Last Updated on November 29, 2024 by Chin Yi Xuan
SCHD is an important dividend ETFn in my Freedom Fund portfolio thanks to its solid record of dividend growth and historical return.
However, SCHD is not perfect for non-US residents. For non-US residents from countries like Malaysia and Singapore, investing in SCHD (listed in the US) comes with a 30% dividend withholding tax (WHT). This is not ideal considering most SCHD investors are investing for dividends.
Let’s say you are receiving $100 in dividends, you’ll only end up getting $70 due to withholding tax.
Investing in Canadian-domiciled ETFs as an alternative
An alternative is to invest in dividend ETFs domiciled in Canada, specifically the Toronto Stock Exchange (TSE), as it comes with 15% dividend withholding tax (WHT) instead of 30%.
In this post, I will review 2 Canadian-domiciled dividend growth ETFs with exposure to the US stock market, and discuss if they are good alternatives to SCHD.
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Table of Contents
Overview: What and why invest in Canadian-domiciled ETFs?
Canadian-domiciled ETFs are ETFs registered & traded in Canada (Toronto Stock Exchange (TSE)).
Here are 2 key reasons why dividend investors can consider Canadian-domiciled ETFs over US-domiciled ETFs:
Reason #1: 15% dividend withholding tax on Canadian-domiciled ETFs
Thanks to tax treaties between Canada and Malaysia (the same goes for Singapore), the withholding tax for dividends paid out of Canada is 15% instead of the usual 25% for countries without tax treaties.
Reason #2: Availability of Canadian-domiciled ETFs that track the US market
The Canadian ETF market is also very vibrant, where investors will find many Canadian-domiciled ETFs that track the US market.
This makes it possible for us to find alternatives to SCHD.
Comparison: Canadian-domiciled ETFs vs US-domiciled ETFs
| Canadian-domiciled ETFs | US-domiciled ETFs | |
| Dividend withholding tax (WHT) for non-US residents (Malaysia/Singapore) | 15% | 30% |
| ETFs that track the US market | Yes (though lesser in choice) | Yes |
| Expense ratio | Generally low, but slightly higher than US-domiciled ETFs | Generally low |
| Currency | Mainly in CAD, with variants in USD | USD |
| Commission (Interactive Brokers Pro: Tiered Commission) | USD 0.006 (initial tier), min. USD 0.80/order | USD 0.0035 (initial tier), min. USD 0.35/order |
READ MORE: Interactive Brokers (IBKR) long-term review & pricing
My 2 selection criteria for Canadian-domiciled dividend growth ETF
To recap, SCHD is loved by many dividend investors thanks to its record of dividend growth and decent overall returns.
As such, while looking for Canadian-domiciled alternatives for SCHD, I have 2 key criteria:
#1 Consistent record of dividend growth
Firstly, the goal is to look for Canadian-domiciled ETFs with a record of dividend growth.
This is in line with SCHD which has a 12-year streak in growing its dividends.
#2 Decent overall performance (total return)
Next, it is also important to identify Canadian-domiciled ETFs that delivered a decent overall performance.
In other words, I’d be looking for those that delivered positive historical Total Return (price AND dividend growth).
READ: Introduction to dividend growth investing
#1 BMO Low Volatility US Equity ETF (USD) (ZLU.U)
i. ZLU.U Overview: Exposure to low-volatility US stocks that grow their dividends
The BMO Low Volatility US Equity ETF (ZLU.U) is an ETF that offers investors exposure to the performance of a basket of US stocks with lower sensitivity to volatile market movements.
| Ticker/Symbol | ZLU.U |
| Traded Currency | USD |
| Dividend Yield (As of 08/2024) | 2.11% |
| Expense Ratio | 0.33% p.a. |
| Asset Under Management (AUM) (as of 08/2024) | USD 68 m |
| Dividend Payout Frequency | 4 |
The technical term for ‘low market sensitivity’ stocks is ‘low beta‘ stocks. Beta is usually measured with reference to a benchmark, usually the S&P500 (beta: 1.00) for the US stock market. The lower the beta of a stock (<1.00), the less it will be impacted by market movement compared to the benchmark.
