Tag Archives: ETFs

With 15 Years Till Retirement, How Much Annual Return Growth Can I Expect for XIC the Canadian TSX Stock Market ETF?

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Our retirement date is a moving target in part because we expect to get “retired” rather than to choose when to retire. This year alone, an entire tier of management, basically anyone 60 or older, has been offered a package to retire. (Those who don’t choose to accept the package are taking a risk that they may be simply “right sized” without any retirement bridge perks.) Who knows how bad it’s going to get? Still, I was looking at my XIC holdings the other day and began wondering roughly how much we could expect them to grow between now and retirement if that was, say, 15 years away.

XIC Is a Low-Fee ETF That Mirrors Most of the Toronto Stock Exchange (TSX) S&P Composite Index

XIC is a Blackrock iShares ETF. You buy units of the ETF on the stock market, just like shares of Bell or Enbridge. Unlike a mutual fund, the value of these units goes up and down throughout the day based on the value of the underlying stocks. Like a mutual fund, there is a management fee for these units: it’s low though at 0.05-0.06% a year.

I bought a bunch of XIC every month one year when I couldn’t spot any dividend paying stocks that I wanted to own forever offered at good prices. I figured I would be over-paying for some of the component stocks in the index fund, but under-paying for others so it should be overall beneficial.

Does XIC Pay a Dividend or Distribution? Can I Get Income from It?

XIC does pay distributions quarterly based on the underlying stocks. It yields about 2-3% a year although it’s not something you can actually estimate with any particular accuracy.

If you look under Performance, then Distributions, then Table, then Calendar Year, you can see the total annual distribution per unit for tax purposes. For the full years the unit has been offered, it’s varied from about 22 cents per unit to a high of 1.25 per unit. During those years, the price per unit has varied from about $10 to about $25.

What Capital Gain or Growth Can I Expect Over the “Long Term” For My XIC Investment?

I’ve been reading books and newspaper articles about planning for retirement and they use a wide variety of values for how much you can expect your long-term investments to grow.

I see things like “expect to grow 3% above inflation” and even “5% after inflation.” I’m always a bit skeptical of those numbers because I’ve been investing so long I’ve seen many market setbacks.

So knowing I bought my XIC units when the TSX was in the 15000 range and that it is still well below that this year (2016), I wondered whether “past performance could be used to predict future performance.” OK, I know it can’t. But I still wondered how XIC has actually performed over the long term.

First, I did a quick and dirty check looking at the values 15 years ago and today on the BMO InvestorLine website. That suggested a return of a bit less than 4.5% per year, not including the distributions. That suggested to me a return of 6-7% or so if you included the distributions.

So then, wanting a more accurate evaluation, I went onto the Blackrock website to look for the data.

They conveniently report the Total Return as an Average Annual return including distributions and changes to the NAV.

The total average annual return since inception, February 16 2001, is 6.02%. So my estimate was pretty accurate.

How Does the Total Average Annual Return for the Past 15+ Years Compare With the Rate of Inflation?

So if the return was 6.02%, how much of that was eaten up by inflation?

I went to the Bank of Canada website to see what they report the “average annual rate of inflation (%) / Decline in the Value of Money” was from 2001 to 2016.

They say that over 15 years, the rate of inflation was 1.83%.

(Anyone who actually owns and runs a home knows that the CPI tends to understate the actual rate of inflation for goods and services you actually need to survive, but it’s as good as I can get easily.

So What Can I Expect from My XIC for Long-Term Return After Inflation?

Ok, if I’m doing this correctly, that means that should future performance mirror past performance, which is very unlikely, then

6.02 % – 1.83 % = 4.19%

I really, really don’t think the data is accurate to two decimal places, so I’ll say “about 4%.”
In other words, I can expect my investment in XIC to grow about 4% a year for the next 15 years.

How Soon Will My Money Invested in XIC Double In Amount?

There’s an old estimating rule for how quickly your money will double in amount (not necessarily in value, as inflation plays a role in that.) You take 72 and divide it by the % that the money is growing each year.

So at 4%, my investment in XIC will double in amount in 18 years.

