XIU Vs. XIC: The Best Canadian Index ETFs Compared

As a matter of fact, The world’s first Exchange-traded funds (ETFs) were created here in Canada by the Toronto Stock Exchange in 1990.

It was then called the Toronto 35 Index Participation Units (TIPS 35 Fund), or TIPs for short. This fund ushered in a platform where investors such as yourself are allowed to participate in the performance of the Toronto 35 Index without having to go through the hurdle of having to purchase 35 different companies’ shares respectively.

TIPs was then followed by a second ETF, the TSE 100 Index Participation Fund (TIPS 100 Fund), or HIPs for short. In March 2000, TIPs and HIPs had a merger that formed into today’s single fund as we know it, which is called the iShares S&P/TSX 60 Index ETF (XIU).

XIU is currently still the largest ETF in Canada to date, with assets under management just shy of $10 billion. The XIU fund tracks the S&P/TSX 60 Index, which was created by Standard & Poors to navigate the performance of 60 large companies in Canada. Its largest holdings include a number of household names among Canada’s dominant industries.

XIC is an ETF (Exchange-Traded Fund) that tracks the performance of the Canadian equity market. It is managed by BlackRock Canada, and it invests in the FTSE Canada All Cap Index, which includes companies across various market capitalizations. The ETF seeks to provide investors with exposure to the overall Canadian equity market, including large-cap, mid-cap, and small-cap companies.

As a passive investment vehicle, XIC seeks to replicate the performance of the FTSE Canada All Cap Index by investing in the underlying securities held by the index. The ETF provides investors with a low-cost way to gain exposure to the Canadian stock market, as it has a relatively low management expense ratio (MER) of 0.05%.

XIC

What are Exchange Traded Funds (ETFs) all about?

Similar to mutual funds, ETFs allow you to invest in a group of stocks or other various investments. Although you should know that one of the benefits of ETFs is its lower-fee version over some mutual funds.

Due to the fact that ETFs that follow an index change their holdings to copy that of the index, the fund manager has less work to do. The fund manager will not have to do any research in relation to what investments to make and when to make them. For this reason, ETFs that follow an index generally incur less cost.

Popular types of ETFs hold the same variety of stocks that a stock market index does, so just as the index performance goes so does your ETF performance less minuscule money management fees. ETFs can be safely kept” in Canadian dollars, which accumulates costs and may not be good when our Canadian dollar depreciates.

XIU VS. XIC

ETFs can be a great avenue to get a lot of companies to invest, also networking with many companies from many countries achieving diversification which is key and in turn a huge advantage. An advantage that comes with ETFs is the ability for the investor to trade them as often as possible.

Regardless, It would be better for you to buy and hold ETFs rather than constantly trading. Investors receive money disbursed from ETFs on a regular basis. This money made and disbursed by most ETFs is referred to as distributions.

One way for your money to make more money each month or quarter is to automatically reinvest your ETF distribution. You can do this without paying a commission. You can only trade ETFs when the stock market is open.

In order to buy and sell ETFs, you will need to own a brokerage account. There is much more to the “what is an ETF?” beyond what you have read from the information above but you could say that’s a decent starting point for many investors.

Based on the brief summary above you should know that these ETFs can be bought (and sold). A question that arises sometimes with investors is “where do I begin to use these ETFs?’’ below are some of the following considerations who to ETFs with:

Using full-service investment companies.
Using discount brokerages.
Portfolio managers.

ETFs are not all created equal. To shed more light on this, you could read up on a few books, and search for sites and web pages that will help you make better investment decisions and determine how they could fit into your overall financial plan.

XIC Vs. XIU

When looking for an Exchange Traded Fund (ETF) that indexes Canadian equities, these two are the most suitable choices for you from iShares:

The iShares CDN Large Cap 60 Index Fund (XIU) tracks the S&P/TSX 60 Index. This index is composed of S&P’s selection of 60 of the largest, most liquid stocks on the TSX. The Management Expense Ratio (MER) on this ETF is a very low 0.18%.
The iShares CDN Composite Index Fund (XIC) tracks the S&P/TSX Capped Composite Index. This index includes over 200 companies listed on the TSX. Its MER is 0.27%.

It is not advisable to make investment decisions based solely on MER. It is much wiser to take a better look at the two Major ETFs before investing. Looking closer at these two ETFs is our main focus.

Most of the similarities, comparison, and differences on the XIU vs XIC issue is what I’ll be breaking down to bridge the gap on the stress of not knowing what and where you can invest.

