XIU Vs. XIC: The Best Canadian Index ETFs Compared

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XIU

XIU or XIC, which one’s the better choice, or should you invest in both? Let’s find that out here. First of all, XIC and XIU are both Index funds. Index ETFs track and replicate the performance of a financial market index as much it can.

Just like stocks, ETFs hold a basket of securities. It can trade throughout the day on major exchanges. For an investor, Index ETFs help them gain more (exposure to many securities) in a single transaction and spend a lesser fee than the market it tracks and replicates.

Thus, for Canadian investors, one of the top-ranking Canadian equity (index ETFs) is the iShares S&P/TSX 60 Index ETF (XIU) and iShares Core S&P/TSX Capped Composite Index ETF (XIC).

Both of these ETFs track the Canadian market, but XIU tracks the TSX 60 Index (Top 60 companies in Canada) vs XIC which tracks the TSX Capped Composite Index (the entire Canadian stock market).

Looking at the fund performances over the past 10 years (since Inception), XIU has outperformed XIC. Now, XIU does have a higher MER of 0.18 vs 0.05 for XIC, but even when you take that into account, XIU still outperformed.

This to me makes sense, as the TSX is littered with junior mining penny stocks and other undesirable companies like Valeant, SNC Lavalin, etc. So with this taken into account, does it really make sense to own the entire Canadian market vs. owning only the top-performing companies?

XIC

What Is XIU?

iShares S&P/TSX 60 Index ETF (XIU) is an index ETF that tracks and replicates the performance of the market (S&P/TSX 60 index) it represents.

S&P/TSX 60 index represents 60 well-established Canadian companies within the top 10 leading industries like finance and utilities.

These leading companies have the most traded stocks listed on the Toronto Stock Exchange (TSX).

XIU

What Is XIC?

iShares Core S&P/TSX Capped Composite Index ETF (XIC) also tracks and imitates the performance of the market (S&P/TSX Capped Composite Index) it represents.

However, S&P/TSX Capped Composite Index represents 229 leading companies in the Toronto Stock Exchange. It tracks the entire Canadian market.

It is a benchmark, which represents about 70% of the TSX total market cap. That is the market value of a company’s outstanding shares of stock.

XIU and XIC are of no doubt some of the best Canadian index ETFs. Nevertheless, they have much more in common as well as some differences.

XIC

Similarities between XIU and XIC

1. iShares ETFs

Both are products of iShares ETFs, managed by BlackRock Canada, otherwise known as BlackRock Asset Management Canada Limited.

Key fact: iShares S&P/TSX 60 Index ETF fund lunch date was on 28/09/1999. That makes it the oldest Index ETFs in Canada/managed by iShares.

2. Trades only on TSX listed companies

Both XIU and XIC trade only on TSX-listed companies. It focuses on the company’s stock listed on the Toronto Stock Exchange (TSX). 

Key fact: The majority of Canadian public companies are listed on the Toronto Stock Exchange owned by TMX Group. That is because they are the largest stock exchange in Canada.

3. Dividend

One of the portfolio characteristics of both XIU and XIC is that they pay a dividend.

Both are also eligible for the DRIP program. DRIP (Dividend Reinvestment Plan) is a program mostly offered directly by the underlying company.

It allows investors to reinvest their dividends automatically into underlying equity. That is without the need to receive them as cash.

4. Long term capital growth

Investors who want to grow their portfolio (capital appreciation) over time (10 years or more) need some investment strategy to make it work.

Both ETFs focus on providing you with long-term capital growth. Nevertheless, unlike XUI, XIC was designed to be a long-term core holding.

Core holding is an investment strategy that enables investors to hold an asset that tracks the overall market for a particular period.

Portfolios with core holding may help to reduce volatility and payout higher overall returns.

However, know that long-term investing does not fully guarantee capital appreciation. The portfolio may outperform or underperform in the market at any time of the year.

5. Capitalization-Weighted Index

Market cap indicates the value of a company’s stock in the market. Both XIU and XIC ETFs index weight is based on their market cap.

That means bigger companies will have much more impact on the index more than the smaller ones.

Their performance can also greatly influence the movement of the index value, which can be either good or bad.

However, the top 10 holdings in each ETF are the same. They only vary in portfolio percentages. It totals 48.63% for XIU and 38.16% for XIC.

Below is the table of the top 10 holdings and their percentages as of 05/31/2021.

 

TOP HOLDINGS

 

XIU %

 

XIC %

1.

ROYAL BANK OF CANADA

7.95

6.24

 

2.

SHOPIFY SUBORDINATE VOTING INC CLA

7.48

5.87

 

3.

TORONTO DOMINION

7.10

5.57

4.

