Canadians love their big juicy dividends. And for those who do seek income they’ve been forced into this search for yield thanks to the low bond yield environment. I am guilty as charged. I personally hold several Canadian wide moat dividend stocks. For my wife’s main RRSP account we hold Vanguard’s High Dividend Yield Index ETF VDY. Let’s have a look at two popular Canadian Dividend ETFs.
What’s the better dividend ETF, VDY or XEI?
All said, we should be careful when we ‘chase’ yield. You’ll find that most of the high dividend ETFs have underperformed the broad market indices. That is the case in Canada and the US. For the Canadian market we can use the benchmark capped composite iShares XIC.
The popular big dividend ETFs.
- The Vanguard High Dividend Yield VDY has almost $555 million in assets. ($795 million 03/21)
- iShares High Dividend XEI has over $670 million in assets. ($984 million 03/21)
- BMO’s Canadian Dividend ETF (largely high yield) ZDV has just under $470 million in assets. ($607 million 03/21)
- iShares XDV appears to have the greatest asset haul in Canada at almost $1.4 billion. ($1,521,000 million 03/21)
As a comparison point, iShares TSX 60 XIU (the first ETF) has $8.6 billion ($10.0 billon 03/21
Here is an update post from March 2021, as iShares Dividend ETF XEI is built for the times. With more direct exposure to Canadian energy producers XEI might be well positioned to continue to take advantage of rising oil prices and increased demand.
The total return scorecard.
VDY has a slightly beat over the market, while XEI has delivered significant under-performance with respect to total returns. To analayze the returns in ETF form we go to the VDY inception of December 2012.
The following is courtesy of portfoliovisualizer.com.
- Portfolio 1 – VDY
- Portfolio 2 – XEI
We see XEI under-performing by 1% annual, and VDY out-performing by almost 1% annual. Both dividend funds have offered greater volatility and a greater draw down in the modest Canadian market correction of 2015 into 2016.
Performance update 03/21
Here’s the performance comparison of VDY vs XEI from VDY’s inception to the end of February 2021. We see Vanguard’s VDY extend its lead over iShares XEI.
VDY now has a slim lead over the market, using iShares XIC as a benchmark. As we discussed in the Canadian dividend ETFs in 2020, the dividend funds lost ground to TSX Composite largely thanks to Shopify. That wonderful Canadian tech success story delivered gains of 178% in 2020.
But those dividend funds are charging back in 2021 as earnings yields and dividends are back in favour. We are also seeing a sector shift with financials and energy leading the charge.
The management expense ratio for XEI is also .22%.
The sector weightings.
This is where we will see ‘the why’ as to the difference in performance characteristics.
Obviously VDY is a big bet on Canadian financials. And while the big Canadian banks have grossly outperformed the market over the many decades, past performance does not guarantee future returns. Of course, Canadian financials will include insurance companies and a sprinkling of wealth management exposure by way of companies such as Power Financial.
In fact as a cap-weighted fund VDY is concentrated in the top 10 holdings.
VDY is then ‘filled in’ with utilities and pipelines and the Canadian Telco’s. While it’s a concentrated portfolio, fans of VDY will suggest that it holds companies that typically have a wider moat and the potential of greater financial stability. That does not guarantee future success of course.
Light on energy explorers and producers.
Only one integrated oil and gas company makes the top 45 holdings of VDY. Vermilion Energy is less than $1.5 million of value or risk to the portfolio. The top weighting is Royal Bank of Canada at over $85 million.
Vermilion has lost nearly two-thirds of its value over the last 5 years.
Conversely the top holding of XEI is an energy explorer and producer.
Here are the top 10 holdings for XEI.
That’s a handsome grouping as well. And we see that same theme of financials pipelines and telco’s. That is certainly the domain of the big juicy dividends in Canada. But we see that the top pick is an energy producer, Canadian Natural Resources.
Canadian Natural Resources is often touted as top of the heap by those who cover the Canadian energy sector. From Morningstar they are the picture of ‘health’ for a company that lives and dies by the price of oil and gas.
Energy producers are out of favour to say the least. XEI has almost 12% in oil producers and explorers. With respect to that longer term CNQ price chart, keep in mind that it crushed the market from 2000 and into the last major market correction. It was more than a 10-bagger from 2000 to 2008, in price terms alone.
But energy investors have left the building. Canadian investors have left. International investors have left. Many say there is now incredible value in the Canadian energy producers sector. What will it take to bring back those investors, and elevate those share prices? If the investors come back, XEI may benefit and outperform.
March 2021 update commentary: Yup, XEI is benefitting greatly from that direct exposure to producers. The ETF may offer a wonderful inflation hedge.
The trailing yield is higher for XEI vs VDY at 4.7% vs 4.0%. XEI is more yield hungry.
Let’s have a look at the dividend history of these two Canadian Dividend ETFs.
As always ensure that you understand all tax implications. Eligible Canadian dividends are not always more tax efficient compared to capital gains. XEI is more than lumpy and has not delivered on dividend growth. It was hit hard in the Canadian energy recession and market correction. Here we see a dividend correction. As much as we might like our dividends, they are certainly not guaranteed.
Here’s the dividend history for XEI.
We see that Vanguard VDY has delivered some wonderful dividend growth over time. The dividend payments have increased 76% from 2013 through 2018. VDY is delivering on dividend growth again in 2019. The fund also experienced some dividend disruption in 2016 but quickly recovered, and then some.
The wide moat sectors held up quite well given the disruption for the period.
Vanguard VDY or iShares XEI?
That’s your call of course. VDY delivered over the last several years on total return and on dividend income. VDY is more concentrated. It’s a big bet. If the financials get hit, you go down with the ship .
XEI may roar back if energy makes a comeback. Again, VDY is more comfortable taking the tolls by way of the pipelines. It will leave the energy exploration and product risk to XEI.
You don’t have to go all in. And many would suggest you do not use a dividend ETF as a core holding. I’ll leave that up to you.
Thanks for reading, we’ll see you in the comment section. I’ll certainly be back with a look at other Canadian dividend ETFs.
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