The Hidden TSX 60 ETF Edge Most Investors Miss

Choosing an ETF to track Canada's 60 largest companies seems simple. Pick the one with the lowest fee, right? Wrong. That's the kind of thinking that leaves money on the table. The battle for your investment dollar between the big TSX 60 ETFs is more complex than a simple price tag. The right choice depends entirely on your strategy, your account type, and your tolerance for risks that aren't listed on the fund's main page.

Getting this decision right is about understanding the hidden trade-offs most investors completely miss.

Insights

• The S&P/TSX 60 Index is not a diversified bet on the Canadian economy; it's a concentrated play heavily weighted in Financials and Energy, making it sensitive to sector-specific shocks.
• The main players—iShares' XIU, Horizons' HXT, and BMO's ZIU—offer different strategic advantages in cost, structure, and liquidity. There is no single "best" option.
• Horizons' HXT uses a total return swap structure, offering superior tax efficiency in non-registered accounts but introducing counterparty risk that physically-backed ETFs like XIU and ZIU avoid.
• For active traders and large institutional players, XIU's massive liquidity and tight spreads can easily outweigh its higher management fee through lower trading costs.
• Your choice has significant tax implications. HXT defers taxes in cash accounts, while XIU and ZIU generate taxable dividend income annually, a critical distinction that changes the entire game.

The Lay of the Land: What You're Actually Buying

Before you compare the funds, you need to understand the battlefield. The S&P/TSX 60 Index tracks the 60 largest Canadian companies by market capitalization. It’s a who's who of Canadian blue-chips, featuring giants like Royal Bank of Canada, TD Bank, Shopify, and Enbridge.

But let's be clear: this is not a broadly diversified index. Financials and Energy stocks dominate, together accounting for roughly 48% of the index's weight. This concentration means your investment is lashed to the fortunes of banks and oil prices. When those sectors boom, you do well. When they stumble, the entire index feels the pain.

Thinking of this as a proxy for the entire Canadian economy is a strategic error. It's a targeted bet on the country's largest, most established players.

The Main Event: A Three-Way Battle for Your Capital

Three ETFs dominate the S&P/TSX 60 space: the original titan, iShares S&P/TSX 60 Index ETF (XIU), the low-cost challenger, Horizons S&P/TSX 60 Index ETF (HXT), and the solid competitor from BMO, the BMO S&P/TSX 60 Index ETF (ZIU). They all track the same index, but how they do it creates critical differences.

Here’s how they stack up on the key metrics.

Metric	iShares (XIU)	Horizons (HXT)	BMO (ZIU)
MER	0.18%	0.04%	0.18%
AUM (Approx.)	C$16.7 Billion	C$3.1 Billion	C$1.5 Billion
Structure	Physical Replication	Synthetic (Swap)	Physical Replication
Distributions	Quarterly	None (Total Return)	Quarterly
Liquidity	Very High (~3.5M daily vol)	Moderate	Moderate

Cost vs. Liquidity: The Classic Trade-Off

At first glance, HXT's 0.04% management expense ratio (MER) makes it the obvious winner on cost. Over decades, that fee difference against XIU's and ZIU's 0.18% can compound into a meaningful sum. For a buy-and-hold investor making few transactions, this is a powerful argument.

But fees aren't the only cost. Liquidity—the ease of buying and selling shares without moving the price—is paramount for active traders or anyone moving serious capital. XIU is the undisputed king here, with C$16.7 billion in assets and an average daily trading volume of around 3.5 million shares.

This translates to an extremely tight bid-ask spread, often just a penny. For large orders, that tiny spread can save you more in transaction costs than you'd pay in higher management fees over a year.

HXT and ZIU are plenty liquid for most retail investors, but they can't compete with XIU's sheer volume. If you plan to trade frequently or in size, XIU's liquidity is a feature, not a bug.

The Tax Battlefield: Where Your Account Type Changes Everything

This is where the choice gets really interesting. The structural differences between these ETFs have massive tax implications, but only if you hold them in a non-registered (cash or margin) account. Inside a registered account like an RRSP or TFSA, these differences are mostly irrelevant because investment growth is tax-sheltered.

Physical vs. Synthetic Replication

XIU and ZIU use physical replication. They buy and hold the actual 60 stocks in the index. When those companies pay dividends, the ETF collects them and passes them on to you as quarterly distributions. In a non-registered account, that dividend income is taxed every single year.