BANK OF NOVA SCOTIA

4.43

3.47

 

5.

CANADIAN NATIONAL RAILWAY

4.30

3.38

6.

ENBRIDGE INC

4.18

3.28

7.

BROOKFIELD ASSET MANAGEMENT INC CL

3.78

2.97

8.

BANK OF MONTREAL

3.67

2.88

9.

CANADIAN PACIFIC RAILWAY LTD

2.91

2.28

10.

CANADIAN IMPERIAL BANK OF COMMERCE

2.83

2.22

 

Total of Portfolio

48.63

38.16

 

Note that holdings are subject to change.

6. Income Tax

XIU and XIC attract an income tax. When you make money on any ETF, you are to pay an income tax. Fortunately, ETFs are tax-friendly.

However, although both ETFs are taxable, there is no specific tax amount attached to them. That is because; some factors determine how much you have to pay.

Some of them include:

  • The tax laws of where you reside
  • The plan in which you hold the ETF (taxable or not)

You can choose to hold your ETFs in a non-registered plan, which is subject to tax. Your taxable income will include distributions from the ETF either as cash or as reinvestment.

Alternatively, you can choose a registered plan where investment income is not taxed.

Examples of registered plans are Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA).

XIC

Differences between XIU and XIC

1. Cost

This is one of the main differences between the two ETFs. Although XIU is a low-cost ETF, it tends to have a higher cost than XIC.

Here are the reasons.

2. Management fees

A management fee is a fee payable by shareholders of ETFs to its investment provider such as BlackRock Canada. Specifically, it is paid to portfolio managers to cover the expenses used to manage the fund.

Thus, in this case, the investor pays:

  • XIU Management Fee of 15%, and

  • XIC Management Fee of 05%

3. Management Expense Ratio (MER)

MER is a percentage of your annual portfolio’s value.

It consists of both the management fees and operating expenses deducted from your yearly returns. You do not pay them directly. And so, it not deducted as a fee from your account.

More importantly, if you are not attentive to details, you may not know you are even paying for it or how much is being deducted.

XIU and XIC MER is the inclusion of all the management fees and GST/HST, and even more, paid by the fund for a given period.

4. Other Expenses

In addition to these fees, a fund in XIU ETF also pays 0.02% for Maximum Annual Other Expenses per year.

However, expenses and fees relating to income tax, commissions, brokerage expenses, HST, tax withholding, etc., are not among them.

While these fees may look insignificant, they can hugely reduce your investment returns in the end.

Winner: XIC

5. Capped index

The indexes in XIU and XIC center on their market capitalization. However, the holdings in XIC are capped but not in XIU. 

A capped index simply does not allow single security like a stock to influence the index as they grow.

That is because some companies may grow too powerful, owning a large percentage of the index. It seems to be good news but poses an even greater risk when the market decline.

Therefore, to minimize this kind of risk, XIC places a limit on the weight of its ETF. The limit helps to prevent the overweight of a single stock and is usually 10% of the total holdings.

Winner: XIC

6. Investment Liquidity

Investment liquidity means how easy it will take to trade (sell or buy) an asset and convert it to cash without causing a change in its market price.

XIU has higher liquidity than XIC as it focuses on large caps. It is the largest and most liquid ETF in Canada.

On the other hand, XIC stocks are illiquid and have small caps. Liquidity is always a problem with stocks of small caps.

However, when compared to penny stocks, they have high liquidity. Investors refrain from buying stocks of small caps, as it is always hard to sell them at a good price.

Therefore, the high liquidity of XIU makes it a better option in this case.

Winner: XIU

7. Diversification

Both the XIU and XIC provide diversified funds across different companies. However, investors have a more diversified option with XIC.

With XIU, diversification is limited to the top 60 large-cap companies within the 10 top leading industries only.

On the other hand, XIC has a well-diversified portfolio than XIU. You have access to all the Canadian public companies in the TSX, which totals 229.

More diversification leads to less potential risks. However, it may not guarantee better average returns.

Winner: XIC

Bottom line

From the comparison, XIC offers more advantages over XIU. However, XIU has always outperformed XIC over the past years regardless of its high MER and less diversification.

For some investors, they see no reason why they should owe the whole Canadian TSX market consisting of many undesirable companies. They believe to have a better chance with the best performers i.e. XIU.

Investing is not just about picking good companies but picking which companies will win the beauty pageant and be selected as good by others, too. For foreigners Investing in Canada, you need only look at Blackrock. Retail foreigners and institutions that want ‘Canada’ with a single ETF will only be buying these 60-90 companies and that is good enough for me too.

Thanks for reading, please let me know your thoughts and comments below. 

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