CanETF Portfolio Trade #3: Emerging Markets Bear Market Buy

Emerging markets equities have been on a slide since the early 2018 peak, even falling so far as to enter a bear market.

VWO 09102018

The valuation on both an absolute basis and relative to other markets has finally become became attractive enough to warrant a purchase for the CanETF Portfolio. The earnings yield exceeds 8%, the cheapest valuation since the beginning of 2016. As the above chart shows, that was an excellent time to go long.

TSX SPX MXEA MXEF Trailing P/E 09102018

Given the setup, it was time to act and 20 shares of Vanguard FTSE Emerging Markets ETF (VWO) were purchased.

Trade 3 Order VWO

Trade 3 Filled VWO

Trade 3 Confirmation VWO

The timing worked out well with the purchase price of $39.94 only 3 cents above the day’s low. Not only was this a new 52-week low for VWO, but it was the first time under $40 since mid-2017.

At nearly $800 USD and over $1,000 CAD, the position is a sizable 9% allocation in the Portfolio. This purchase increases the pressure to spend more of the Portfolio’s unused cash balance to buy things that will offset the volatility common to emerging market stocks. Fortunately, the two existing holdings, PFF and FREL, which hold U.S. preferred shares and U.S. REITs, respectively, have done well during this most recent emerging markets sell-off.

 Current ValueCurrent Allocation
CAD TFSA
Cash$5,000.0042.77%
USD RRSP
Cash$3,997.2434.19%
VWO$1,052.519.00%
PFF$979.858.38%
FREL$659.995.65%
USD RRSP Total$6,689.6057.23%
Grand Total (CAD at $1.3163 per USD as of 9/10/2018)$11,689.60100.00%

There is no doubt that VWO could fall further from here. As enticing as this drop below $40 has been, the ETF fell below $30 in early 2016. But instead of trying to time the market, this purchase recognizes the appealing valuation and accompanying return potential currently offered by emerging markets stocks. Should negative returns continue, there is some additional capacity to add to the position while keeping in mind the risk effect on the whole Portfolio.

Why VWO? With a low expense ratio of 0.14% giving access to 4655 stocks (Vanguard page as of 7/31/2018), this is an ideal ETF for broad, passive emerging markets exposure.

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.

2 Replies to “CanETF Portfolio Trade #3: Emerging Markets Bear Market Buy”

Leave a Reply

Your email address will not be published. Required fields are marked *