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. The dividend battle – Vanguard VDY vs iShares XEI.
What’s the better dividend ETF, VDY or XEI?
In 2021 Vanguard VDY offered 36.6%. iShares XEI delivered 35.6%.
In 2022 Vanguard VDY lost 0.22% while iShares XEI was up 0.45%.
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.
That said, Vanguard’s VDY does have a market beat underway, to the tune of almost 1% annual. That should not be surprising if we look at the performance of the high yield Beat The TSX Portfolio.
The popular big dividend ETFs
- The Vanguard High Dividend Yield VDY has $2.12 billion in assets. ($795 million 03/21) ($1,287 million 11/21)
- iShares High Dividend XEI has $1.43 billion in assets ($1.49 billion 03/23) ($984 million 03/21) ($1,135 million 11/21)
- BMO’s Canadian Dividend ETF (largely high yield) ZDV has just under $1.00 billion in assets. ($607 million 03/21) ($774.7 million 11/21)
- iShares XDV also has a good haul in Canada at almost $1.56 billion. ($1,521 million 03/21) ($1,803 million 11/21)
- iShares XDIV has $863 million.
As a comparison point, iShares TSX 60 XIU (the first ETF) has $11.35 billion in assets. ($10.7 billion (03/23) ($10.0 billon 03/21 ($10,464 million 11/21). The TSX Composite XIC has $9.1 billion in assets.
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.
In fact, we see two large cap oil and gas producers have cracked the top 3 holdings in XEI.
As I mentioned in a recent MoneySense post the free cash flow generation and dividend increases for the energy producers is nothing short of jaw-dropping. This ETF would be a very good way to get that additional energy exposure. Two big paying pipelines also make the top 6. Here was the weighting in late 2021 that set up the XEI short term outperformance and a super-charged dividend increase in 2022.
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 analyze the returns in ETF form we go to the VDY inception of December 2012.
The following is courtesy of portfoliovisualizer.com. The period is to the end of August 2023.
We see XEI under-performing the market by over 1% annual, and VDY out-performing by almost 1% annual. Both dividend funds offered greater volatility and a greater drawdown in the modest Canadian market correction of 2015 into 2016. Ditto for the 2018 and COVID corrections.
Here is more historical context for total returns. From inception to the end of December 2021. Here’s the VDY beat.
Performance update from 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 has a 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. Of course, that Shopify outperformance came to an end. The markets have a history of returning to an appreciation of real earnings – often reflected by a strong and growing dividend.
Those dividend funds are charged back in 2021 as earnings yields and dividends were back in favour. We were also seeing a sector shift with financials and energy leading the charge.
Performance update 11/21
Here’s the performance comparison of VDY vs XEI from VDY’s inception to November, 2021. We see Vanguard’s VDY maintain its healthy lead over iShares XEI.
In this post from October of 2021, I looked at the returns for the leading dividend ETFs in Canada. We see that the big Canadian dividend payers of VDY are outperforming the market, once again.
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.
Vanguard’s VDY – September 2023.
iShares XEI – September 2023
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.
- Royal Bank of Canada
- Toronto-Dominion Bank
- Enbridge Inc.
- Bank of Nova Scotia
- Canadian Natural Resources
- Bank of Montreal
- Canadian Imperial Bank of Commerce
- TC Energy Corp.
- BCE Inc.
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.
The oily dividend ETF
Energy producers are on a roll, it was the top performing sector in 2021. XEI has almost 15% in oil producers and explorers.
In 2020 I wrote …
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.
Investors are coming back to Canadian energy producers. That was the top-performing sector in 2021. Ditto for 2022.
Of course, I put investing in Canadian oil and gas stocks on the table in October of 2020.
Due to falling share prices (as the ETFs experience dividend growth) the yields are again very attractive for the two ETFs, in mid September 2023.
XEI – 5.1% yield
VDY – 4.8% yield
The yield in early 2023 was in the 4.5% area for both ETFs.
Thanks to rising prices of the ETFs in 2022 (that’s a good thing) the yield available dropped. Here was the yield estimate at the beginning of 2022.
XEI – 3.6%
VDY – 3.6%
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. I have only included the total payout. For your taxable accounts, check with Vanguard and iShares for the eligible dividends vs capital gains and return of capital.
And here we see the lack of dividend growth for XEI in chart form, and then that massive gain in 2022. We will likely see 5.0% dividend growth in 2023 based on payments year to date.
Vanguard VDY dividend growth
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 delivered 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. Dividend growth has been very steady from the time of the pandemic – 2020.
I would estimate that we will see 5-7% dividend growth in 2023.
The distribution history for VDY
We see much greater dividend growth and stability within VDY. In fact, while lumpy, the dividend increased by 127% over a ten year period. Heading into 2022 I had suggested that we would see some very generous dividend growth in 2022, thanks to the big Canadian banks and energy exposure. In the end we were offered modest dividend growth of 5.8% for VDY. As expected (and offered in this space), the XEI dividend exploded in 2022 thanks to the oil and gas exposure.
In late 2021 I “guessed” …
XEI might lead the way in 2022, on the dividend growth front.
Vanguard VDY vs 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 continue to fight back if energy continue its near term outperformance. XEI has outperformed VDY over the last 3 years. Yes, that was an easy call. Again, VDY is more comfortable taking the tolls by way of the pipelines. It will leave more of the energy exploration and production risk to XEI.
Both ETFs have outperformed the TSX Composite over the last 3 years.
From 2020, when the world changed with the first modern day pandemic, VDY has outperformed the TSX, while XEI has underperformed.
Dividend or core?
You don’t have to go all in. And many would suggest you do not need to use a dividend ETF as a core holding. I’ll leave that up to you.
I also like iShares TSX 60, ticker XIU. And perhaps the most sensible Canadian equity ETF is BMO’s low volatility ETF – ZLB. That ETF has offered a considerable total return beat with lower volatility.
Keep in mind that Vanguard’s VDY and iShares XEI are greatly exposed to cyclical sectors. If we do enter a recession or period of economic weakness, they will likely take a good hit in price terms. Dividend cuts are also a possibility.
Thanks for reading, we’ll see you in the comment section. What’s your call in the battle of Vanguard VDY vs iShares XEI.
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