CanETF Portfolio July 2018 Update: Waiting Patiently…

Market Highlights

Two events stand out amid the continued trade disputes and quarterly earnings releases capturing much of market participants’ attention:

On July 1, the Mexican presidential election was won by Andres Manuel Lopez Obrador, known as AMLO.

The Bank of Canada raised the overnight rate target to 1.50% on July 11.

NameTickerJuly 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN1.15%3.11%
BMO MSCI EAFE Index ETFZEA1.53%3.61%
BMO MSCI Emerging Markets Index ETFZEM1.59%-1.36%
iShares Core Canadian Universe Bond Index ETFXBB-0.78%-0.22%
iShares Canadian Corporate Bond Index ETFXCB-0.57%-0.09%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.10%0.41%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD1.09%1.56%
Vanguard FTSE Canadian Capped REIT Index ETFVRE1.64%6.86%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY3.70%6.39%
Vanguard FTSE Developed Markets ETFVEA2.28%-0.49%
Vanguard FTSE Emerging Markets ETFVWO3.17%-4.27%
iShares Core U.S. Aggregate Bond ETFAGG0.03%-1.63%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD1.16%-3.19%
Vanguard Short-Term Corporate Bond ETFVCSH0.25%-0.28%
iShares iBoxx $ High Yield Corporate Bond ETFHYG1.15%1.29%
iShares U.S. Preferred Stock ETFPFF0.43%1.49%
Fidelity® MSCI Real Estate ETFFREL0.69%2.18%
USD/CAD-1.15%3.76%

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

Emerging markets equities, an area discussed last month as moving closer to an attractive valuation, delivered a solid return in July and made up some of the year to date loss. The bounce isn’t surprising given five straight months of negative returns, and the asset class remains intriguing due to the sizable valuation discount to developed market equities.

Canadian bonds delivered negative returns due to rising interest rates. The following chart shows rates are still shy of the year’s highs, but made a notable gain in July.

BoC 5-10 Year Average Bond Yield 07312018
Government of Canada Marketable Bonds – Average Yield – 5 to 10 Year
Source: Bank of Canada

U.S. interest rates were higher as well, but still managed positive returns as evidenced by the representative ETFs. Equity markets were strong overall and preferred shares delivered gains as well.

Monthly Portfolio Activity

July BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,831.64$3,835.52$3.88
PFF$745.00$751.80$6.80
FREL$476.20$493.60$17.40
USD RRSP Total$5,052.84$5,080.92$28.080.56%
CAD Total$11,653.58$11,613.83($39.75)-0.34%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.05%
USD RRSP
Cash$4,992.7042.99%
PFF$978.628.43%
FREL$642.525.53%
USD RRSP Total$6,613.8356.95%
Grand Total (CAD at $1.3017 per USD as of 7/31/2018)$11,613.83100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.71$37.59$0.194044$1.480.20%0.01%
FREL20$24.54$24.68$0.000$2.800.57%0.02%

FREL and PFF both sport modest gains for July, although PFF relied on the dividend distribution to generate a positive total return.

The CAD strengthened relative to the USD in July, after two months of weakness. This was the key factor for the negative return in CAD for the CanETF Portfolio, more than offsetting the positive returns from the two U.S. listed ETFs.

Trade Summary

No trades were placed in July.

Looking Ahead

Comments written one month ago in this space remain valid and the plan has not changed. At this stage in the cycle, buying small increments on dips that make valuations more attractive is the only sensible approach for the strategy. Some asset classes are a relatively small drop away from a desirable price, and their ETFs will be purchased should such an opportunity arise. A decline in price is not the only way an asset could become attractive. Alternatively, some decisively positive development could occur that raises the intrinsic value of the asset and is simultaneously ignored or underappreciated by the market. This latter scenario is less likely and more difficult to navigate, but warrants a watchful eye.

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.

CanETF Portfolio June 2018 Update: More Emerging Markets Weakness

Market Highlights

Markets were primarily focused on the potential for a global trade war. Sky has a useful timeline of events.

In monetary policy news, the U.S. Federal Reserve hiked the overnight rate to a range of 1.75%-2.00% on June 13 and suggested two more hikes are coming in 2018.

