The second month for the CanETF Portfolio brought a second trade, the purchase of 20 shares of the Fidelity® MSCI Real Estate Index ETF (FREL). Not only that, but a new milestone was reached when the Portfolio earned its first income, a distribution from the iShares U.S. Preferred Share ETF (PFF) holding purchased in January.
Positive returns were scarce in February, as shown by the market representative ETFs below:
|Name||Ticker||February 2018 Return||2018 YTD Return|
|Canadian Listed ETFs|
|BMO S&P/TSX Capped Composite Index ETF||ZCN||-3.00%||-4.35%|
|BMO MSCI EAFE Index ETF||ZEA||-0.82%||2.04%|
|BMO MSCI Emerging Markets Index ETF||ZEM||-1.26%||4.83%|
|iShares Core Canadian Universe Bond Index ETF||XBB||0.14%||-0.69%|
|iShares Canadian Corporate Bond Index ETF||XCB||-0.02%||-0.32%|
|Vanguard Canadian Short-Term Corporate Bond Index ETF||VSC||0.18%||0.11%|
|iShares S&P/TSX Canadian Preferred Share Index ETF||CPD||-1.09%||0.50%|
|Vanguard FTSE Canadian Capped REIT Index ETF||VRE||-0.36%||-1.64%|
|U.S. Listed ETFs|
|SPDR® S&P 500 ETF||SPY||-3.69%||1.82%|
|Vanguard FTSE Developed Markets ETF||VEA||-5.24%||-0.67%|
|Vanguard FTSE Emerging Markets ETF||VWO||-4.72%||3.31%|
|iShares Core U.S. Aggregate Bond ETF||AGG||-0.97%||-2.10%|
|iShares iBoxx $ Investment Grade Corporate Bond ETF||LQD||-2.07%||-3.27%|
|Vanguard Short-Term Corporate Bond ETF||VCSH||-0.39%||-0.82%|
|iShares iBoxx $ High Yield Corporate Bond ETF||HYG||-0.97%||-0.55%|
|iShares U.S. Preferred Stock ETF||PFF||0.21%||-1.13%|
|Fidelity® MSCI Real Estate ETF||FREL||-6.95%||-9.47%|
Source: Morningstar.ca NAV returns for ETFs; Bank of Canada Daily Exchange Rates for currency
The big story in February was the return of volatility in markets, triggered by new worries over rising inflation. Reuters elaborates on the topic. The chart below shows market inflation expectations are higher than they have been in several years. (The breakeven inflation rate is measured as the difference between the yield of a nominal bond and the inflation-linked bond of the same maturity.)
Markets sold off sharply, with the Dow Jones Industrial Average dropping over 1,000 points on February 5th for the first time ever (an relatively easier feat now that the Dow is as high as it is; this was not nearly the largest single day percentage drop). The Chicago Tribute has a useful summary.
The U.S. equity market shortly afterwards reached an official correction (10% drop from the last peak) and although markets recovered some of the losses, it was not before a new tone was set. Perhaps the most memorable remnant of the sell-off, is the catastrophic loss of the short volatility trade, highlighted by the liquidation of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV). Bloomberg details the carnage.
The Portfolio benefitted from not having equity exposure. Missing out on Canadian fixed income was a small negative as interest rates in Canada edged lower in the month. The sole holding going into the month, PFF, delivered a positive return thanks to the monthly distribution.
Monthly Portfolio Activity
|February Balance||Beginning Value||Ending Value||Change ($)||Change (%)|
|USD RRSP Total||$4,999.60||$5,008.79||$9.19||0.18%|
While the timing of the PFF purchase in late January was a bit early, the timing on FREL buy turned out to be solid as the ETF only briefly traded in the low $22/high $21 area. Nevertheless, the loss on PFF narrowed such that both the Portfolio’s positions had a positive return in February.
Current Portfolio Allocation and Balance
|Current Value (In CAD)||Current Allocation|
|Cash (USD translated to CAD)||$4,881.50||42.76%|
|PFF (USD translated to CAD)||$961.44||8.42%|
|FREL (USD translated to CAD)||$572.82||5.02%|
|USD RRSP Total in CAD||$6,415.76||56.20%|
|Grand Total (CAD at $1.2809 per USD as of 2/28/2018)||$11,415.76||100.00%|
The strengthening U.S. dollar helped the portfolio to a gain overall, as the USD denominated RRSP balance is translated to CAD at a higher rate.
The overall portfolio value in CAD is now above the inception value after a decline in January.
Performance and Contribution
|Shares||Beginning Price||Ending Price||Income||Return ($)||Return (%)||Contribution|
After a weak end to 2017 and negative January, U.S. REITs sold off sharply amid the volatility in the markets. The Portfolio seized the opportunity and 20 shares of Fidelity® MSCI Real Estate ETF (FREL) were purchased.
Equity valuations have reset, as the falling prices have not been joined by falling earnings. Further selling pressure may bring stocks to an attractive level for beginning to build a position. Most major markets look better than the U.S. on a valuation basis, and Canada’s P/E ratio has compressed more than other markets.
Trailing P/E, local currency
Bonds are arguably more attractive in the U.S. because of the negative return in February, but the higher nominal yields come with increased inflation expectations. Higher real yields are still needed to entice capital to this space.
Canadian preferred shares are another area of interest. The rate reset feature that exists in most Canadian issues gives the asset class a unique characteristic that can counteract the negative effect on rising interest rates in other parts of the portfolio.
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.