Sigh.

I guess I’d better hope they don’t retire me any day soon!

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Why Buying an Index Fund ETF Must be for the Long Term Not for a “One Year Wonder”

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Back in 2014, I had some RRSP cash to invest in the equities side of my portfolio but I didn’t have any particular companies in mind. Instead, I gradually bought $24 295 worth of XIC an, ETF that tries to reflect the entire S&P TSX Composite index. Looking back on how it performed in 2015, I decided yet again that Index Fund ETFs are most suited to someone investing for the long-term, such as a distant retirement, rather than for the short term or just one year.

Whether Markets Rise or Fall, Dividends Still Get Paid by Most Companies

Many of the companies on the TSX S&P Composite Index list pay dividends. These include Canada’s big banks, telecoms like Bell and Telus, and old established utilities like Fortis and Canadian Utilities. An ETF that mirrors holding those companies, like XIC, usually will pay distributions to unit holders based on the dividends and other income it receives.

What Was My (Quick and Dirty) Yield on Investment for XIC in 2015?

In 2015, my actual distribution payments totaled $674.64.

While it’s not a particularly accurate way to calculate my return on investment, if I just divide my distributions by the amount I spent on XIC units in 2014, I get a percentage of 2.78%.

This is a bit different than today’s (January 6, 2016) quote for XIC on RBC Direct Investing, which says I will get 3.24%.

Why is my number lower? Because I spent more to get the same distribution.

What Happened to the Unit Value of XIC During 2015?

You see, the TSX had a difficult year in 2015. Its overall value dropped, at least on paper. I bought my units of XIC in 2014 at a rough average cost of $23.14 each.

Today, at this moment, on January 6 2016 they are worth 20.20 each.

Sigh. They’ve dropped in value by $2.94 each. And that’s not even factoring in any inflation and what not for the year between when I bought them and today.

If I Needed That Money In One Year, What Alternative Investment Might Have Been Better?

It doesn’t matter much to me that on paper my XIC units are worth less today than when I bought them. That’s because I don’t need the cash today so I don’t need to sell them and make that paper loss a real loss.

But what if I had been investing for the short term? What if I did need the cash today?

Well, I likely would have invested the same $24 295 in 2014 in some one-year GICs. I did buy quite a few GICs that year so I can find an average rate for 1-year certificates. On average, I invested at a rate of 1.91% for 1-year GICs in 2014.

So if I had put my money in GICs, on January 1 2016, I would have had all of my principal returned to me ($24 295) and I would have received $464 in interest.

You can see that the GIC interest is $210.61 less than the XIC distributions.

But the XIC loss of principal if I had sold the units today would be $3 087.

Ouch!

The lesson is obvious to me. Don’t invest in an index fund ETF for the very short term unless you are prepared to accept the possibility of a large, real drop in value. I wouldn’t risk $3 087 to gain $211 in interest/dividend distributions over a one-year period.

That said, my XIC investment is supposed to be needed in 20 or more years. So I’ll let it putter along, paying the 0.10% expense ratio and hopefully over that length of time, the capital value of the units will have increased at least enough to cover inflation and even better enough to generate a capital gain and profit.

Just Out of Curiosity, How Much Did Bell Do Better than a GIC and than XIC Over 2015?

I noticed when I looked at this particular account, that in 2014, I also bought about $25 000 of BCE stock. It was paying dividends to yield about 4.92% at my purchase price. The actual dividend per share has increased since then, so it’s still yielding about 4.77% today, January 6 2016.

The shares were bought at $50.25 in mid-2014. They are trading for $54.50 right now, today, January 6 2016. So they have appreciated in value by $4.25 each.

Too bad there was no way to know that in advance, or to be sure that that trend would continue (which it probably won’t) or I would have been very happy to have invested the full $50 000 in BCE and left XIC on the shelf!

Ah well, that’s why we’re supposed to invest in a variety of assets with a variety of risks and volatilities. I’m satisfied with having some BCE, some XIC and some GICs as part of my overall blend. Between them, it was a reasonable 2015.

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