How does RBC's new Canadian Dividend ETF compare?

The ETF market in Canada took another step towards greater competition this month with RBC's launch of five new equity dividend-oriented ETFs, covering Canada, the USA (a US dollar version and a Canadian dollar hedged version) and developed countries (EAFE in both a US dollar and Canadian dollar hedged version).  Today we'll compare the ETF for Canadian equities, the RBC Quant Canadian Dividend Leaders ETF (TSX: RCD), which started trading January 15, 2014, with its competitors. We'll also see how these ETFs are faring against each other and the broader Toronto Stock Exchange.

RBC Quant Canadian Dividend Leaders ETF

Our comparison table below shows the numbers that lead us to say that RBC's new ETF has:

• Low MER - At 0.39% maximum management fees (it isn't clear from the prospectus whether the cap on fees means only the management fee only or all the fund expenses as well, like legal, administrative, trading etc which, if not capped, might mean MER around 0.45%), this is second lowest to Vanguard's ETF of 0.35%.
• Fairly conservative dividend seeking - This ETF does not look to be chasing the highest yielding stocks - e.g. only 2% of its portfolio yields more than 8%. It also has about the same proportion of companies that have cut or not increased their dividend as the TSX, as represented by two market benchmark ETFs, the iShares S&P TSX 60 (TSX: XIU) and the iShares S&P TSX Capped Composite (XIC). However, RCD is not entirely conservative since it has a fairly high proportion of companies with high dividend payouts (more than 90% of cash flow) and with dividends greater than trailing twelve month earnings. 
• Low individual company concentration - Despite not having an explicit cap on concentration, the portfolio as of now is spread out - the top 10 stocks make up only 31% of the total value of holdings, which is at the low end of the spectrum.
• Similar company size to the TSX Composite - It is among the closest of the ETFs to the benchmark XIC in terms of the average market cap of its holdings. 
• High concentration in financials and energy - Offsetting somewhat the good risk spreading across companies, there is still a somewhat uncomfortably high proportion of 70% of holdings in just two sectors. Only Vanguard's FTSE Canadian High Dividend Yield Index ETF (VDY) has a higher sector concentration.

The other Canadian dividend ETFs

• iShares Dow Jones Canada Select Dividend Index Fund (XDV) - still the dominant fund; total assets now stand at $1.42 billion
• iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX symbol: CDZ) - still second most popular fund with $937 million in assets
• iShares S&P/TSX Equity Income Index Fund (XEI) - also from iShares, it has $156 million in assets
• Horizons Dividend ETF (HAL) - 4 years on the market yet still tiny with only $12 million in assets
• BMO Canadian Dividend ETF (ZDV) - BMO's version has leapfrogged XEI into 3rd place with $315 million in total assets
• First Asset Morningstar Canada Dividend Target 30 Index ETF (DXM) - growing very slowly at $36 million in assets
• PowerShares Canadian Dividend Index ETF (PDC) - another laggard since its launch in June 2011 with only $20 million in assets
• Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX symbol: VDY) now up to $71 million in assets

Dividend ETFs - Portfolio Characteristics

Dividend ETFs - Performance

Dividend ETF performance is impressive but surprising

• Total return out-stripping TSX by a lot - Over the year 2013, all but one (BMO's ZDV) of the dividend ETFs outperformed both the large cap XIU or the Composite XIC, most by 3% to 7%. A lot of the return came from capital gains since the difference in dividend yield was nowhere higher than 2.2% (ZDV's 4.9% vs XIU and XIC's 2.7%). One supposedly dividend fund, Vanguad's VDY, actually yielded less at 2.6%, than the TSX! But its capital gains far outpaced the TSX and it was the highest return fund of all. The dividend ETF return advantage manifested itself consistently for those funds - HAL, XDV and CDZ - with a longer history of 3 or 5 years. This is not just one or two sectors, like financials or energy, doing especially well. XDV achieved the outperformance with a high concentration in financials and energy while CDZ achieved it with a markedly lower concentration in those sectors. We note in passing, though again the time frame is too short to be sure, that these results conform to the general findings about superior returns from dividend stocks that we wrote about last July. 
• Volatility of dividend ETFs is less than the TSX - The numbers on beta, which measures sensitivity to moves of the overall market where a beta of 1.0 equals the market (i.e. XIC) and under 1.0 is less volatile, show that almost all the dividend ETFs are significantly less volatile than the TSX. The figures on absolute volatility of each ETF as measured by standard deviation of its returns compared to XIU and XIC indicate the same result. The Sharpe Ratio, which measures return over standard deviation, i.e. the higher the ratio the better, shows that most of the dividend ETFs did much better than both benchmarks during 2013. More return, less volatility risk, that's a good place to be, if it keeps up.
• Some of ETFs' distribution (aka dividend) increases did not keep pace in 2013 - What surprised us even more is that several dividend ETFs in our list did not increase their cash distributions, because their holdings did not, as much as the benchmark ETFs. XDV, XEI, DXM and PDC had significantly lower distribution rises from 2012 to 2013 than either XIU or XIC. 
• Long term distributions of XDV and CDZ are rising nicely - Perhaps what is most important for the investor seeking the higher distributions is the possibility that such higher distributions can be maintained in the long run. That seems to be the case so far for the two ETFs with the longest track record as the graph below shows. XDV has maintained its lead over XIU and CDZ, after a big drop in 2010 and 2011 when the big banks fell afoul of CDZ's selection criteria by not increasing dividends, seems to be recovering strongly.

Which Dividend ETF is best?

We still don't like HAL much for its high MER, lack of visibility (it doesn't publish its full holdings) and lower distribution rate, nor VDY which looks more like a value-oriented capital appreciation fund. It's hard to pick amongst the rest - good points of each one are offset by some weak points. ZDV would still be a slightly preferred option for those whose purpose in looking to this kind of ETF is to obtain high steady income. It had the highest trailing distribution yield, the tied highest forward looking distribution yield and the second highest increase in distributions in 2013. CDZ is an alternative for a mainstream type equity holding with a slightly higher dividend and perhaps/probably/hopefully better long term returns but the same risk characteristics as the overall market.

Disclaimer: This post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.