On the 28th of September, 1999 the iShares S&P/TSX 60 Index Fund alongside the XIU was introduced. This introduction was done in a bid to reproduce some specific securities listed on the S&P/TSX 60 Index. These specific securities are the 60 most liquid and largest securities.

Which companies are represented in XIU?

In Canada, there are three main sectors represented. These sectors are:

The materials sector
The financial industry
And the energy sector

XIU reflects this as just about 78% (as of April 23, 2012) of the funds holdings are in these sectors, compared to XIC’s 77% (as of April 23, 2012). The numbers above are not that different if you check the figures but please be aware of them for future reference.

As of 23rd of April, 2012, these were the funds top 10 holdings:

Goldcorp Inc. 3.04%

Canadian Natural Resources Ltd. 3.27%

Canadian National Railway Co. 3.32%

Potash Corp. of Saskatchewan Inc. 3.44%

Bank of Montreal 3.58%

Barrick Gold Corp. 3.71%

Suncor Energy Inc. 4.58%

Bank of Nova Scotia 5.83%

TD Bank 7.09%

Royal Bank of Canada 7.70%

Both the XIC and XIU have similar holdings in their top 10 categories. It is thus difficult to see the difference between the two. However, what difference is there to be found?

Put together, the top 10 holdings account for approximately 46% of XIU’s portfolio, compared to only 33% of XIC’s portfolio. Currently, XIC holds 254 companies while XIU holds 60 companies. Holdings in both XIC and XIU are measured based on their market capitalization, but the major difference between the two is that the holdings in XIC are capped. In other words, anyone holding in XIC cannot exceed 10% of the total holdings.

Based on these differences, XIC has better benefits. You receive over 4 times as many companies, which increases your diversification while minimizing the risk associated with your portfolio simultaneously, also in order to prevent a single stock portfolio from having a large concentration, there is a 10% holdings cap.

XIU

Management Expense Ratio (MER)

XIC’s MER is at 0.26%. This is 0.10% higher than XIU’s MER which is just about 0.17%. This is one of the biggest reasons why investors are advised to own an XIU portfolio instead of the XIC.

Tracking Error and Return

XIUs purpose, just like other index funds, is to replicate the returns of a benchmark index. In other words, Whatever performance is made by the S&P/TSX 60 index, will be replicated by the XIU. This is how the XIU is designed to perform. For this reason, the fund manager’s main objective is to ensure that he reduces the difference between the index return and the fund return.

In order to ascertain how successful a fund manager is in accomplishing this goal, you have to look at the tracking error. When purchasing ETFs it is best to purchase the ones with extremely low tracking records.

Below, you will discover how much returns XIU yields annually in comparison to its benchmarked index. This information is given in percentages;

Based on the tracking error, despite both been very close, XIU definitely takes the upper hand on this in comparison to XICs tracking error difference in 2005. The question is how do the returns themselves compare between the two ETFs?

An example of how to get a clearer picture on this; Let’s say you invested $10,000 into each ETF as of 2002 and kept it till 2011.

Both portfolios will yield different benefits with a difference. The XIU would have increased drastically and would be worth $18,967. However, the XIC portfolio would be worth more. It would be valued at about $19,146. An outstanding difference of $179!

Dividend Yield

To compare these top (2) ETFs, you might want to compare their dividend yields. This is quite important for anyone who is seeking high dividend yields to replicate their income stream. The current dividend yields for these ETFs can be found on Yahoo Finance and other financial websites.

Using Yahoo finance, the current dividend yield of XIC (as of February 29, 2012) is 2.31%, while XIUs current dividend yield is 2.45% (as of February 29, 2012). It’s also important you know that the current dividend yield is based on the current share price.

Although XIC’s distributions are generally higher than XIUs distributions, XICs share price is higher than XIU’s share price as well, hence the higher dividend yield for XIU.

Eventually, the volume of XIU is almost 10 times the volume of XIC, meaning XIU is definitely more liquid, take note of this when trading, to ensure your bid-ask spread is low. Having either ETF would be a great part of your portfolio! I must admit that I am relieved that the analysis shows that the returns between the two are pretty comparable and quite safe.

Dividend Distributions

The following is the comparison summary of the distributions for the two ETFs during 2011-2007:

XIC XIU Difference

2011 0.46126 0.44231 0.01895

2010 0.46603 0.44562 0.02041

2009 0.45833 0.42690 0.03143

2008 0.55486 0.62068 0.06582

2007 1.00801 0.41424 0.59377

In general, XIC’s distributions are a bit higher than XIUs, all the more reason for you to be a part of any of these two (2) ETFs.

XIU Vs. XIC – Which ETF Is Better?