As of August 2024, ZLU.U has a beta of 0.42, translating to a less volatile nature:
ii. Methodology: How are stocks selected to be part of ZLU.U?
BMO, the fund manager of ZLU.U, uses a rule-based methodology to select the 100 least market-sensitive stocks among large-cap stocks listed in the US.
While ZLU.U’s methodology does not involve screening criteria for dividends, the stocks that made it to the selection tend to be dividend-distributing stocks.
In the following section, I will discuss the dividends and overall performance of ZLU.U.
iii. Top 10 holdings, geographical and sector exposure of ZLU.U
I find ZLU.U’s overall portfolio to be rather balanced.
As of August 2024, the top 3 sectors of ZLU.U are consumer staples (20.42%), healthcare (17.81%), and the utility sector (17.15%) respectively.
The top 10 holdings in ZLU.U are companies like Lockheed Martin, Johnson & Johnson, and IBM.
These are relatively established companies that have increased their dividends over the years:
iv. A look at ZLU.U Dividends: Track record of stable dividend growth
As of August 2024, ZLU.U pays about 2.11% in dividend yield.
ZLU.U dividend growth has been relatively stable since 2013. It stalled a little between 2017 – 2018, but has shown a solid 3-year growth streak since 2021.
What I appreciate about ZLU.U (compared to the other ETF I discussed in this article), is a longer dividend payout record.
v. ZLU.U Overall Performance: Enjoy stable dividend growth at low volatility
As of July 2024, ZLU.U returned a Year-To-Date (YTD) performance of 9.95%, and a 5-year annualized return of 8.26%:
| Performance as of July 2024 | ZLU.U |
| Year-to-date total return (%) | 9.95% |
| 5-year annualized return (%) | 8.26% |
What’s unique about ZLU.U is the fund manager’s approach to selecting low-beta stocks. This should translate to a lower drawdown during a challenging market.
Let’s see if this is true:
Scenario #1: 2022 Bear Market: ZLU.U vs S&P500
Scenario #2: 2020 Covid-19 Selloff: ZLU.U vs S&P500
Scenario #3: 2018 Trade War Selloff: ZLU.U vs S&P500
vi. Verdict for ZLU.U: A low volatility dividend growth ETF
From the above chart comparison between ZLU.U and the S&P500, I find ZLU.U to be a decent ETF for investors seeking a less volatile investing experience in the US stock market.
Its track record of dividend growth also means investors can enjoy growing dividend income with time.
What do you think of ZLU.U? Let me know in the comment section below!
#2 iShares Core MSCI US Quality Dividend Index ETF (USD) (XDU.U)
i. XDU.U Overview: A balanced dividend ETF
The iShares Core MSCI US Quality Dividend Index ETF (XDU.U) offers investors exposure to US stocks with above-average dividend yield and steady or increasing dividends.
Compared to ZLU.U, XDU.U has a lower expense ratio of 0.15% p.a.
| Ticker/Symbol | XDU.U |
| Traded Currency | USD |
| Dividend Yield (As of 08/2024) | 2.38% |
| Expense Ratio | 0.15% p.a. |
| Asset Under Management (AUM) (as of 08/2024) | USD 13.9m |
| Dividend Payout Frequency | 12 |
ii. Methodology: How are stocks selected to be part of XDU.U?
XDU.U tracks the performance of the MSCI USA High Dividend Yield Index. Stocks are selected based on:
- Strong financials, including a healthy balance sheet and less volatile earnings.
- Then, stocks are screened for factors such as Return on Equity (ROE), earnings variability, Debt-to-Equity, and recent 12-month price performance.
iii. Top 10 holdings, geographical and sector exposure of XDU.U
As of August 2024, the top 3 sectors of XDU.U are consumer staples (18.44%), information technology (15.53%), and the industrial sector (14.28%) respectively.
It is a rather balanced holding with no specific sector dominating over others.
The top holdings of XDU.U include stocks like Broadcom and Procter & Gamble. These are companies that have a record of increasing dividend payout:
iv. A look at XDU.U Dividends: Relatively new dividend ETF waiting to prove itself
As of August 2024, XDU.U pays about 2.38% in dividend yield.
