The Toronto Stock Exchange is home not only to publicly listed companies but also exchange-traded funds (ETFs). Because there are more than 700 ETFs on the index, Canadians have a diversity of products to choose from. It’s a growing marketplace with a market capitalization growing to around $200 billion in the last five years.
ETF investing is a cool way to simplify the process of selecting individual stocks. The TMX Group says ETF investments also represent a low-cost, tax-efficient way for investors to hold stocks. The true advantage is instant diversification and broad market exposure. Moreover, ETFs trade like regular stocks, so you can buy and sell as you deem fit.
The key takeaway to this simple investment approach is that asset managers like BMO and BlackRock generally try to invest to mirror the holdings and performance of a particular stock market index instead of actively managing stock holdings. However, if you were to invest today, is a tech-heavy ETF a better choice than the clean energy index?
Top TSX tech stocks
The investment objective of BlackRock’s iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) is long-term capital growth. This ETF replicates the performance of the S&P/TSX Capped Information Technology Index (net of expenses). Some investors use XIT to express a sector view, particularly technology.
Would-be investors gain exposure to Canada’s information technology companies. As of January 19, 2022, the net asset value is $507.5 million on 24 holdings. At $44.49 per share, current investors are down 14.08% year-to-date. Note that technology is the worst-performing (-13.94%) sector as of this writing.
However, in the last 10 years, XIT’s total return is 654.90% (22.38% CAGR). Currently, the top five holdings are Constellation Software, Shopify, CGI, Open Text, and Descartes Systems Group. On sector exposure or breakdown, XIT lean towards application software (52.41%), internet services & infrastructure (19.76%), and IT consulting & IT services (16.65%).
For ESG investors
BMO Clean Energy Index ETF (TSX:ZCLN) is likely to attract ESG investors. The design or portfolio strategy of this ETF is to replicate, to the extent possible, the performance of the S&P Global Clean Energy Index. The Fund invests in companies with clean energy-related businesses to capture the clean energy mega trend.
The proportion of the stocks in the Fund is the same as the actual proportion of the constituent securities of the index. BMO’s benchmark index for this ETF is based on the S&P Global Broad Market Index. The Index consists of large, mid and small capitalization companies across developed and emerging markets.
Aside from offering growth solutions, ZCLN is for investors looking to align sustainable and responsible values with their investments. As of January 19, 2022, the total net assets is $67.5 million with 77 holdings. If you invest today, the current share price is $18.40 (-9.80% year-to-date).
The stocks are from more than 10 countries, with the U.S. (37.84%), Denmark (12.38%), and Canada (7.21%) having the most representation. Companies in the electric utilities (21.09%) and semiconductors (18.30%) are the two largest sector allocations.
Between the tech and clean energy ETFs, I would pick XIT over ZCLN. The historical overall return of more than 650% is enough justification for me at this point.