Running an ETF involves various operational costs, from administrative expenses to marketing efforts, making it a business endeavor like any other. To cover these expenses and turn a profit, the management fees charged by the ETF need to be supported by a sufficiently large AUM.
While there's no strict rule, an AUM of around $50 million is often considered the minimum threshold for an ETF to be economically viable. Achieving and surpassing this benchmark is crucial for the long-term sustainability of the fund.
Among the most successful ETFs in Canada, reaching the $1 billion AUM mark is often seen as a coveted achievement, indicating widespread investor trust and confidence. Recently, the Cboe Canada listed Scotia U.S. Equity Index Tracker ETF (SITU) surpassed this milestone to now sit at $1.44 billion, indicating widespread investor trust and confidence.
But what makes SITU particularly attractive to investors, and how can it be effectively integrated into a diversified investment portfolio? Here's all you need to know.
How SITU ETF works
SITU exemplifies a passive ETF strategy, aiming to mirror the composition of a specific benchmark index accurately. This approach brings several advantages for investors, chief among them being a significantly lower expense ratio—only 0.09% for SITU—and reduced portfolio turnover.
Essentially, investors can achieve the average returns of the index without the need for intricate analysis or active portfolio management, offering a streamlined and cost-efficient investment solution.
A critical aspect of SITU's appeal is its unique benchmark. Diverging from the path of some other U.S. equity ETFs, SITU does not follow the well-known S&P 500 index.
Instead, it tracks the Solactive GBS United States 500 CAD Index. This index comprises the top 500 U.S. stocks by market capitalization, presenting a broad view of the U.S. equity market.
While the Solactive GBS United States 500 CAD Index and the S&P 500 might appear similar at first glance, with nearly identical holdings and sector weights, key differences exist. The S&P 500 employs a more active selection process than some may realize, including a profitability screen and a committee responsible for deciding on the addition or removal of companies.
How investors can use SITU ETF
Primarily, SITU serves as an ideal choice for buy-and-hold investors aiming for exposure to the U.S. market. With an expense ratio of just 0.09%, investors access a broad range of 500 large and mid-cap stocks across all 11 sectors, making it an economical stand-alone option for those bullish on U.S. equities over the long term.
Another strategic approach involves integrating SITU with ETFs that cover Canadian, developed, and emerging markets. Specifically, Scotia offers three complementary ETFs: Scotia Canadian Large Cap Equity Index Tracker ETF (NLB:SITC), for Canadian large caps; Scotia International Equity Index Tracker (SITI), targeting international equities; and Scotia Emerging Markets Equity Index Tracker ETF (SITE), focusing on emerging markets.
This method surpasses the utility of all-in-one asset allocation ETFs by providing investors with the flexibility to tailor the geographical distribution of their investments according to personal preferences and goals.
Furthermore, SITU can be employed for tax-loss harvesting in tandem with S&P 500 ETFs. Despite the similarities in holdings and performance between SITU and S&P 500 ETFs, the variance in their benchmark indices means they are considered distinct for tax purposes.
This distinction could prevent the activation of the Canada Revenue Agency's superficial loss rule, thus allowing investors to remain in a position while claiming capital losses.
This content was originally published by our partners at the Canadian ETF Marketplace.