Since XDU.U was listed in October 2019, its dividend track record is limited compared to ZLU.U which we’ve discussed above. So far, it has recorded a dividend growth streak of 2 years.
What makes XDU.U unique compared to most dividend ETFs is its monthly distribution payout, compared to the typical quarterly payout.
v. XDU.U Overall Performance: Enjoy stable dividend growth at low volatility
As of July 2024, XDU.U delivered a Year-To-Date (YTD) performance of 10.88%. Since it was listed in 2019, there is no data on its 5-year annualized return yet.
| Performance as of July 2024 | XDU.U |
| Year-to-date total return (%) | 10.88% |
| 5-year annualized return (%) | N/A |
vi. Verdict for XDU.U: Not my top Canadian-domiciled dividend growth ETF
Given XDU.U lack of dividend track record, it is not my top Canadian-domiciled dividend growth ETF for the time being.
That said, it should not be overlooked and I will keep track of XDU.U’s performance from time to time.
Comparison: Canadian-domiciled dividend ETFs (ZLU.U, XDU.U) vs SCHD
Before I share my concluding thoughts in the final verdict, let me lay out some side-by-side facts & features of the dividend growth ETFs that we’ve discussed in this post today:
| SCHD | ZLU.U | XDU.U | |
| Domicile | US | Canada | Canada |
| Exposure | US market | US market | US market |
| Special traits (as of 08/2024) | 12-year dividend growth streak | Less volatile stocks selection | Fewer years of dividend growth track record |
| Expense Ratio | 0.06% p.a. | 0.33% p.a. | 0.15% p.a. |
| Dividend Yield (as of 08/2024) | 3.43% | 2.11% | 2.38% |
| Dividend Growth Streak | 12 years | 3 years | 2 years |
| YTD Total Return (as of 07/2024) | 10.47% | 9.95% | 10.88% |
| 5-Year Annualized Return (as of 07/2024) | 12.78% | 8.26% | N/A |
How to invest in Canadian-domiciled ETFs
Investing in Canadian-domiciled ETFs like ZLU.U and XDU.U requires access to the Toronto Stock Exchange (TSE).
Since most brokers in Malaysia do not offer access to the Canadian market, my go-to broker to invest in Canadian-domiciled ETFs is Interactive Brokers (IBKR).
Interactive Brokers (IBKR) is one of the most reliable global brokers as it is regulated by financial authorities in over 10 countries (eg. US, UK, SG, HK, Canada, and more).
Aside from that, IBKR offers access to the USD-denominated Canadian-domiciled ETF at an affordable fee. You can check out IBKR’s fee structure HERE (under ‘Canada’ > ‘USD-denominated’)
READ: My Interactive Brokers (IBKR) long-term user review
Verdict: While not perfect, Canadian-domiciled ETFs provide a more tax-efficient way to invest for dividends in the US stock market
My search for the best SCHD alternative brought me to explore Canadian-domiciled dividend ETFs,
Just like my research on Ireland-domiciled dividend ETFs, I think there is no perfect alternative to SCHD in the Canadian stock market.
Despite Canadian ETFs being more tax efficient (15% dividend withholding tax), SCHD’s 12-year dividend growth streak is difficult to beat. Furthermore, SCHD also has the lowest expense ratio of 0.06% p.a. compared to ZLU.U and XDU.U.
Ultimately, it is up to us as investors to decide what compromise to take while deciding between US or Canadian-domiciled ETFs.
What do you think?
Stay tuned as I continue my quest to search for the best SCHD alternatives (in other markets, maybe!).
Meanwhile, check out my go-to broker to invest in Canadian-domiciled ETFs below!
Disclaimers
Any of the information above is produced with my own best effort and research.
This post is produced for general information purposes only. It is not intended to constitute professional buy/sell advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances.
The inclusion of Interactive Brokers’ (IBKR) name, logo or weblinks is present pursuant to an advertising arrangement only. IBKR is not a contributor, reviewer, provider or sponsor of content published on this site, and is not responsible for the accuracy of any products or services discussed.
