markets debt ETF's listed on U.S. exchanges.

http://etfdb.com/etfdb-category/emerging-markets-bonds/


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## joncnca (Jul 12, 2009)

so most of these posts were quite interesting and appreciate them because they got me thinking, although only a few actually addressed my original question. why bother having something like zcn when you can just have xdv, and it seems that the regular index may perform better than the dividend etf over the long term, and xdv is useful if you need the cashflow but may not be as useful if you don't specifically want the cashflow..

thanks for all the replies and discussion!


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## My Own Advisor (Sep 24, 2012)

I find there is always a trade-off. Do you want more income or capital appreciation? You really can't have it both ways but if you find ETFs or companies that give out lots of both over time - I'm all ears


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## james4beach (Nov 15, 2012)

joncnca said:


> so most of these posts were quite interesting and appreciate them because they got me thinking, although only a few actually addressed my original question. why bother having something like zcn when you can just have xdv, and it seems that the regular index may perform better than the dividend etf over the long term, and xdv is useful if you need the cashflow but may not be as useful if you don't specifically want the cashflow..


I think the regular index is likely to out-perform over the very long term period. But this has been hard for people to see, since there has been such amazing performance of "dividend stocks" in the last few years.

And don't forget the MERs. Remember that neither share price increases nor dividends are a certainty; but fees are certain and directly detract from performance.


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## fatcat (Nov 11, 2009)

joncnca said:


> so most of these posts were quite interesting and appreciate them because they got me thinking, although only a few actually addressed my original question. why bother having something like zcn when you can just have xdv, and it seems that the regular index may perform better than the dividend etf over the long term, and xdv is useful if you need the cashflow but may not be as useful if you don't specifically want the cashflow..
> 
> thanks for all the replies and discussion!


you are buying 2 different products ... xdv is heavily overweighted in financials and has no materials virtually ... zcn is a snapshot of the top canadian companies which includes a lot less financials and more materials ... there is a full point difference in yield ... these funds each have a different audience it seems to me ... i agree that one is better over the long term (to catch the power of commodities and not have the over-exposure to financials) and the other is better for income oriented investors


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## james4beach (Nov 15, 2012)

I don't think they're that different. Both are concentrated in financials, especially the big banks.

If you bought the two in equal weights, your combined investment would be invested 43% in financials! That's an enormous allocation to one sector. The S&P 500 has only 16% financials.

I'll never understand how everyone can so comfortably go overweight the banks, which are leveraged about 33:1 in Canada... I mean that is literally Lehman grade leverage, yet everyone and their uncle seems to want to buy more bank shares. It feels like the American financials mania before 2008.


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## james4beach (Nov 15, 2012)

fatcat said:


> you are buying 2 different products ... xdv is heavily overweighted in financials and has no materials virtually ... zcn is a snapshot of the top canadian companies


Maybe also useful, I used my correlation calculator to inquire about the correlation coefficient between XDV and XIC (using XIC because I don't have enough history for ZCN)

Over the last 4 years, the correlation in daily price movements was 0.913 which is very high... they're basically the same thing.

If you were actually talking materials, you get a much lower number. XDV and XMA correlation in the same period is only 0.575


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## andrewf (Mar 1, 2010)

I don't know why daily correlations are important. What about monthly?


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## james4beach (Nov 15, 2012)

That's a good point andrewf


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## fatcat (Nov 11, 2009)

james, you appear to be contradicting yourself here 
you say they are not that different and then go on warn about financials
yet xdv as of 17-may had 51.65% in financials !
zcn only has 34% financials and 13.9 materials, making it a much more diversified fund with a much lower mer

i don't see how anyone could look at both of these as an either or choice
they are very different


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## james4beach (Nov 15, 2012)

I would describe them both as heavy in financials. I think that makes them quite similar... I don't think you're gaining much diversification by choosing one with a heavy 34% financials, and then a second with a whopping 52% financials.


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## CanadianCapitalist (Mar 31, 2009)

joncnca said:


> so most of these posts were quite interesting and appreciate them because they got me thinking, although only a few actually addressed my original question. why bother having something like zcn when you can just have xdv, and it seems that the regular index may perform better than the dividend etf over the long term, and xdv is useful if you need the cashflow but may not be as useful if you don't specifically want the cashflow..


Sorry about the thread getting sidetracked. I don't know how you got the impression that "the regular index may perform better than the dividend etf over the long term". Dividend etfs gives you some exposure to the value effect. One would expect value stocks to outperform the overall market. However, dividend etfs are (a) more expensive (b) have higher turnover than the index, so the value effect should overcome these drags. 

Of course, there are also tax consideration. Dividend ETFs typically have higher yield than index. Therefore, the tax drag will be higher in taxable accounts. This might be acceptable is one is retired and living off portfolio income. For those accumulating assets, tax considerations might mean choosing etf that tracks the index.

IMO, default choice should be an index ETF. Investors may add or replace with a dividend ETF (or even individual stocks as a dividend etf proxy) depending on their income requirements, tax situation etc.

