What we’re looking for
Canadian-listed mutual funds and ETFs that offer exposure to companies at reasonable valuations.
The screen
The extraordinary rise of the Magnificent Seven, the small cluster of mega-capitalization technology and growth stocks that dominate both U.S. and global benchmarks – has left investors in a familiar position: benefiting from impressive momentum, but increasingly wary of how much future success is already priced in.
Experienced Canadian investors will recall the saga of Nortel, which at its peak accounted for 35 per cent of the S&P/TSX Composite Index, only to disappoint greatly in the following years.
The Magnificent Seven’s shares have been propelled by robust earnings, dominant platforms and optimism surrounding artificial intelligence. Yet their valuations now sit well above long-term averages, with price-to-earnings and price-to-sales multiples that assume years of uninterrupted growth.
For Canadian investors holding broad U.S. index ETFs or global mandates, this concentration risk is material, as a handful of companies can dictate portfolio outcomes. That raises an important question: What happens if the story changes? When valuations are stretched, even modest earnings disappointments, higher rates or shifting investor sentiment can have an outsized impact on returns. Paying a high premium for growth leaves little margin for error.
Today, we turn our attention to Canadian-domiciled mutual funds and ETFs that have decidedly steered clear of these types of companies and instead pursue firms with more reasonable valuations.
To find these investments, I used Morningstar’s classic “style box” methodology, looking for funds or ETFs that hold companies that, on aggregate, tilt toward lower valuations using core fundamental measures such as price-to-earnings, price-to-book, price-to-sales, price-to-cash flow, dividend yield and buyback yield.
These classic measures are aggregated at the portfolio level and compared to the broader universe of funds to determine the style tilt of a given portfolio. I applied this style box to all Canadian-domiciled funds and ETFs and further screened for funds and ETFs that
- have received a Morningstar Rating for funds, or “Star Rating,” of five stars. This indicates that the fund has outperformed its peers historically on an after-fee risk-adjusted basis. The objective rating uses 10 years of performance history if available, putting the greatest emphasis on the latest three years of performance data;
- have received a Morningstar Medalist Rating of bronze, silver or gold, indicating Morningstar’s view that the fund has the ingredients necessary to outperform peers on an after-fee basis in the future. This assessment is based on our analysts’ review of the parent (the stewardship qualities of the fund company), people (the experience and track record of the portfolio management team) and process (the robustness and repeatability of the day-to-day management of the portfolio).
Where available, fee-based share classes of mutual funds were considered (which excludes the cost of advice and distribution) to ensure some comparability with ETFs, which have no embedded advice fee. Only funds that have allowed Morningstar to disclose recent holdings (using Sept. 30, 2025, as the cut-off) were considered in this screen.
What we found
The funds and ETFs that qualified are listed in the table accompanying the article inclusive of tickers, categories, MERs, Morningstar ratings, trailing returns, inception dates and a sampling of valuation ratios. Investors are urged to first consider the asset class and category to which each ETF belongs, given that Morningstar’s ratings are meant to be observed relative to category peers.
Though the introduction to this article did speak of U.S. indexes, I caution readers that many of these funds are in categories that don’t exclusively invest in U.S. equities, largely denoted by the category name.
Ian Tam, CFA, is director of investment research for Morningstar Canada.