CanETF Portfolio October Update: Sea of Red

Market Highlights

Positive returns were tough to come by in October. All the representative ETFs in the table below finished the month in the red. Equities sold off by mid-to-high single digits, bonds were modestly negative, and REITs and preferreds were in between. The selloff significantly took down the year to date returns, and the U.S. is the only stock market in the green (SPY).

In other news, the Bank of Canada raised the overnight rate by 0.25% to 1.75% on October 24.

NameTickerOctober 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-6.26%-4.98%
BMO MSCI EAFE Index ETFZEA-6.14%-4.71%
BMO MSCI Emerging Markets Index ETFZEM-6.80%-11.94%
iShares Core Canadian Universe Bond Index ETFXBB-0.64%-1.08%
iShares Canadian Corporate Bond Index ETFXCB-0.68%-0.80%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.42%0.23%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-2.83%-0.99%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-3.40%4.07%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY-6.84%2.89%
Vanguard FTSE Developed Markets ETFVEA-8.51%-10.00%
Vanguard FTSE Emerging Markets ETFVWO-7.60%-15.76%
iShares Core U.S. Aggregate Bond ETFAGG-0.78%-2.41%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-1.89%-5.06%
Vanguard Short-Term Corporate Bond ETFVCSH-0.05%0.10%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-1.68%0.80%
iShares U.S. Preferred Stock ETFPFF-2.19%-1.12%
Fidelity® MSCI Real Estate ETFFREL-2.92%-0.95%
USD/CAD1.52%4.76%

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

Monthly Portfolio Activity

October BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,054.74$2,341.41($713.33)
PFF$742.60$1,445.60$703.00
VWO$820.00$757.20($62.80)
FREL$481.40$468.20($13.20)
USD RRSP Total$5,098.74$5,012.41($86.33)-1.69%
CAD Total$11,600.32$11,587.31($13.01)-0.11%

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

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.15%
USD RRSP
Cash$3,077.0826.56%
PFF$1,899.8116.40%
VWO$995.118.59%
FREL$615.315.31%
USD RRSP Total$6,587.3156.85%
Grand Total (CAD at $1.3142 per USD as of 10/31/2018)$11,587.31100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF40$37.13$36.14$0.159159($33.23)-2.24%-0.29%
VWO20$41.00$37.86$0.4746($53.31)-6.50%-0.46%
FREL20$24.07$23.41$0.000($13.20)-2.74%-0.11%

Among the CanETF Portfolio‘s holdings, only Fidelity MSCI Real Estate ETF (FREL) ended the month above the purchase price ($23.41 vs. $22.00 paid in February). On a total return basis, the first batch of iShares U.S. Preferred Stock ETF (PFF) purchased in January is also in the green thanks to the distributions earned ($36.14 + $1.59 in dividends vs. $37.64 ). Finally, the September purchase of Vanguard FTSE Emerging Markets ETF (VWO) turned out to be early, although the distribution paid out this month of $9.49 ($0.4746 per share * 20 shares) offsets some of the decline the ETF has experienced.

The Portfolio benefitted from the Canadian dollar weakening relative to the U.S. dollar, since the USD RRSP balance is translated at a more favourable exchange rate. This currency translation offset much of the loss from the ETF holdings and the Portfolio ultimately recorded a very small negative return for the month.

Trade Summary

CanETF Portfolio Trade #4 was executed on October 3rd. It was the first add-on purchase, with 20 more shares of iShares U.S. Preferred Stock ETF (PFF) joining the fold. The timing could have been a bit better as these shares are sitting on a small loss, but their contribution to the income of the Portfolio will be welcome.

Looking Ahead

It may go without saying, but the field of potential purchases has widened significantly. Prior monthly updates noted a sizable sell-off was standing in the way of building out the Portfolio further. There are now more compelling valuations across most asset classes.

Of particular interest are Canadian preferred shares and international developed equities. Canadian preferreds held quite steady all year in a narrow trading range until the recent selloff. Now offering a higher yield, the Canadian preferred share market is appealing because of the existence of both classic perpetual issues which move inversely with interest rates and fixed-reset issues which move with interest rates, giving rate sensitivity diversification within the asset class.

CPD 10312018

International developed equities have more favourable valuations than the U.S. and are a strong candidate to build out the equity allocation from the sole emerging markets holding currently in place.

VEA 10312018

Elsewhere, Canadian stocks are getting closer to offering attractive valuations, while U.S. stocks still have further to go. Bonds are more attractive than in the past, but not yet compelling with plenty more monetary tightening still to come.

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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