PS: I think Vanguard Dividend ETF VDY should be a consideration because it is significantly cheaper than others.


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> I don't know how you got the impression that "the regular index may perform better than the dividend etf over the long term"


If you're claiming the opposite (that long term, dividend paying stocks outperform the broad market) I'm not sure where the evidence is for that. Maybe I just haven't seen it yet.

This analysis (see pages 12 and 13) shows that stocks that pay more dividends, in payout ratio terms, have underperformed the S&P 500 over 20 years. The *lower* the dividend payout ratio, the higher the return. In one of the charts they separate S&P 500 stocks that pay dividends versus non-dividend stocks. The non-dividend stocks are shown to outperform as you can see in this chart, attached below:









http://www.factset.com/websitefiles/PDFs/dividend/dividend_3.28.13

Another piece of research that shows that dividend stocks under-perform long term

http://seekingalpha.com/article/1041571-higher-dividend-stocks-are-inferior


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## Belguy (May 24, 2010)

In your consideration of which Canadian equity ETF's to include in your registered account, does XCV deserve any consideration?

http://ca.ishares.com/product_info/fund/overview/XCV.htm

3 year returns as of end April:

XCV: +4.58%
XIC: +3.25%
XIU: +2.39%


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## james4beach (Nov 15, 2012)

Belguy said:


> In your consideration of which Canadian equity ETF's to include in your registered account, does XCV deserve any consideration?


LOL it's 57% financials, just another fund of banks. Where do they get off calling this a value fund? And high MER of 0.55%

I swear, in Canada there's a million ways to own bank stocks through cute names... equity fund, dividend fund, value fund... they're all bank stocks


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## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> If you're claiming the opposite (that long term, dividend paying stocks outperform the broad market) I'm not sure where the evidence is for that. Maybe I just haven't seen it yet.


Here's a good summary of research into dividend payers:

http://www.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf

I don't think much credence should be given to the factset info. First, in the chart you posted, they've excluded AAPL saying "Apple has been excluded because its significant weight and volatile performance in 2011 and 2012 has distorted the trends". Huh? In other words, they've mined the data. The finding that value factors have outperformed in the past is not inconsistent with info that in some time periods value lagged the broad market.


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## My Own Advisor (Sep 24, 2012)

james4beach said:


> LOL it's 57% financials, just another fund of banks. Where do they get off calling this a value fund? And high MER of 0.55%


Just own the banks directly. No MER, ever.


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## fatcat (Nov 11, 2009)

CanadianCapitalist said:


> Here's a good summary of research into dividend payers:
> 
> http://www.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf
> 
> I don't think much credence should be given to the factset info. First, in the chart you posted, they've excluded AAPL saying "Apple has been excluded because its significant weight and volatile performance in 2011 and 2012 has distorted the trends". Huh? In other words, they've mined the data. The finding that value factors have outperformed in the past is not inconsistent with info that in some time periods value lagged the broad market.


wow, very interesting ... it would seem to contradict the standard disclaimer "beware stocks with very high yields" ... i know suncor is sending messages that it will become a top tier dividend payer and i have been thinking of selling cpg and cos (both of which pay double what suncor does) to fold into something i think is safer in the long run but perhaps i should rethink that ... thanks for that cc


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## Belguy (May 24, 2010)

Why I don't own individual stocks:

Buy, sell, buy, sell, buy, sell, buy, sell, buy, sell.

It makes my head explode!!:grumpy::uncomfortableness::sour::disgust:


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> I don't think much credence should be given to the factset info. First, in the chart you posted, they've excluded AAPL saying "Apple has been excluded because its significant weight and volatile performance in 2011 and 2012 has distorted the trends". Huh? In other words, they've mined the data. The finding that value factors have outperformed in the past is not inconsistent with info that in some time periods value lagged the broad market.


Yes I agree they shouldn't have excluded Apple. But if they had included Apple wouldn't it make the "non-dividend stocks outperform" story even stronger?

AAPL start paying a dividend in 2012. In its amazing performance years pre-2012, it was a non-dividend payer. This further bolsters those charts I linked... they would have showed even GREATER outperformance of non dividend stocks if Apple was included.

Apple started paying a dividend right near its peak price. Ever since it started paying a dividend, it has under-performed the S&P 500.

I don't think you should be so quick to dismiss that research. I think they were being generous to dividend stocks by excluding Apple.


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> Here's a good summary of research into dividend payers:
> 
> http://www.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf


I haven't read the whole thing but from what I see the point they're making is that, among stocks that pay dividends, those that yield more tend to result in better performance. And I don't doubt that... in fact the research I linked to shows the same thing. If you're looking at stocks that DO pay dividends, you're better off with stocks that pay high dividends. The group of S&P 500 dividend payers with the highest yields also resulted in best performance, among dividend payers. (This is why if I go for dividends, I'd be tempted to go for something like ZDV that has the highest yielders)

But that's actually a different point than what I'm making. Stocks with zero dividends outperformed stocks with dividends, is what they're showing I think.

