The end of the year means it’s time for the annual Reddit Recap and the Reddit Recap for Canada. This year, r/personalfinancecanada made it to number 3 on the most-viewed community list. We used the community for some of our own content, answering questions like why we save and whether you should invest or pay off your mortgage.
Some of the most popular posts on Personal Finance Canada for this year are about scammers (learn how to protect yourself here), cost of living (learn about Canada’s grocery store stocks here), and income inequality (which could be driving labour issues.) One of the top comments was about – what else? – mortgage sizes.
And 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 – though ETFs are in general, cheaper than mutual funds.
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 but one the ETFs on this list have Morningstar Medalist Rating of Gold, Silver or Bronze. 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 high rate environment, determining where, when and how to allocate to equity funds can be a challenge,” she says.
There are four Canadian equity ETFs that made the list which is interesting because Canada has underperformed most equity markets except emerging markets so far YTD. In terms of index providers that made this list, its not surprising to see that Vanguard, BMO and iShares are the only ones represented as they are the largest 3 providers in Canada and represent 65% of ETF assets.
LeClair adds that there are similar trends here that we saw with the mutual fund list – the list is diversified across equity and balanced asset classes with the iShares Core Canadian Universe Bond ETF the only representation from fixed income. “We don’t see any thematic or style specific ETFs on the list which is interesting. Most of these strategies could be considered core portfolio holdings. Vanguard’s multi-asset suite of funds is almost fully represented here with three of the four funds in the suite on the list. The conservative portfolio is the only one absent,” she notes.
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 Medalist Rating of Gold. As a reminder, the Morningstar Medalist 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 Vanguard S&P 500 ETF VFV 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. Morningstar analyst Mo'ath Almahasneh says it combines a broadly diversified portfolio of U.S. large-cap stocks with low turnover and a competitive expense ratio, providing it with a durable edge over its average peer, earning it a Morningstar Analyst Rating of Gold.
“Rather than index rules dictating construction, an index committee has discretion over selecting stocks that meet certain liquidity and profitability standards. The index then weights the chosen constituents by market cap. While a committee-based approach lacks transparency, it adds flexibility to reduce unnecessary changes during reconstitution. This tames transaction costs compared with more-rigid rules-based indexes. The fund holds its U.S.-listed counterpart, Vanguard S&P 500 ETF VOO, to reduce transaction costs.,” he says.
Almahasneh adds that market-cap weighting is a sensible approach here. “It harnesses the market’s collective wisdom of the relative value of each holding with the added benefit of low turnover and associated trading costs.
However, market-cap weighting may expose the index to significant stock- or sector-level concentration during the market’s intermittent manic episodes. This can tilt the portfolio toward richly valued names or sectors, as was the case during the post-lockdown rally in 2020. In the long run, the benefits of broad diversification, low turnover, and a low fee outweigh these drawbacks,” he notes.
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