Scotia's SITU ETF: A Steady Anchor in Rising Rates and U.S. Equity Exposure

The Scotia US Equity Index Tracker ETF (SITU:CA) has announced its June 2025 cash distribution, reinforcing its role as a low-cost vehicle for accessing U.S. equities. With a record date of June 25 and a payout on July 3, SITU continues to offer Canadian investors exposure to the Solactive GBS United States 500 CAD Index, a benchmark designed to mirror the performance of large-cap U.S. companies while mitigating currency risk for CAD investors. This article evaluates SITU's appeal in a rising rate environment and its suitability for long-term U.S. equity exposure.

The Dividend Factor in a Rising Rate World

Rising interest rates typically reduce the relative appeal of equities, as bonds become more competitive for income-focused investors. However, SITU's dividend yield of 1.26% (as of the latest data) provides a modest but stable income stream, aligning with the broader U.S. equity market's yield profile. While this may not outpace high-yield bonds in a sharply rising rate environment, the ETF's quarterly distribution of $0.076 per unit (annualized to ~$0.298) offers predictability in a volatile market.

Crucially, SITU's low expense ratio of 0.08%—among the lowest in its category—reduces frictional costs, ensuring more of the underlying index's returns flow to investors. In an era of rising rates and tighter monetary policy, such efficiency becomes a competitive advantage, especially for long-term holders.

Tracking the U.S. Equity Engine

SITU's performance hinges on its ability to replicate the Solactive GBS United States 500 CAD Index. This index includes the 500 largest U.S. companies by market capitalization, weighted by float-adjusted market cap, and is hedged to CAD. This structure offers two key benefits:
1. Currency Hedging: Canadian investors avoid the volatility of the U.S. dollar/CAD exchange rate, which can erode returns in a strong CAD environment.
2. Broad Market Exposure: The index's diversification across sectors—technology, healthcare, finance, and consumer discretionary—aligns with the U.S. economy's growth drivers.

In a rising rate environment, sectors like financials and industrials may benefit from economic expansion, while technology and healthcare offer defensive resilience. SITU's tracking of this diversified index positions investors to capitalize on both cyclical and secular trends.

Long-Term Appeal: A Core Holding for Patience

For investors with a multi-year horizon, SITU's combination of low cost, dividend income, and broad exposure makes it a compelling core holding. While U.S. equities face headwinds from rate hikes and geopolitical risks, their long-term growth trajectory—driven by innovation, corporate profitability, and demographic trends—remains intact.

Consider the following:
- Total Return Potential: Even a modest dividend yield can compound meaningfully over time. Pair this with the index's historical returns (the S&P 500 has averaged ~10% annually over decades), and SITU becomes a vehicle for capital appreciation.
- Low Cost = Long-Term Advantage: Over a 10-year horizon, SITU's 0.08% fee could save investors thousands compared to actively managed alternatives with 1%-2% expense ratios.

Risks and Considerations

No investment is without risks. SITU's performance is tied to U.S. equities, which could underperform if the Federal Reserve's rate hikes trigger a recession. Additionally, while currency hedging protects against CAD strength, it may also limit gains if the U.S. dollar appreciates. Investors should also be aware of tax implications, as ETF distributions may be taxed as income.

Investment Recommendation

SITU is best suited for investors seeking:
1. Low-cost, broad U.S. equity exposure with CAD hedging.
2. Steady income through quarterly distributions.
3. Long-term growth aligned with the U.S. economy's trajectory.

For portfolios already overweight in Canadian equities or fixed income, SITU provides diversification. However, it should not be over-concentrated: consider it a core holding alongside other asset classes and geographies.

Final Take

In a world of rising rates and market uncertainty, SITU offers a disciplined way to participate in U.S. equity markets without overpaying for access. Its blend of income, diversification, and cost efficiency makes it a pragmatic choice for long-term investors. As the adage goes: “The best time to invest is when you have money and nothing better to do with it.” For those with a patient mindset, SITU is a solid “nothing better to do” option.

Disclaimer: Past performance does not guarantee future results. Investors should conduct their own research or consult a financial advisor before making investment decisions.