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Ten ETFs in the Canadian dividend and income equity category follow rules-based indices, but that’s about all they have in common. Fees, sector weightings, screening processes, the number of holdings and the size of companies vary widely. All these differences have implications for performance, in terms of both yields and total returns.

The underlying indices — some of which are created by the management firms themselves — are subsets of broad market benchmarks. Known as strategic or “smart” beta, this type of approach has a growing following among Canadian ETF investors, nowhere more so than in the Canadian dividend category. Dividend strategies are far and away the most popular type of strategic beta ETF by assets in Canada, according to “A Global Guide to Strategic-Beta Exchange-Traded Products,” released in March by Chicago-based Morningstar Inc.

As Morningstar’s Alex Bryan explains, fund managers do not have discretion to deviate from the index criteria, but the decision to screen for dividend-paying stocks is an active one. “Some of these strategies may have a quality screen. Some are just going after the highest-yielding names,” says Bryan, who is director of manager research, passive strategies, North America, and a co-author of the Morningstar study.

Currently, the strategic beta ETFs in the Canadian dividend category have about $4.7 billion in assets under management. By far the biggest player is Toronto-based BlackRock Asset Management Canada Ltd., managing four such ETFs and a combined total of about $3 billion.

Close to half of these BlackRock assets are in the $1.4-billion iShares Canadian Select Dividend Index ETF (XDV). Its 30 holdings, currently mostly financial services stocks, are selected on the basis of dividend growth, dividend yield and payout ratio. Oddly, the stock weightings are based on the dollar value of dividends paid per share, regardless of the number of shares outstanding or the company’s market capitalization. “Dividends per share doesn’t really make a lot of sense,” Bryan says.

BlackRock’s best combination of sector diversification, quality screens for strong company fundamentals, and low cost is the $127-million iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV). The smallest and newest of the four, it launched in July 2017. The strategy selects 20 stocks that are weighted by market capitalization, subject to a cap of 10% per holding. Within its peer group of 10 ETFs, it’s tied for the lowest management expense ratio (MER) at just 0.11%.

In addition to requiring above-average yields and dividend growth, XDIV’s holdings are subject to multiple quality screens, including return on equity, earnings variability and debt-equity ratio. “It’s very selective so there are not that many companies that end up being eligible,” says Steven Leong, head of ETF product with BlackRock Canada. “It’s a mixture between an income play and a dividend quality and growth play.”

The two other BlackRock offerings are the $592-million iShares S&P/TSX Composite High Dividend Index ETF (XEI) and the $878-million iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ). They are a study in contrasts in the emphasis placed on dividend yield as opposed to dividend growth. The more income oriented of the two is XEI, a market-cap-weighted portfolio of more than 70 above-average dividend payers, subject to maximum weightings of 5% per holding and 30% per sector. Its MER is a fairly cheap 0.22%.

CDZ’s more than 80 holdings, meanwhile, are weighted according to their dividend growth rates, making it more of a total return mandate. The broadly diversified strategy selects companies that have increased dividends for five consecutive years, though it also allows for dividends that had no year-over-year growth in two of those years. The maximum holding per stock is 8%, though as with other ETFs this cap applies only at the time of rebalancing. At 0.66%, its MER is one of the highest.

The yields of CDZ’s holdings may not be particularly high, says Leong, but their records of dividend growth are “a way of assessing the underlying strength and health of a company and its business.” The ETF has an above-average Morningstar Rating for its historical risk-adjusted returns.

Other strategic-beta ETFs in the Canadian dividend category:

Invesco Canadian Dividend Index ETF (PDC). Assets $673 million. MER 0.55%. The ETF’s underlying index screens for companies that have maintained or increased their dividends for five consecutive years, subject to minimum average daily trading volumes. The strategy, which has produced an above-average Morningstar Rating, then selects the 60 highest yielding securities. The final selection consists of the top 45 of these securities by market cap, and also weighted by market cap, subject to a maximum of 8% per holding.

Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY). Assets $515 million. MER 0.22%. This ETF ranks stocks based on their annual forecasted dividend yield, until their combined market capitalization accounts for 50% of the total market cap of the FTSE Canada All Cap Index. These stocks are then market-cap weighted, resulting in a portfolio that’s heavily weighted in financial services stocks. From a sector perspective, VDY is not the most diversified, “but it definitely does deliver on yield,” says Bryan.

Horizons Cdn High Dividend Index ETF (HXH). Assets $200 million. MER is tied for lowest at 0.11%. Launched in April 2016, the strategy is diversified equally among three groups: financial services, energy and a third group that combines all remaining sectors. Individual holdings are capped at 9.5%. Subject to diversification and size requirements, the ETF selects 40 securities, ranked according to their yields. Within the three groups, holdings are market-cap weighted.

WisdomTree Canada Quality Dividend Growth Index ETF (DGRC). Assets $178 million. MER 0.21%. Launched in September 2017, this ETF has 50 holdings. They are selected on the basis of growth and quality factors, from securities that meet the initial screening for minimum market cap, dividend payouts, dividend coverage ratio and trading liquidity. The portfolio is weighted according to the aggregate cash dividends paid by each company. There’s a cap of 5% per individual holding and 33% per sector.

Fidelity Canadian High Dividend Index ETF (FCCD). Assets $83 million. Launched in August 2018, it’s too new to have an MER; the management fee is 0.35%. The strategy creates composite scores for individual stocks that factor in yield, payout ratio and income growth. Its portfolio of more than 50 holdings is overweight in sectors that have higher dividend yields. The selection process includes a size factor designed to ensure that the portfolio’s overall exposure to large-, mid- and small-cap securities is similar to the broad market.

CI First Asset Morningstar Canada Dividend Target 30 Index ETF (DXM). Assets $16 million. At 0.67%, its MER is the highest. Eligible holdings must have expected yields of at least 1%, and are screened for trading liquidity. Among the quality screens are return on equity, earnings growth and cash flow to debt. The portfolio’s 30 holdings are equally weighted. Performance has been far below average.