CanETF Portfolio September 2018 Update: Trade Progress and Fed Tightening

Market Highlights

On September 17, the U.S. government placed new tariffs on China, further escalating trade tensions between the two countries.

Fortunately, even bigger trade news came this month (at least for Canadians). Late on September 30, Canada and the U.S. agreed to a last-minute trade deal for Canada to join a new NAFTA, to be called USMCA – United States Mexico Canada Agreement. This follows last month’s deal between the U.S. and Mexico.

On September 26, the U.S. Federal Reserve raised the policy interest rate to a range of 2.00%-2.25%. One more hike is expected in 2018. Short term yields in the U.S. continue a notable climb:

U.S. 1 Year Treasury Yield 09272018

NameTickerSeptember 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-0.89%1.36%
BMO MSCI EAFE Index ETFZEA-0.08%1.52%
BMO MSCI Emerging Markets Index ETFZEM-1.85%-5.51%
iShares Core Canadian Universe Bond Index ETFXBB-0.99%-0.44%
iShares Canadian Corporate Bond Index ETFXCB-0.84%-0.12%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.17%0.66%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-0.43%1.90%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-1.33%7.73%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY0.56%10.45%
Vanguard FTSE Developed Markets ETFVEA0.74%-1.63%
Vanguard FTSE Emerging Markets ETFVWO-1.30%-8.83%
iShares Core U.S. Aggregate Bond ETFAGG-0.66%-1.64%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-0.34%-3.23%
Vanguard Short-Term Corporate Bond ETFVCSH-0.07%0.15%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.51%2.52%
iShares U.S. Preferred Stock ETFPFF-1.46%1.10%
Fidelity® MSCI Real Estate ETFFREL-2.59%2.03%
USD/CAD-0.84%3.19%

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

Gains were hard to come by in September, with only three of the above ETFs generating positive returns.

Monthly Portfolio Activity

September BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,839.05$3,054.74($784.31)
VWO$820.00$820.00
PFF$758.80$742.60($16.20)
FREL$506.00$481.40($24.60)
USD RRSP Total$5,103.85$5,098.74($5.11)-0.10%
CAD Total$11,663.07$11,600.32($62.75)-0.54%

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

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.10%
USD RRSP
Cash$3,954.3634.09%
VWO$1,061.499.15%
PFF$961.308.29%
FREL$623.175.37%
USD RRSP Total$6,600.3251.53%
Grand Total (CAD at $1.2945 per USD as of 9/28/2018)$11,600.3294.63%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
VWO20$39.94$41.00$0.0000$21.202.65%0.18%
PFF20$37.94$37.13$0.160748($12.99)-1.71%-0.11%
FREL20$25.30$24.07$0.564($13.32)-2.63%-0.11%

Thanks to the timing of the purchase of VWO in the month, the position contributed positively to performance despite the ETF having a negative return for the period. The other two holdings declined and the net result is a small overall loss from the ETF holdings.

The CAD strengthened relative to the USD in September and currency translation caused the bulk of the monthly loss in the value of the CanETF Portfolio.

Trade Summary

CanETF Portfolio Trade #3 took place on September 10 and 20 shares of Vanguard FTSE Emerging Markets ETF (VWO) were bought. The timing has turned out to be good thus far, but this is an asset class that is likely to have more surprises in store.

Looking Ahead

Adding some emerging market stocks to an allocation of mostly cash, some U.S. preferred shares and U.S. REITs was a key step in diversifying the Portfolio. But the classic building blocks of developed market stocks and bonds are still nowhere to be found. This is valuation driven and time will tell when a bargain will arise. Bonds have become more attractive throughout the year as interest rates have risen and some of the feared increase in rates is behind us. Meanwhile, developed market stocks are near all time highs and in a very long bull run. For now, there is no obvious next target for purchase, and no intention to sell down the current holdings. Action will be taken when an opportunity arises.

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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