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The popularity of exchange-traded funds (ETFs) is rising by leaps and bounds owing to the record year in 2021. According to data from the National Bank of Canada, total inflows reached $52.5 billion, a 27% increase from 2020. The bank’s financial analyst, Daniel Straus, shared an interesting observation.
Straus said retail and institutional investors’ turn to ETFs is continuing for “tactical and strategic” reasons. He adds that because of enhanced buying power due to pandemic-induced lockdowns and little discretionary outlets, Canadians invested in all types of accounts, especially funds.
More than 50% of the new money went to Bank of Montreal’s ETF division, BlackRock’s iShares (a partnership with the Royal Bank of Canada), and established fund provider Vanguard. If you want to be part of the growing ETF investors, there are three outstanding choices in February 2022.
A fund of funds
BMO Monthly Income ETF (TSX:ZMI) is primarily for investors looking for higher yielding balanced ETFs. The fund tracks the performance of an underlying basket of higher yielding BMO ETFs. According to the asset manager, ZMI is a fund of funds and management fees charged are reduced by those accrued in the underlying funds.
The holdings are weighted to emphasize yield, with a 50% investment each in equity and fixed income, while the cap for each security is 20%. BMO rebalances and reconstitutes the ETF semi-annually, in July and January of every year. Currently, there are nine ETFs in the portfolio with BMO Corporate Bond Index ETF as the top holding (23.45%). At $16.97 per share, ZMI pays a 3.91% dividend.
BlackRock’s iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI) is a top-of-mind choice of ETF investors for three reasons. The fund pays monthly dividends, is low cost, and is ideal for long-term foundational holding. XEI replicates the performance of the S&P/TSX Composite Index and aims to deliver long-term capital growth.
If you take a position today, the share price is $26.64 (+5% year-to-date), while the dividend yield is 3.77% (dividend frequency is monthly). As of January 31, 2022, there are 76 stock holdings. Of the top 10 holdings, four are energy stocks, followed by four bank stocks and two telco stocks. Canadian Natural Resources is the top holding (5.73%).
Exposure to the oil & natural gas industry
Investors in Horizons Enhanced Income Energy ETF (TSX:HEE) gain exposure to the performance of an equal-weighted portfolio of Canadian companies in the crude oil and natural gas industry. Apart from the monthly dividend distributions, there’s a potential call option income.
At $10.80 per share, the trailing one-year price return is 112.6%, while the year-to-date gain is 19.1%. HEE pays a decent 3.54% dividend yield. As of year-end 2021, the top four holdings are Enerplus, MEG Energy, Vermilion Energy, and Tourmaline Oil. The asset manager, Horizons ETFs Management (Canada), is a financial services company whose ETF products include a broadly diversified range of solutions for investors of all experience levels.
Temper market risks
The best part about ETF investing is that investors gain instant diversification to temper market risks. This year could see another record inflow if Canadians have less spending choices and more investment options.