Both XIU and XIC are popular Canadian ETFs that track the performance of the Canadian stock market, but they have some differences that may make one better suited for your investment goals than the other.

XIU is the iShares S&P/TSX 60 Index ETF, which tracks the performance of the 60 largest companies on the Toronto Stock Exchange. It includes large-cap companies in various sectors such as financials, energy, and materials. As a result, it is a well-diversified ETF that provides exposure to the Canadian stock market’s most prominent and established companies.

On the other hand, XIC is the iShares Core S&P/TSX Capped Composite Index ETF, which tracks the performance of the broad Canadian equity market by investing in the S&P/TSX Capped Composite Index. The S&P/TSX Capped Composite Index is a broader index than the S&P/TSX 60, as it includes a more extensive range of Canadian companies across various market capitalizations.

In summary, if you’re looking for exposure to Canada’s largest and most established companies, XIU may be a better option. However, if you’re looking for broader market exposure across all market capitalizations, XIC may be a more suitable option. Ultimately, the choice between XIU and XIC will depend on your investment goals, risk tolerance, and portfolio diversification needs.

Additional Information –

XIU has been around for longer than XIC and has a lower management expense ratio (MER) of 0.18% compared to XIC’s MER of 0.06%. This means that XIU is a bit more expensive to own than XIC, but the difference is relatively small.

One thing to note about XIU is that it is heavily weighted towards financials, which make up around 35% of the portfolio. Other sectors that make up significant portions of the ETF include energy (19%) and materials (11%). As a result, the performance of XIU can be heavily influenced by the performance of these sectors.

XIC, on the other hand, is a more diversified ETF that includes a broader range of companies across various sectors. It includes large, mid, and small-cap companies, which means that it provides more exposure to smaller companies than XIU. The sector allocations are also more evenly distributed, with financials, energy, and materials each making up around 10-15% of the portfolio.

Overall, both XIU and XIC are good options for investors looking to gain exposure to the Canadian stock market. XIU may be more suitable for those looking for exposure to large, established companies, while XIC may be more appropriate for those seeking a more diversified portfolio that includes smaller companies.

Is VCN Better?

VCN, which stands for Vanguard FTSE Canada All Cap Index ETF, is another popular Canadian ETF that tracks the performance of the broad Canadian equity market. Like XIC, VCN also invests in the FTSE Canada All Cap Index, which includes companies across various market capitalizations.

Compared to XIC, VCN has a higher MER of 0.06%, but it also includes a broader range of companies, including small and mid-cap companies. This means that VCN provides exposure to a more comprehensive range of Canadian companies than XIC, which could be beneficial for investors looking for broader diversification.

One potential advantage of VCN over XIU is that it includes more small and mid-cap companies than XIU, which is heavily weighted towards large-cap companies. This could make VCN more suitable for investors looking for exposure to smaller companies that have the potential for greater growth.

Ultimately, whether VCN is better than XIC or XIU depends on your investment goals and preferences. If you’re looking for broad market exposure across all market capitalizations, VCN may be a better option than XIC. However, if you’re looking for exposure to the largest and most established companies in Canada, XIU may be more suitable.

XIU Vs. XIC Market Returns

XIU and XIC have both historically provided solid market returns, but their returns can vary due to differences in their respective holdings and sector allocations.

Since their inception, both XIU and XIC have provided annualized returns of around 7-8%. However, there have been some variations in performance over the years. For example, in 2020, XIU had a return of -3.3%, while XIC had a return of 2.7%. This difference in performance can be attributed to the fact that XIU is more heavily weighted towards financials, which were hit hard by the economic impact of the COVID-19 pandemic, while XIC’s more diversified holdings helped cushion the blow.

In general, XIC’s broader market exposure means that it can potentially provide higher returns than XIU over the long term, especially during periods when small and mid-cap companies outperform large-cap companies. However, XIU may outperform XIC during periods when financials, energy, or materials companies outperform other sectors.

Final Words

In summary, XIU and XIC are both popular ETFs that track the performance of the Canadian stock market, but they have some differences in their sector allocations and holdings. XIU is heavily weighted towards financials, while XIC has a more diversified portfolio that includes small and mid-cap companies. Both ETFs have historically provided solid market returns, but their performance can vary over time.

When deciding between XIU, XIC, or any other ETF, it’s important to consider your investment objectives, risk tolerance, and overall portfolio strategy. It’s also important to do your research, including reviewing the ETF’s historical performance, fees, and sector allocations, and seeking advice from a qualified financial advisor.

Ultimately, the best ETF for you will depend on your individual circumstances and investment goals. Please let me know your thoughts and comments below. Thanks for reading!