A look at the iShares smallcap index fund (XCS)

The  iShares CDN SmallCap Index Fund (XCS) can be considered a newer entry in the iShares suite of exchange traded funds (ETFs). According to the factsheet, XCS is almost 3 years old. That is compared with the iShares CDN LargeCap 60 Index Fund (XIU) that has traded for more than 10 years now (since 1999). Three years is a sufficient window to examine the XCS and make some observations.

First of all, it is interesting that most (if not all) holdings in the fund currently trade on the TSX. Many of the 186 holdings are covered to various degrees by analysts. So it presents the investor with a universe of stocks to consider. This universe is different from the  XIU or even the  iShares CDN Composite Index Fund (XIC). The XCS continues to fly under the radar of investors with a 85.5 million market cap.

XCS, XIU sector view (April 9, 2010)

From an asset allocation perspective, a major difference is in the allocation of materials and financials as shown in the figure on this page. The materials (primarily metals and mining) represent 32.02% of the assets of the XCS ETF compared to 18.26% on the XIU ETF. Financials represents 13.49% which is a fraction of the 33.29% this sector enjoys in the XIU. The other two notable differences are in terms of industrials (11.60% for the XCS vs 5.17% for the XIU)  and telecomunication services ( nil for the XCS vs. 4.92% for the XIU) .

XCS performance compared to the S&P/TSX and TSX venture exchange indices since the March 9th, 2009 low (courtesy of stockcharts.com)

The XCS continues to be highly correlated with other Canadian indices, reflecting the flow of money into Canadian markets. Comparing the performance of the various indices can yield clues about the health of the markets and some asset allocation choices the investors can choose to consider.The XCS does not have many years of history, however, it ranks well in the globefund.com ranking system with four stars. That being said Canadian investors have the benefit of better performing mutual funds with longer histories and/or well known managers. In a future note, we will look at some of these choices.

Some additioal notes regarding ETFs and in particular the XCS units :

• Non-resident investors can choose to invest in this ETF which is not true about mutual funds (which have to be sold by prospectus).
• The units can be sold short for hedging a portfolio for example. However, investors have to be aware of the volume constraints in this case. While it is true that the exponential moving average of the volume is over 50,000 shares over the last 60 days, the fund on many days only trades a fraction of this number. The fund has  6 million units outstanding.
• The management expense ratio (MER) is .55%. This is a fraction of what most other mutual funds have in fees and is attractive for those who believe in indexing and passive management.
• There is no restriction on ownership in terms of holding period or short term trading fees that are associated with mutual funds.

In summary, the XCS is a newer entry in the Canadian ETF universe. It presents investors with new choices and is an extra tool in the money management toolbox.

XCS performance compared to the S&P/TSX and TSX venture exchange indices since inception (courtesy of stockcharts.com)

This entry was posted on April 13, 2010 at 5:45 pm and is filed under Stocks & ETFs. You can follow any responses to this entry through the RSS 2.0 feed.