CanETF Portfolio January 2018 Update: One Month In

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.

Market Highlights

The following table shows market returns using representative  ETFs:

 TickerJanuary 2018 Return
Canadian ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-1.39%
BMO MSCI EAFE Index ETFZEA2.89%
BMO MSCI Emerging Markets Index ETFZEM6.17%
iShares Core Canadian Universe Bond Index ETFXBB-0.83%
iShares S&P/TSX Canadian Preferred Share Index ETFXCB-0.30%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.07%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD1.61%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-1.29%
U.S. ETFs
SPDR® S&P 500 ETFSPY5.71%
Vanguard FTSE Developed Markets ETFVEA4.82%
Vanguard FTSE Emerging Markets ETFVWO8.43%
iShares Core U.S. Aggregate Bond ETFAGG-1.14%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-1.22%
Vanguard Short-Term Corporate Bond ETFVCSH-0.43%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.43%
iShares U.S. Preferred Stock ETFPFF-1.34%
Fidelity® MSCI Real Estate ETFFREL-2.71%
Currency
USD/CAD-2.01%

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.

2-5-10-year-treasury-01312018

Rates are up in Canada as well, with the 5 year Government of Canada benchmark yield surpassing 2%.

BoC-5-year-01312018
Source: Bank of Canada

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 ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash (CAD)$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash (USD)$5,000.00$4,247.20-$752.80
PFF (USD)$0.00$752.40$752.40
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
CAD TFSA
Cash (CAD)$5,000.0044.86%
USD RRSP
Cash (USD translated to CAD)$5,221.0846.84%
PFF (USD translated to CAD)$924.938.30%
USD RRSP Total in CAD$6,146.0155.14%
Grand Total (CAD at 1.2314 per USD as of 1/31/2018)$11,146.01 CAD100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeChange in ValueReturnContribution
PFF20$37.64$37.62$0.00-$0.40-0.05%-0.004%

Trade Summary

DateTypeTickerSharesCommissionTotalLocation
1/29/2018BuyPFF20$0.00$752.80USD RRSP

Looking Ahead

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.

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