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 HXT 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.