This post is part of a series called Under the Hood, where l take a detailed look at specific Canadian ETFs or index funds.
The fund: iShares S&P/TSX Completion Index Fund (XMD)
The index: This ETF tracks the S&P/TSX Completion Index of midcap and small-cap Canadian stocks. It includes all of the stocks in the S&P/TSX Composite Index except for those in the large-cap S&P/TSX 60.
The cost: The fund’s MER is 0.59%.
The details: There are currently 251 stocks in the iShares S&P/TSX Composite (XIC), which is a core holding in my most popular model portfolios. About 73% of XIC (by market capitalization) is concentrated in the largest 60 companies, which can be bought separately with the iShares S&P/TSX 60 (XIU). XMD holds the other 27% of the market, comprising 191 companies. Justin Bender has written a good overview of how these two funds complement each other.
Canada’s large-cap market is absolutely dominated by a small number of companies—mostly banks and energy giants. Just 10 companies make up a third of this country’s market (and half of the S&P/TSX 60). XMD is also highly concentrated in these three sectors, but it still offers somewhat better diversification. The fund is about 30% energy, but this is spread across 50 small companies, and only seven of them comprise more than 1% of the fund. XMD is still about 24% financials, but many of these holdings are REITs and small investment firms, with almost zero exposure to banks. Another 21% is in materials, with a number of small gold and silver miners making up most of that share.
XMD is not representative of the Canadian market on its own, so it’s not suitable as a core holding. However, investors who want to tilt their portfolios toward smaller stocks can do so by holding equal amounts of XIU and XMD. This strategy would have outperformed the broad market (represented by XIC) by 57 basis points a year over the last decade:
| Year | XIU | XMD | 50/50 | XIC |
| 2002 | -14.08% | -11.54% | -12.81% | -14.06% |
| 2003 | 25.20% | 27.85% | 26.53% | 25.19% |
| 2004 | 13.59% | 21.60% | 17.60% | 13.58% |
| 2005 | 25.94% | 21.27% | 23.61% | 27.01% |
| 2006 | 18.89% | 13.13% | 16.01% | 16.96% |
| 2007 | 10.93% | 5.30% | 8.12% | 9.55% |
| 2008 | -31.08% | -38.70% | -34.89% | -32.95% |
| 2009 | 31.50% | 46.53% | 39.02% | 34.46% |
| 2010 | 13.60% | 29.48% | 21.54% | 17.26% |
| 2011 | -9.23% | -8.33% | -8.78% | -8.93% |
| 6.61% | 7.79% | 7.28% | 6.71% | |
The alternatives: There are no other ETFs or index mutual funds tracking this index.
Bottom line: XMD is an extremely useful fund that probably should be more widely used by investors, especially those with large portfolios who are willing to divide their Canadian equity holdings among two funds. It should be combined with a large-cap fund such as XIU, the Horizons S&P/TSX 60 (HXT), or the Claymore Canadian Fundamental (CRQ). (This latter pairing is what you’ll find in my Über-Tuber portfolio.)
The fund has become even more interesting since the appearance of commission-free ETFs at three online brokerages. Not only do Scotia iTrade, Qtrade and Virtual Brokers all include XMD among their lists of eligible ETFs, they also offer HXTÂ without commissions. A combination of 75% HXT and 25% XMD would have a weighted annual fee of just 0.21%, which is even cheaper than XIC. Holding equal amounts of each would cost 0.33%.
Disclosure: I currently hold XMD in my personal account.
How does that compare to Vanguard’s VCE?
How would you compare VCE to the combination of XIU and XMD? VCE is more diversified than XIU (but less diversified than XIU+XMD). However, VCE’s MER is 0.09%, whereas XIU+XMD has an average MER of 0.38%. Is the extra diversification worth 0.29%?
Interesting post since I’ve been considering these questions recently.
I think splitting XIC into XMD and one of XIU or HXT makes a lot of sense when the account already has to be split across multiple accounts.
@Slacker and Michael: If you just want an all-in-one Canadian equity ETF, I think VCE is an excellent choice. However, I think that VCE’s returns will be much closer to XIU than to XIC. VCE has 100 stocks, of which the top 60 are the same as XIU. I can’t imagine that the bottom 40 will make much difference. Whereas in XIC you have an additional 190 stocks, which has made a significant difference in the past.
Clearly the added cost of XIU+XMD was worth it over the last 10 years. And over any period where small stocks outperform large caps it will be worth it. But ultimately this is not a decision to agonize over.
@Paul: Great point. If you need to split up your Canadian equity holdings anyway, this gives you an opportunity to get a little added diversification at the same time.
What do you think of holding VCE and XCS instead of XIU and XMD? I think you get the same exposure, for a slightly lower MER.
I also wonder.. if you want to add a small cap tilt to your portfolio, why would you choose XMD instead of XCS?
