It seemed like the first month of the CanETF Portfolio would pass silently, with no trades and a portfolio full of cash earning nothing. Then, on the third last day of the month, an opportunity presented itself and 20 shares of the iShares U.S. Preferred Stock ETF (PFF) were purchased. They went on to decline a bit further, but a trade was made and the portfolio has some real investments.
The following table shows market returns using representative ETFs:
|Ticker||January 2018 Return|
|BMO S&P/TSX Capped Composite Index ETF||ZCN||-1.39%|
|BMO MSCI EAFE Index ETF||ZEA||2.89%|
|BMO MSCI Emerging Markets Index ETF||ZEM||6.17%|
|iShares Core Canadian Universe Bond Index ETF||XBB||-0.83%|
|iShares S&P/TSX Canadian Preferred Share Index ETF||XCB||-0.30%|
|Vanguard Canadian Short-Term Corporate Bond Index ETF||VSC||-0.07%|
|iShares S&P/TSX Canadian Preferred Share Index ETF||CPD||1.61%|
|Vanguard FTSE Canadian Capped REIT Index ETF||VRE||-1.29%|
|SPDR® S&P 500 ETF||SPY||5.71%|
|Vanguard FTSE Developed Markets ETF||VEA||4.82%|
|Vanguard FTSE Emerging Markets ETF||VWO||8.43%|
|iShares Core U.S. Aggregate Bond ETF||AGG||-1.14%|
|iShares iBoxx $ Investment Grade Corporate Bond ETF||LQD||-1.22%|
|Vanguard Short-Term Corporate Bond ETF||VCSH||-0.43%|
|iShares iBoxx $ High Yield Corporate Bond ETF||HYG||0.43%|
|iShares U.S. Preferred Stock ETF||PFF||-1.34%|
|Fidelity® MSCI Real Estate ETF||FREL||-2.71%|
Source: Morningstar.ca NAV returns for ETFs; Bank of Canada Daily Exchange Rates for currency
The Portfolio missed out on gains from foreign equities, but benefitted from avoiding fixed income and Canadian equities.
At Davos, Ray Dalio said “If you’re holding cash, you’re going to feel pretty stupid.” A sentiment soon echoed by BlackRock’s Larry Fink. Indeed, holding so much cash meant missing out on strong gains in some assets in January.
On January 11, Brent crude hit $70 for the first time since 2014. For the whole month of January, U.S. monthly oil output average 10 million barrels per day for the first time since 1970.
On January 17, the Bank of Canada hiked the policy interest rate to 1.25%. Meanwhile, the ECB lowered its QE to 30B from 60B effective 2018.
Interest rates made sizable advances in January and over the past several months. As the following chart shows, short term U.S. interest rates have headed higher than the 10 year, compressing the term premium and flattening the yield curve.
Rates are up in Canada as well, with the 5 year Government of Canada benchmark yield surpassing 2%.
Bonds look relatively more attractive than one month ago, but yields (and more importantly, real yields) need to move up further for if they are to become compelling buy.
Monthly Portfolio Activity
|Beginning Value||Ending Value||Change ($)||Change (%)|
|USD RRSP Total||$5,000.00||$4,999.60||-$0.40||-0.01%|
|Grand Total (CAD at 1.2293 per USD as of 1/31/2018)||$11,272.50 CAD||$11,146.01 CAD||-$126.49||-1.12%|
The decline in the USD relative to the CAD is the main reason for the negative return in January. The Portfolio turned in a loss even on a constant currency basis as PFF decline modestly from the purchase price.
Current Portfolio Allocation and Balance
|Current Value (In CAD)||Current Allocation|
|Cash (USD translated to CAD)||$5,221.08||46.84%|
|PFF (USD translated to CAD)||$924.93||8.30%|
|USD RRSP Total in CAD||$6,146.01||55.14%|
|Grand Total (CAD at 1.2314 per USD as of 1/31/2018)||$11,146.01 CAD||100.00%|
Performance and Contribution
|Shares||Beginning Price||Ending Price||Income||Change in Value||Return||Contribution|
Equity valuations are even more stretched, with the exception of Canada. Relative valuations in emerging markets are favourable, but the large advance since the February 2016 lows beckons for waiting for a retracement of some sort. There is a need for a pullback in varying degrees before committing capital to the various equity markets.
Short term corporate bonds may be appealing soon if interest rates continue to climb. Likewise, REITs in the U.S. will be interesting if they continue to sell off. Interest rate sensitive assets may provide buying opportunities sooner than later.
The CanETF Portfolio is not meant to be taken as investment advice. Please conduct due diligence on any ETF investment you are considering, including but not limited to a review of the prospectus, underlying benchmark methodology (if applicable), portfolio characteristics, holdings, performance since inception, role in your existing portfolio, and outlook for future performance.