CanETF Portfolio July 2018 Update: Waiting Patiently…

Market Highlights

Two events stand out amid the continued trade disputes and quarterly earnings releases capturing much of market participants’ attention:

On July 1, the Mexican presidential election was won by Andres Manuel Lopez Obrador, known as AMLO.

The Bank of Canada raised the overnight rate target to 1.50% on July 11.

NameTickerJuly 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN1.15%3.11%
BMO MSCI EAFE Index ETFZEA1.53%3.61%
BMO MSCI Emerging Markets Index ETFZEM1.59%-1.36%
iShares Core Canadian Universe Bond Index ETFXBB-0.78%-0.22%
iShares Canadian Corporate Bond Index ETFXCB-0.57%-0.09%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.10%0.41%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD1.09%1.56%
Vanguard FTSE Canadian Capped REIT Index ETFVRE1.64%6.86%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY3.70%6.39%
Vanguard FTSE Developed Markets ETFVEA2.28%-0.49%
Vanguard FTSE Emerging Markets ETFVWO3.17%-4.27%
iShares Core U.S. Aggregate Bond ETFAGG0.03%-1.63%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD1.16%-3.19%
Vanguard Short-Term Corporate Bond ETFVCSH0.25%-0.28%
iShares iBoxx $ High Yield Corporate Bond ETFHYG1.15%1.29%
iShares U.S. Preferred Stock ETFPFF0.43%1.49%
Fidelity® MSCI Real Estate ETFFREL0.69%2.18%
USD/CAD-1.15%3.76%

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

Emerging markets equities, an area discussed last month as moving closer to an attractive valuation, delivered a solid return in July and made up some of the year to date loss. The bounce isn’t surprising given five straight months of negative returns, and the asset class remains intriguing due to the sizable valuation discount to developed market equities.

Canadian bonds delivered negative returns due to rising interest rates. The following chart shows rates are still shy of the year’s highs, but made a notable gain in July.

BoC 5-10 Year Average Bond Yield 07312018
Government of Canada Marketable Bonds – Average Yield – 5 to 10 Year
Source: Bank of Canada

U.S. interest rates were higher as well, but still managed positive returns as evidenced by the representative ETFs. Equity markets were strong overall and preferred shares delivered gains as well.

Monthly Portfolio Activity

July BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,831.64$3,835.52$3.88
PFF$745.00$751.80$6.80
FREL$476.20$493.60$17.40
USD RRSP Total$5,052.84$5,080.92$28.080.56%
CAD Total$11,653.58$11,613.83($39.75)-0.34%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.05%
USD RRSP
Cash$4,992.7042.99%
PFF$978.628.43%
FREL$642.525.53%
USD RRSP Total$6,613.8356.95%
Grand Total (CAD at $1.3017 per USD as of 7/31/2018)$11,613.83100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.71$37.59$0.194044$1.480.20%0.01%
FREL20$24.54$24.68$0.000$2.800.57%0.02%

FREL and PFF both sport modest gains for July, although PFF relied on the dividend distribution to generate a positive total return.

The CAD strengthened relative to the USD in July, after two months of weakness. This was the key factor for the negative return in CAD for the CanETF Portfolio, more than offsetting the positive returns from the two U.S. listed ETFs.

Trade Summary

No trades were placed in July.

Looking Ahead

Comments written one month ago in this space remain valid and the plan has not changed. At this stage in the cycle, buying small increments on dips that make valuations more attractive is the only sensible approach for the strategy. Some asset classes are a relatively small drop away from a desirable price, and their ETFs will be purchased should such an opportunity arise. A decline in price is not the only way an asset could become attractive. Alternatively, some decisively positive development could occur that raises the intrinsic value of the asset and is simultaneously ignored or underappreciated by the market. This latter scenario is less likely and more difficult to navigate, but warrants a watchful eye.

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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