Earlier, I went over the benefits of a home-country bias for Canadian investors. To sum it up, a 20 – 30% weighting towards domestic equities for a Canadian investment portfolio has numerous advantages, including better tax-efficiency, lower currency risk, and reduced portfolio volatility.

Canadian investors seeking a domestic stock allocation for their portfolios could use various S&P/TSX 60 index ETFs as a low-cost, transparent holding. However, there are a myriad of options out there, from vanilla buy-and-holds, to more complex ETFs employing derivatives and advanced strategies. 

What is the S&P/TSX 60?

The S&P/TSX 60 is a market capitalization weighted index of 60 large-cap companies traded on the Toronto Stock Exchange. The index covers 10 GICS stock market sectors, but is dominated by the financial services (35.8%) and energy (18.5%) sectors. 

Funds tracking the S&P/TSX 60 are some of the most popular in the Canadian ETF industry, with billions in assets under management. Notably, the iShares S&P/TSX 60 ETF (XIU) began trading in 1990, making it the first ETF to debut worldwide. The fund is still in existence today, having attracted some $10 billion in assets under management (AUM) and high daily volume. 

From 2000 to present (September 23rd, 2022), the S&P/TSX 60 has returned 6.6% annualized with all dividends reinvested, despite suffering deep drawdowns during the 2000 Dot-Com Bubble, and 2008 Great Financial Crisis, and the 2020 COVID 19 Crash. Over a 15-year rolling basis, the index has returned an average annualized return of 6.9%. 

Physically Backed ETFs

The most basic S&P/TSX 60 ETF is the vanilla physically backed variant. These ETFs physically hold all underlying 60 stocks tracked by the index in a "basket". When you buy shares of the ETF, the fund manager allocates your capital into this basket via the ETF creation and redemption process. 

Canadian investors who want the name brand recognition of the S&P/TSX 60 usually opt for XIU. Despite its higher expense ratio of 0.20%, few other Canadian equity ETFs come close to its AUM, miniscule bid-ask spread, daily volume, or options chain. It's the most popular choice by far. 

Of course, the S&P/TSX 60 isn't the only way of obtaining exposure to Canadian equities. In previous articles, I've talked about the merits of using other indexes like the S&P/TSX Composite or the FTSE Canada / FTSE Canada All-Cap. Many of these choices make for great tax-loss harvesting partners with XIU given their different construction but similar performance. 

Synthetic ETFs

More complex S&P/TSX 60 ETFs can be synthetic. That is, they are not backed by physical shares of the underlying companies. Rather, these ETFs use derivatives, like swaps, options, or futures to achieve different investment objectives, such as enhanced tax-efficiency or magnified exposure. 

A great example is the Horizons S&P/TSX 60 Index ETF (HXT). HXT uses an over-the-counter derivative called a total return swap (TRS) to obtain the returns of the S&P/TSX 60 index. Notably, the ETF does not own any underlying shares, nor does it pay a distribution. 

The main benefit of this approach is extremely low tracking error and great tax-efficiency in a taxable account. I took an in-depth look at Horizons TRS ETFs in a previous article, so give it a read if you're curious. It is also significantly cheaper than XIU with an expense ratio of 0.04%. 

More advanced S&P/TSX 60 ETFs can use derivatives to achieve magnified daily exposure. These ETFs are often used by day or swing traders. A popular example is the Horizons BetaPro S&P/TSX 60 2x Daily Bull ETF (HXU), which targets a daily return 2x of the S&P/TSX 60 ETF net of fees.

If the S&P/TSX 60 rises 1% in a day, HXU will rise 2%, and vice-versa if the index falls. HXU is therefore a leveraged ETF, which is intended to be held for short periods. It also has an inverse counterpart which does the opposite, the Horizons BetaPro S&P/TSX 60 -2x Daily Bear ETF (HXD).

Word of warning: holding HXU or HXD longer than a day can produce long-term returns that differ significantly from the 2x daily leverage target due to compounding and volatility decay. Finally, like most leveraged funds, HXU and HXD are expensive, costing upwards of 1.50% each. 

Please note this article is for information purposes only and does not constitute investment advice.