CanETF Portfolio December Update: 2018 Reflections (And A Bear Market)

Market Highlights

December was a nasty month for stocks and a terrific one for bonds, especially longer term government bonds which benefitted most from retreating interest rates.

Notable central bank activity included the ECB announcement of the end of asset purchases and the rate hike by the Federal Reserve to 2.25% – 2.50% (although the Federal Open Market Committee (FOMC) is now guiding to two hikes in 2019 rather than three previously).

But the biggest event of the month was no doubt the S&P 500 slipping into a bear market.

Meanwhile, the yield curve continues to ominously march towards inversion:

U.S. 10 Year Treasury Yield - 2 Year Treasury Yield 12282018

2019 will feature no shortage of market impacting developments, with unanswered questions around the U.S.-China trade conflict, monetary policy worldwide, oil oversupply, and Brexit among others on investors’ minds.

NameTickerDecember 2018 Return2018 Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-5.37%-8.84%
BMO MSCI EAFE Index ETFZEA-2.47%-5.98%
BMO MSCI Emerging Markets Index ETFZEM-0.56%-7.72%
iShares Core Canadian Universe Bond Index ETFXBB1.34%1.28%
iShares Canadian Corporate Bond Index ETFXCB0.99%0.58%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.59%1.58%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-1.64%-8.43%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-4.85%1.33%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY-8.98%-4.45%
Vanguard FTSE Developed Markets ETFVEA-5.32%-14.47%
Vanguard FTSE Emerging Markets ETFVWO-2.94%-14.57%
iShares Core U.S. Aggregate Bond ETFAGG1.82%-0.05%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD1.69%-3.76%
Vanguard Short-Term Corporate Bond ETFVCSH0.79%0.91%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-2.21%-1.93%
iShares U.S. Preferred Stock ETFPFF-1.53%-4.77%
Fidelity® MSCI Real Estate ETFFREL-7.94%-4.50%
USD/CAD2.56%8.74%

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

Monthly Portfolio Activity

December BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$3,719.55$3,719.55$0.00
CPD$1,284.00$1,253.00($31.00)
CAD TFSA Total$5,003.55$4,972.55($31.00)-0.62%
USD RRSP
Cash$2,352.57$2,377.82$25.25
PFF$1,407.20$1,369.20($38.00)
VWO$793.80$762.00($31.80)
FREL$490.20$447.80($42.40)
USD RRSP Total$5,043.77$4,956.82($86.95)-1.72%
CAD Total$11,712.27$11,734.64$22.380.19%

Income was earned from PFF (pays monthly but also paid a special year-end distribution this month), FREL (pays quarterly), and VWO (pays quarterly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,719.5531.70%
CPD$1,253.0010.68%
CAD TFSA Total$4,972.5542.37%
USD RRSP
Cash$3,243.8227.64%
PFF$1,867.8615.92%
VWO$1,039.528.86%
FREL$610.895.21%
USD RRSP Total$6,762.0957.63%
Grand Total (CAD at $1.3642 per USD as of 12/31/2018)$11,734.64100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF40$35.18$34.23$0.413720($21.45)-1.52%-0.18%
VWO20$39.69$38.10$0.2591($26.62)-3.35%-0.23%
FREL20$24.51$22.39$0.176($38.88)-7.93%-0.33%
CPD100$12.84$12.53$0.00($31.00)-2.41%-0.26%

The carnage in markets did not spare the Portfolio’s ETF holdings, and all four are in the red for December. Hardest hit was Fidelity MSCI Real Estate ETF (FREL) but the impact was lessened by the fact that it is the smallest of the holdings.

Trade Summary

No trades were placed in December.

2018 Reflections

In a declining market, such as the one we experienced in 2018, waiting patiently until an asset dips into attractive territory is often followed by wishing one had waited just a little bit longer. This was the common theme among the five trades (all buys) made for the CanETF Portfolio this past year.

Trades #1 and #4: iShares U.S. Preferred Stock ETF (PFF)

PFF 2018

The very first purchase in the CanETF Portfolio was 20 units of PFF at $37.64. These have gone on to earn $2.16 in income but are still in the red for the year thanks to a closing price of $34.23. 2018 return: ($1.25) or -3.31%.

The add-on purchase of 20 more units at $36.60 fared a little better, though it would have been better to wait longer. These collected $1.59 in income. 2018 return: ($0.48) or -1.32%.

Trade #2: Fidelity MSCI Real Estate ETF (FREL)

FREL 2018

Soon after the first PFF buy was the addition of 20 shares of FREL at $22.00. These were an excellent investment for most of the year, earning $1.24 in distributions and sitting on impressive price gains for most of the year. Unfortunately, December wreaked havoc on this position and FREL finished the year at $22.39. Still, the total return is very good especially given the returns of most asset classes in 2018. This is also the only ETF position with a gain for the year. 2018 return: $32.60 or 7.41%.

Trade #3: Vanguard FTSE Emerging Markets ETF (VWO)

VWO 2018

VWO hit a high of $50.98 in late January. Eager to add long-term exposure to emerging markets stocks, the dip into a bear market seemed like a good time. Of course, much lower prices were soon available. This holding offset some of the capital loss with $0.73 of income but shares ended the year at $38.10, a good bit below the purchase price of $39.94. 2018 return: ($22.13) or -2.77%.

Trade #5: iShares S&P/TSX Canadian Preferred Share Index ETF (CPD)

CPD 2018

It was a relief to put some of the CAD balance into an ETF investment, but once again the timing proved to be early. After waiting out a lengthy period in which CPD was eerily calm around $14.00-$14.25, $12.85 was enticing enough for a sizable position of 100 shares. Only one dividend distribution of $4.90 has been received thus far, so there is little to offset the fall to $12.53. 2018 return: ($27.10) or -2.11%.

One consistent positive has been the growing income earned by the Portfolio. While still modest, distribution income ramped up throughout the year for a total of $94.13 USD and $4.90 CAD. This represents a yield of just over 1% and should grow handsomely as more of the cash balance is invested and existing holdings pay out for a full period.

Fortunately, the Portfolio in aggregate was successful in achieving the mandate of positive returns even in negative markets, as the sizable strengthening of the USD means the USD-denominated portion of the portfolio was translated at a much more favourable rate at the end of the year ($1.3642 CAD for every USD) than at the start of the year ($1.2545).

USDCAD 2018

All together, the total Portfolio was valued at $11,146.01 CAD at inception (January 1, 2018). It ended 2018 (the first year in existence) worth $11,734.64, an increase of $462.14 or 4.10%. In these terms, the Portfolio accomplished its objective and generated a reasonable positive return. What is remarkable about this return is that it exceeds all of the broad markets as measure in the first table in this update.

Admittedly, the Portfolio failed to generate this gain from the intended core function of investing in ETFs, but 2018 was not the year to look a gift horse (USD strengthening relative to CAD) in the mouth.

Looking Ahead

Despite mixed returns from the existing holdings, there are no intentions of selling a single holding. In fact, they have held up well in light of sharp sell-offs in many asset classes, particularly stock markets. It is a benefit of the unconstrained benchmark-free nature of this strategy that it is not at the mercy of equity or any other markets.

What would make 2019 a success is investing the majority of the remaining cash and achieving a well diversified portfolio; one capable of withstanding any market scenario while being nimble enough to always seek the most attractive reward for the risk taken. Time will be the ultimate judge of the merits of this approach, and your readership is appreciated as the journey ahead unfolds.

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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