HXT uses a different playbook. It employs a synthetic replication strategy using total return swaps with large financial institutions, typically major Canadian banks. Instead of holding the stocks, HXT enters a contract where the bank agrees to pay the ETF the total return of the S&P/TSX 60 Index. In exchange, the ETF gives the bank cash as collateral.

The genius of this structure is that HXT receives no dividends. The value of the dividends is simply rolled into the ETF's share price (its Net Asset Value, or NAV). You pay no tax until you sell your shares, at which point the entire gain is treated as a capital gain. With Canada's 50% capital gains inclusion rate, this can be far more efficient than paying tax on fully-taxed dividend income year after year.

This introduces counterparty risk—the small but real risk that the bank providing the swap could default on its obligation. While regulations require collateral to be posted to mitigate this risk, it's a structural risk that physically-backed ETFs do not have. You are trading a small degree of risk for a significant tax advantage.

Beyond the Big 60: Broader Plays and Smarter Diversification

Is the TSX 60 even the right index for you? If its heavy concentration in financials and energy makes you nervous, you have other options. A broader index like the S&P/TSX Capped Composite, which includes around 219 stocks, offers a much more balanced exposure to the Canadian market.

ETFs like the iShares Core S&P/TSX Capped Composite Index ETF (XIC) and the BMO S&P/TSX Capped Composite Index ETF (ZCN) track this broader index. Both are incredibly cheap, with MERs of just 0.06%. They reduce your dependency on any single sector and give you a better picture of the Canadian economy as a whole.

For a completely different approach, consider the Invesco S&P/TSX 60 Equal Weight Index ETF (EQAL). Instead of weighting by size, this ETF gives every company in the TSX 60 an equal slice of the pie. This dramatically reduces the influence of the big banks and gives smaller companies in the index a much larger voice, preventing a few behemoths from dictating your returns.

"I see several trends playing out for the ETF market in 2025: The final catalyst is the ongoing adoption of model portfolios, where ETFs (both active and passive) remain one of the most efficient building blocks for strategists to express their portfolio views."

Noel Archard Global Head of ETFs and Portfolio Solutions, AllianceBernstein

Analysis

The decision framework is straightforward once you cut through the noise. The "best" ETF is a myth; the right ETF is a strategic choice. If you are a long-term, buy-and-hold investor using a registered account (TFSA/RRSP), HXT's rock-bottom fee is hard to ignore. The structural and liquidity differences are less important when your gains are tax-sheltered and you aren't trading frequently.

If you are investing in a non-registered account, the decision becomes a duel between HXT's tax efficiency and XIU's simplicity and liquidity. Are you comfortable with the counterparty risk of a swap structure to achieve tax deferral and convert income into more favorably taxed capital gains? If so, HXT is a powerful tool. If you prefer the simplicity of owning the underlying stocks directly and don't mind the annual tax drag from dividends, XIU or ZIU are your workhorses.

Finally, if you are an active trader or an institution deploying large sums, the conversation begins and ends with XIU. Its unparalleled liquidity means you can get in and out with minimal price impact. The slightly higher MER is simply the cost of doing business at that scale, a cost that is often dwarfed by the savings on the bid-ask spread.

Final Thoughts

Stop looking for a single right answer. Instead, define your mission. Are you a long-term accumulator in a tax-sheltered account? A tax-conscious investor in a cash account? Or a high-volume trader? Your identity as an investor dictates your choice.

For most, the decision will come down to a direct comparison of HXT's superior cost and tax structure against the deep liquidity and simplicity of XIU. ZIU stands as a solid, if less spectacular, middle-ground alternative. Before you commit any capital, check the latest details on the provider's website, as these figures can and do change.

Read the ETF Facts document. Understand the machine you're buying. In a game of inches like investing, choosing the right vehicle for the job isn't just a small detail—it's a critical edge.

Did You Know?

The iShares S&P/TSX 60 Index ETF (XIU) was launched on March 9, 1990. This makes it not only Canada's first exchange-traded fund but also one of the very first ETFs in the entire world, predating the well-known SPY ETF in the United States by nearly three years.

This article is for informational purposes only and should not be considered investment advice. The author is not a registered financial advisor and does not hold positions in the securities mentioned. All investment decisions should be made with the help of a qualified professional, taking into account your personal financial situation and risk tolerance. All information is believed to be accurate at the time of writing but may have changed.