CanETF Portfolio March 2018 Update: Equity Losses Continue

March was a quiet month for trade activity in the CanETF Portfolio, but plenty happened in the markets.

Market Highlights

NameTickerMarch 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-0.15%-4.49%
BMO MSCI EAFE Index ETFZEA-0.38%1.65%
BMO MSCI Emerging Markets Index ETFZEM-0.09%4.73%
iShares Core Canadian Universe Bond Index ETFXBB0.77%0.08%
iShares Canadian Corporate Bond Index ETFXCB0.50%0.17%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.05%0.16%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-0.76%-0.26%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.66%0.97%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY-2.55%-0.78%
Vanguard FTSE Developed Markets ETFVEA-0.47%-1.13%
Vanguard FTSE Emerging Markets ETFVWO-1.19%2.09%
iShares Core U.S. Aggregate Bond ETFAGG0.62%-1.49%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.31%-2.97%
Vanguard Short-Term Corporate Bond ETFVCSH0.03%-0.79%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-0.58%-1.13%
iShares U.S. Preferred Stock ETFPFF0.49%-0.64%
Fidelity® MSCI Real Estate ETFFREL3.77%-6.06%
USD/CAD0.66%2.78%

Source: Morningstar.ca NAV returns for ETFs; Bank of Canada Daily Exchange Rates for currency

Worries over potential for a trade war shook Canadian markets early in the month by the announcement of steel and aluminum tariffs coming from the United States. Fortunately, fears were quickly extinguished when Canada turned out to be exempt.

Next came the tech selloff, which began at Facebook and soon extended to other high flying information technology stocks. In the end, the first quarter of 2018 was a challenging one for equities as losses mounted in most markets.

In monetary policy, the Federal Reserve raised the overnight rate to a range of 1.50%-1.75%. Meanwhile, assets continue to roll off of the balance sheet as part of the Fed’s policy normalization. The effect is now clearly visible in the following chart although still minute compared to the expansion of the balance sheet since the Great Financial Crisis.

 Federal Reserve Total Assets 03282018
Monthly Portfolio Activity

March BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,810.99$3,819.66$8.67
PFF$750.60$751.20$0.60
FREL$447.20$457.60$10.40
USD RRSP Total$5,008.79$5,028.46$19.670.39%
CAD Total$11,415.76$11,483.70$67.940.60%

Income was earned this month from both PFF (pays monthly) and FREL (pays quarterly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.54%
USD RRSP
Cash$4,925.0742.89%
PFF$968.608.43%
FREL$590.035.14%
USD RRSP Total$6,483.7056.46%
Grand Total (CAD at $1.2894 per USD as of 3/29/2018)$11,483.70100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.53$37.56$0.172386$4.050.54%0.04%
FREL20$22.36$22.88$0.261$15.623.49%0.14%

It is encouraging that the best return from Market Highlights table came from portfolio holding FREL, while PFF also had a positive return. Meanwhile, avoiding equities once again helped avoid losses but the Portfolio missed out on positive returns from bonds.

The CAD continued to weaken relative to the USD. Put another way, the U.S. dollar denominated RRSP got a boost in Canadian dollar terms. Overall, the CanETF Portfolio recorded a positive return in March due to both positive performance from both holdings and the positive currency translation.

With the first quarter of 2018 now in the books, the CanETF Portfolio has its first quarterly return. In line with the stated goal of this benchmark free strategy, the Portfolio managed a positive return n the quarter.

Trade Summary

No trades were placed in March.

Looking Ahead

Economic fundamentals were so rosy heading into 2018 that the thought of buying stocks with fresh funds was an uncomfortable idea. Over the longer term, the Portfolio can be expected to have a substantial allocation to equities, but this will be built up when the price is right. That said, an opportunity for an equity ETF purchase may be near if selling pressure continues.

Canadian preferred shares could very well be the next investment for the Portfolio. Because the majority of Canada’s market is made up of fixed-reset preferred shares, rising interest rates are a positive. The reverse is true in the U.S. where preferred shares are expected to sell off with rising interest rates. Together, owning Canadian and U.S. preferreds could be compelling from a diversification standpoint assuming that Canadian and U.S. interest rates move mostly together.

As well, the appeal of putting some of the large cash balance into short term bonds is tempting, especially now that yields are higher.

BoC 1-3 Year Average Bond Yield 03282018
Government of Canada Marketable Bonds – Average Yield – 1 to 3 Year
Source: Bank of Canada

The attractiveness of short term bonds in this environment is that their sensitivity to rising interest rates is less than longer duration debt. Time will tell whether holding out for higher yields or initiating a position now is the right move.

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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