CI Morningstar Canada Value Index ETF: A Defensive Income Play in Volatile Markets

The CI Morningstar Canada Value Index ETF (FXM.TO) has announced a 75.49% surge in its June dividend to CAD 0.2341 per unit, marking a significant milestone for income-focused investors. With a forward yield of 3.29% and a 16.06% average dividend growth rate over three years, the ETF's recent payout underscores its potential as a resilient income vehicle amid market turbulence. However, its valuation, risk profile, and exposure to undervalued Canadian equities demand careful scrutiny.

Valuation Attractiveness: A Value Tilt in a Volatile Climate

FXM.TO tracks the Morningstar Canada Dividend Growth Index, which targets Canadian equities with a focus on dividend-paying firms demonstrating sustainable payout growth. This dividend-weighted approach inherently tilts toward undervalued stocks, as companies with higher dividend growth often trade at discounts relative to their earnings or cash flow potential.

The ETF's current price of CAD 25.45 (as of June 21, 2025) aligns with its NAV, but investors must consider market volatility. Equity markets have faced headwinds this year, with the TSX down 3.2% year-to-date, driven by geopolitical risks and shifting interest rate expectations. For defensive investors, FXM.TO's value orientation could buffer against broader declines, as value stocks historically outperform in uncertain environments.

Dividend Sustainability: Growth Amid Fluctuations

While the June dividend's 75.49% jump from March's CAD 0.1334 is striking, the ETF's payout history reveals volatility. For instance, the March 2025 dividend dropped 25.89% from its December 2024 level of CAD 0.18. Such swings reflect the index's responsiveness to underlying corporate performance and sector dynamics.

However, the long-term trend is upward: since 2012, dividends have risen by an average of 16.06% annually, buoyed by companies in sectors like financial services and utilities, which often prioritize stable dividends. Morningstar's methodology screens for firms with three years of dividend growth, reducing the risk of abrupt cuts. Still, investors must acknowledge that no dividend is guaranteed, especially in a recessionary scenario.

Cost Efficiency: MER and Risk in Context

FXM.TO's MER of 0.46% (as of June 2025) is competitive for a Canadian equity ETF, especially one requiring active index management. This fee structure ensures that 95.4% of returns flow to investors, a critical advantage over actively managed funds, which often charge 1% or higher.

The ETF's risk profile, measured by a 10-year standard deviation of returns, aligns with broader Canadian equity market volatility. While not a “defensive” asset class, its focus on dividend-paying firms—typically in stable sectors—offers a lower beta than pure growth equity ETFs. This balance makes FXM.TO suitable for investors seeking income without excessive volatility.

Market Conditions: A Case for Defensive Income

In today's environment, where bond yields remain subdued and equity markets oscillate, FXM.TO's 3.29% yield provides a compelling income alternative. Its value tilt also positions it to benefit if the market rotation toward undervalued sectors continues.

Consider this: the Bank of Canada's pause on rate hikes has reduced the threat of margin compression for dividend-paying firms, while a potential economic slowdown could favor stable utilities and consumer staples—sectors well-represented in the index.

Investment Considerations

1. Holdings Transparency: While FXM.TO's exact holdings aren't disclosed, its dividend-weighted index methodology suggests exposure to companies like Toronto-Dominion Bank (TD.TO), Enbridge (ENB.TO), and Brookfield Renewable (BEP.TO)—firms with histories of consistent payouts.
2. Tax Efficiency: As an ETF, FXM.TO avoids the distribution of deferred capital gains common in mutual funds, making it tax-efficient for Canadian investors.
3. DRIP Option: Enrollment in the CI Distribution Reinvestment Plan allows compounding of dividends, boosting long-term returns.

Risks to Monitor

• Dividend Cuts: A prolonged economic downturn could force companies to reduce payouts, impacting the ETF's yield.
• Valuation Compression: If the TSX's value sector underperforms, FXM.TO's price could lag growth equities.
• MER Increases: While unlikely, fund costs could rise if the ETF's AUM shrinks or management adjusts its strategy.

Conclusion: A Balanced Income Play

For income investors willing to tolerate moderate volatility, FXM.TO offers a compelling blend of yield, growth, and diversification. Its 3.29% dividend yield, sustainable payout trends, and cost-effective structure make it a strong contender in a yield-starved market. However, investors should pair this ETF with broader equity or fixed-income holdings to balance risk.

As markets navigate uncertainty, FXM.TO's focus on undervalued Canadian dividend growers positions it as a defensive income play—ideal for those prioritizing steady payouts without excessive exposure to growth-driven volatility.

Final Note: Always consult the fund's latest Management Report of Fund Performance (MRFP) for updated risk metrics and MER details.