CanETF Portfolio August 2018 Update: Emerging Markets Down Again

Market Highlights

August provided a number of notable events and milestones:

The Bank of England raised interest rates on August 2 to 0.75%, the highest since 2009.

The S&P 500 bull market became the longest in history on August 22.

Meanwhile, emerging markets equities continue to face pressure, with crumbling currencies in several countries contributing to the latest round of weakness and leading the MSCI EM index to nearly bear market territory.

The United States and Mexico reached a tentative agreement on a new trade deal on August 27, and ongoing negotiations between the U.S. and Canada will determine the fate of NAFTA.

NameTickerAugust 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-0.82%2.27%
BMO MSCI EAFE Index ETFZEA-1.94%1.60%
BMO MSCI Emerging Markets Index ETFZEM-2.40%-3.72%
iShares Core Canadian Universe Bond Index ETFXBB0.78%0.56%
iShares Canadian Corporate Bond Index ETFXCB0.82%0.73%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.42%0.83%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD0.77%2.34%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.17%9.18%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY3.24%9.84%
Vanguard FTSE Developed Markets ETFVEA-1.89%-2.35%
Vanguard FTSE Emerging Markets ETFVWO-3.51%-7.63%
iShares Core U.S. Aggregate Bond ETFAGG0.64%-0.99%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.30%-2.90%
Vanguard Short-Term Corporate Bond ETFVCSH0.50%0.22%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.70%2.00%
iShares U.S. Preferred Stock ETFPFF1.09%2.59%
Fidelity® MSCI Real Estate ETFFREL2.50%4.74%
USD/CAD0.29%4.07%

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

With the exception of the U.S., equities delivered negative returns in August, while bonds and preferred shares were in positive territory.

After five months of negative monthly returns (February to June), emerging markets equities (as measured by VWO) gained in July. The loss in August more than offset that gain and this asset class is currently the leading candidate for a new investment for the Portfolio. Though the sell-off has been far from unwarranted, at a certain point valuations and a willingness to buy when the situation looks most bleak compel the purchase of assets that are most disliked by the market.

Monthly Portfolio Activity

August BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,835.52$3,839.05$3.52
PFF$751.80$758.80$7.00
FREL$493.60$506.00$12.40
USD RRSP Total$5,080.92$5,103.85$22.920.45%
CAD Total$11,613.83$11,663.07$49.240.42%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0042.87%
USD RRSP
Cash$5,011.8742.97%
PFF$990.618.49%
FREL$660.585.66%
USD RRSP Total$6,663.0757.13%
Grand Total (CAD at $1.3055 per USD as of 8/31/2018)$11,663.07100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.59$37.94$0.176215$10.521.40%0.09%
FREL20$24.68$25.30$0.000$12.402.51%0.11%

U.S. preferred shares (PFF) and REITs (FREL) continue to perform well for the CanETF Portfolio.

The CAD weakened relative to the USD in August, contributing a little more than half of the gain in CAD for the CanETF Portfolio.

Trade Summary

No trades were placed in August.

Looking Ahead

The valuation and mean reversion measures that power the Research Affiliates Asset Allocation Interactive forecast of future asset returns paints a dim view of prospective returns for investors. The expected 10 year annualized return of an all country equity portfolio is only 4.8% nominal and an unappealing 2.6% real (in USD). Only emerging markets equities can be expected to generate a substantial return according to their methodology.

RAAAI-08312018
Source: Research Affiliates Asset Allocation Interactive

This both supports the caution of holding off on buying equities at current valuations and the choice to elevate emerging markets to top candidate for a new purchase. Even though the clouds above emerging markets are darker than other asset classes, a long term perspective and a focus on valuations makes it possible to find the silver lining.

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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