So these two pieces of research we've both linked are not contradictory. The following points are being made by them:
1. Among stocks that pay dividends, the high yield stocks have better total returns than low yield stocks [both support this]
2. Stocks with zero dividends have better total returns than stocks that pay dividends [the one I link shows this]


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## james4beach (Nov 15, 2012)

fatcat said:


> wow, very interesting ... it would seem to contradict the standard disclaimer "beware stocks with very high yields"


This is getting interesting because I'm starting to make sense of things as I look at this research, both what CC posted and the one I posted.

Yes both seem to support the idea that high dividend yields are actually a good thing. They do seem to lead to better total returns. I'm surprised too!

But notice the distinction between that and a high payout ratio. The research I posted also shows that high dividend yields outperform, but the other comparisons look at payout ratio. Stocks with high payout ratios under-perform and the performance gets worse the higher the payout ratio is.

So high dividend yield = good (apparently)
But high payout ratio = bad

Again this combination is actually what BMO's ZDV fund screens for... I may not have given ZDV enough credit. Interesting.

But all that aside, please notice what I'm saying that non-dividend stocks appear to outperform dividend stocks.


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## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> Here's a good summary of research into dividend payers:
> 
> http://www.tweedy.com/resources/library_docs/papers/TheHighDivAdvantageStudyFUNDweb.pdf


Take a look at this very report you linked, page 13, exhibit 2: Dividend Yield and Payout Ratio, research by Credit Suisse.

What that chart shows is that "no dividend" stocks outperform the S&P 500. That is equivalent to saying dividend stocks underperformed the S&P 500. There are also _certain_ categories of dividend stocks that outperform, but as a whole, the dividend stocks underperform the S&P 500.

It's right there in the article you posted  Do you see what I mean? Or am I misinterpreting something?

CC: both the articles we linked actually show the same results, as far as I can tell. That makes the overall message even stronger, if they're independent research.


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## james4beach (Nov 15, 2012)

Also, based on this research, I think what I may want is a TSX Composite ETF that drops all the dividend paying stocks from it. 0% dividend yield


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## CanadianCapitalist (Mar 31, 2009)

I did not make any comment on dividend payers versus non dividend payers. Simply on dividend ETFs, that typically have yields higher than the market versus the broad market, which was OP's question that I was responding to. All I said was that investing in dividend etfs (which tend to have a higher dividend yield than the market) is giving a value tilt to your portfolio (although if you look up work by Fama and French, other factors such as book value-to-market may capture the value factor better). And if you give a value tilt to your portfolio, you can expect higher returns and/or lower risk. The Tweedy Browne article that gathers together a lot of research in this area is meant to show this. Of course, value doesn't always out perform the market. You could end up experiencing returns much lower than the market (late 1990s, for example).

The interesting thing about the value effect is that risk (as measured by SD) of value stocks is lower than the market. That has led to theories varying from value stocks are riskier by the efficient markets crowd or value stocks are cheaper because investors like to own sexier names. This is far from settled.

Now let's consider the case of non-dividend payers compared with the market. A different factor could be at play here: the size effect. Non-dividend payers tend to be smaller companies than the market average. Small caps tend to have higher returns than larger companies. However, they are also more volatile. If non-payers earned higher returns by taking on more risk, the result won't be surprising.


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## cainvest (May 1, 2013)

Maybe playing into the size effect CC is talking about, Apple's previous dividend run beat the S&P500 right?


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## james4beach (Nov 15, 2012)

Thanks CC, I think those are good observations. Yes maybe it's those smaller, growing companies that result in the outperformance of that group. Like the small and midcaps outperforming in strong periods of the economy.

I'm only making a lot of noise about this because I thought the fundamental question in the thread is whether you want a general index ETF (like XIU, ZCN), or something that focuses on dividends (like XDV).

I suppose the best answer is that if you believe that the dividend ETF has successfully picked the best dividend stocks -- high yielding ones with low payout ratios -- then you can expect the dividend ETF to outperform. But if you doubt the dividend fund manager's ability to pick the right dividend stocks, and instead think she's picking any old dividend stock, then you're better off with the XIU / ZCN. And that's because "dividend stocks", if you lump them all together, are not expected to even outperform the index.

To make it worthwhile investing in a dividend fund -- i.e. to expect superior returns vs plain index -- you have to have stocks on the high end of the dividend yields, and low payout ratios.


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## fatcat (Nov 11, 2009)

james, yes, payout ratio matters a lot ... i look for around 60 or below ... more than that and you start to look more carefully

cc, yes, if you go back the last 20 years, the small-cap etf's have spectacular returns ... owning a small cap etf might be a great idea even if dividends are zero ... my concern is that we may be entering a phase where it is becoming harder to succeed at small businesses, especially in a technological and knowledge economy

technology wins when it comes to scale and size, look what amazon is doing to small booksellers .. this is happening in many areas of business ... i think mega cap will outperform going forward ... though i would always recommend to assume one is wrong and buy a small cap etf to hedge one's bets

regarding the non-dividend vs. dividend payers, i have seen lots of articles that assert that solid, stable dividend payers with good track records present less risk and higher returns


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