The end of the year means it’s time for the annual Reddit Recap for Canada. This year, r/personalfinancecanada made it to number 5 on the most-viewed community list, and number 6 on the most-engaged community list for the year. Some of the most popular posts on Personal Finance Canada for this year are about how your realtor doesn’t care about you, about why NSF fees are not good (we agree, BTW, high fees are awful even for your investments), and about the fact that young Canadians are living paycheck to paycheck.
What about Morningstar.ca? This year, just like we did last year, and the year before that, we decided to show you the most popular exchange-traded funds (ETFs) on Morningstar.ca. Before we get into the actual securities, though, let’s look at how popularity itself impacts stock prices.
My colleagues Paul Kaplan, Thomas Idzorek and James Xiong, along with Yale’s Roger Ibbotson wrote a book called Popularity: A Bridge Between Classical and Behavioral Finance, in which they find that simply put, investors are willing to pay more for securities with popular characteristics and less for securities with unpopular characteristics. That means what’s popular isn’t always cheap.
10 Most Popular ETFs on Morningstar Canada
The most popular ETF on Morningstar Canada is also the cheapest on the list and earns a Morningstar Analyst Rating of ‘Gold. In fact, all the ETFs on this list have either a Morningstar Analyst Rating or a Morningstar Quantitative Rating. Here’s the list of the 10 most popular ETFs on Morningstar Canada.
The first thing you probably noticed is that a majority of these ETFs are equity. There’s a reason for that, explains Danielle LeClair, Morningstar Canada’s Director of Manager Research. “It makes sense that investors would be focused this list of equity ETFs because in a rising rate environment, determining where, when and how to allocate to equity funds can be a challenge,” she says.
The Most Popular ETF in Canada is Rated Gold
The most popular ETF in Canada is the Vanguard S&P 500 ETF, which earns a Morningstar Analyst Rating of Gold. As a reminder, the Morningstar Analyst Rating for Funds is not a short-term market call, but instead provides a forward-looking perspective on a fund’s likelihood to outperform. A fund that receives a medalist rating of Gold, Silver, or Bronze, is expected to outperform similar funds over a full market cycle.
The fund tracks the S&P 500, which offers a representative portfolio of the U.S. large-cap market. S&P's eligibility criteria require that index constituents be profitable and highly liquid.
“An index committee selects the stocks of 500 companies that meet these criteria, which represents approximately 80% of total U.S. market capitalization. While a committee-based approach lacks transparency, it provides more flexibility around reconstitution and can reduce unnecessary index changes. This cuts back on transaction costs compared with more-rigid rules-based indexes,” points out Morningstar analyst Lan Ahn Tran.
Tran adds that market-cap-weighting may expose the index to significant stock- or sector-level concentration during the market's intermittent frenzies. “This can tilt the portfolio toward richly valued names or sectors, such was the case during the late-1990s technology bubble. In the long run, the benefits of broad diversification, low turnover, and a low fee outweigh these drawbacks,” she adds.
ARK Drops Off the Most Popular List
One ETF that was on the list last year, but did not make the cut this year, is the ARK Innovation ETF.
“ARK Innovation is a technology-themed product. Products in this space faced challenges this year in general, but this fund struggled significantly dropping to the bottom percentile of its peer group. Our team also downgraded the strategy this year as a reflection of our concern regarding its ability to outperform over the long run,” LeClair says.