“XMD is not representative of the Canadian market on its own, so it’s not suitable as a core holding. However, investors who want to tilt their portfolios toward smaller stocks can do so by holding equal amounts of XIU and XMD. This strategy would have outperformed the broad market (represented by XIC) by 57 basis points a year over the last decade”
This is a small cap tilt strategy. In a tax advantaged account, it sounds like a good idea. However, in a taxable account, I wouldn’t be surprised if a broad market strategy (XIC) comes out ahead.
Similar to Penquin007’s question – if one owns XCS to add a small cap tilt to HXT , is the move to XMD to capture more mid-cap a worthwhile exercise? Why would a provider bother to have 2 products that are so similar, assuming that the not-often-coveted mid-cap sector doesn’t do much to boost performance/diversification in such a (relatively) small market?
One problem I have with tilting in the Canadian stock market is that even without tilting, the Canadian stock market is comparatively small and undiversified (75-80% resources and financials). And a tilt that I might be more interested in ( small cap value) is not available to the retail investor.
For a small cap value tilt, I have money invested in RZV. Among American investors, a criticism you hear about RZV is that it has too few stocks, and so you shouldn’t use it for a small cap value tilt. RZV has 150 stocks.
@Raman and Penguin: Using XCS is an even bigger small-cap tilt and it includes a huge allocation to resource companies. Using XMD is just more subtle.
@sleepydoc: I don’t think I would get too cute by using all three (XIU/HXT, XMD, XCS). It would make more sense to simply use XIC and a bit of XCS. (Note that XCS contains a lot of companies that are not in XIC.)
@Park: I agree, a major small-cap tilt in Canada is essentially a resource play. That’s I like the more subtle approach of using XMD. As you know, small-cap value doesn’t really exist as an asset class in Canada. Whereas in the US, Vanguard’s VBR has over 1,000 stocks.
@CCP Have you ever released a complete picture of what is in your portfolio?
@James: I use the Complete Couch Potato with a few small modifications to take advantage of Scotia iTrade’s commission-free ETFs. I use CBO and CLF instead of XBB, and I use HXT and XMD instead of XIC.
Sorry, I didn’t mean that it would be worthwhile to have both XMD and XCS – but was wondering what the difference between the two is? I can only assume that the XMD has more mid-cap, but would that be significant enough for iShares to offer 2 similar products?
@sleepydoc: XMD and XSC are quite different, although there is some overlap. The latter includes some very small stocks, and it’s more volatile: it lost 45% in 2008, and then gained 61% in 2009!
Thanks for the reply. Is there a reason you are willing to split XIC into two ETFs but not VXUS into VEA and VWO? Also, do you reduce your Canadian holdings to account for the presence of Canadian stocks in VXUS?
@James: Great questions. The main reason I split XIC is for the commission-free trading. I held XIC until iTrade started offering this.
VXUS has thousands of small-cap stocks, whereas VEA and VWO are large-cap only, so the exposure is quite different. Also, I like being able to trade just one international fund rather than two.
No, I don’t worry about the allocation to Canada in VXUS. It’s so small that it makes virtually no difference to the overall allocation of the portfolio. Currently it is 8.7% of the fund, and the fund is 20% of my portfolio, so it adds an extra 1.7% allocation to Canada overall.
Does anyone know where and how to look at past results of these indexes and easily change the percentage of allocation? It would be interesting to play with the percentages and compare.
For example, 75% S&P®/TSX® 60 Index with 25% S&P®/TSX® Completion Index versus a 50/50 allocation as Dan discussed above.
@Que: The index and fund performance are both available on the iShares website:
http://ca.ishares.com/product_info/fund/performance/XIU.htm
http://ca.ishares.com/product_info/fund/performance/XMD.htm
Dan, I was thinking more along the lines of how for example, you can build a portfolio on morningstar.ca and look at past returns and then adjust the percentage of allocation and see how it differs.
@Que: This might be of interest:
http://www.greatadvisors.ca/date-range-calculator/
With all the questions regarding synthetic ETF’s these days and discount, may I ask why I wouldn’t just pay the extra few basis points on the TD eFunds to have peace of mind vs the XIC? What about the tracking error of the ETF vs. the eFund? Thanks so much for all your insights.
@Refugee: XIC is not a synthetic ETF (though HXT is). But I agree with you: the cost difference between XIC and the TD e-Series Canadian Index Fund is so small that it’s not worth worrying about: they both the track the index very closely. However, you can only buy the e-Series funds through TD. Those of us who use other brokerages are best off with the ETF.
Dan, what do you think of a value and small-cap combo of 75% XCV and 25% XCS?
@Que: My concern about XCV is that it is hugely overweight in financials. I have been thinking about taking a closer look at the new XTF Morningstar Canada Value Index ETF, which has a much broader mix of sectors, though it holds just 30 companies. I am starting to think it might makes sense to combine it with something XCV or even just XIC.