Later in the month, Bank of Canada Governor Stephen Poloz talked up the odds of a rate hike in July.

Turning to oil, OPEC agreed on a modest increase in production in Vienna on June 22.

NameTickerJune 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN1.69%1.94%
BMO MSCI EAFE Index ETFZEA0.17%2.05%
BMO MSCI Emerging Markets Index ETFZEM-3.00%-2.90%
iShares Core Canadian Universe Bond Index ETFXBB0.57%0.56%
iShares Canadian Corporate Bond Index ETFXCB0.38%0.48%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.26%0.50%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD0.28%0.50%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.31%5.14%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY0.60%2.59%
Vanguard FTSE Developed Markets ETFVEA-1.53%-2.71%
Vanguard FTSE Emerging Markets ETFVWO-4.49%-7.21%
iShares Core U.S. Aggregate Bond ETFAGG-0.13%-1.66%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-0.72%-4.30%
Vanguard Short-Term Corporate Bond ETFVCSH-0.05%-0.53%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.38%0.14%
iShares U.S. Preferred Stock ETFPFF1.52%1.05%
Fidelity® MSCI Real Estate ETFFREL4.11%1.48%
USD/CAD1.70%4.97%

Emerging markets were particularly hard hit by the aforementioned trade war concerns and tightening monetary policy. The emerging markets ETFs in the table above have now experienced declines for five consecutive months after a strong advance in January.

REITs performed well in both Canada and the U.S., where the portfolio has exposure through the FREL holding. Canadian bonds and stocks did well, while in the U.S. fixed income was mixed and equities edged higher.

The effect of a strengthening U.S. dollar is apparent in the difference in returns between Canadian and U.S. listed ETFs investing in the same market. For example, developed markets in CAD and represented by ZEA were positive in the month, but negative in U.S. dollars as represented by VEA.

Monthly Portfolio Activity

June BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,831.64$3,840.30$8.66
PFF$745.00$754.20$9.20
FREL$476.20$490.80$14.60
USD RRSP Total$5,052.84$5,085.30$32.460.64%
CAD Total$11,542.42$11,696.32$153.911.33%

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$5,000.0042.75%
USD RRSP
Cash$5,056.9143.24%
PFF$993.138.49%
FREL$646.295.53%
USD RRSP Total$6,696.3257.25%
Grand Total (CAD at $1.3168 per USD as of 6/29/2018)$11,696.32100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.25$37.71$0.193889$13.081.76%0.11%
FREL20$23.81$24.54$0.239$19.384.07%0.17%

The CAD again weakened relative to the USD this past month, resulting in the USD RRSP balance being translated at a more favourable rate. Although both ETF holdings performed well, this currency translation provided the bulk of the increase of the Portfolio in Canadian dollar terms for June.

Trade Summary

No trades were placed in June.

Looking Ahead

Some reflection is in order now that the CanETF Portfolio is half a year old. Since inception, the Portfolio has gained $423.82 in CAD terms, or 3.76%. The USD exposure is responsible for the vast majority of this gain, but both ETF holdings contributed positively as detailed above. Two of six months had negative returns, the same two months in which the CAD strengthened relative the USD. This is an uncomfortable reminder of the dominant role of exchange rates as the driving factor of performance and not the ETF holdings themselves and reinforces the need to invest more of the cash balance.

That the CAD TFSA portion of the Portfolio remains fully uninvested is disappointing. The amount of unused USD in the RRSP portion of the Portfolio is high as well, but there is at least the potential for the USD to strengthen and deliver a gain in CAD terms. Because the home, or base, currency of the Portfolio is the CAD, holding USD is a sort of call in itself. However, the mandate of the strategy is to invest in ETFs to achieve the goal of positive absolute returns while avoiding losses and not to manage a basket of foreign currencies.

Hopefully there will be some activity on this front soon. A shopping list is prepared for several almost-attractively-priced asset classes with price targets that are within reach. Still, it is unlikely the Portfolio will get close to fully invested until a more severe market rout occurs, likely into the next global equity bear market.

One area of increasing interest is emerging market equities. While they remain above early 2016 lows, trailing P/E ratios for emerging markets have become much more appealing especially relative to developed markets. Because earnings growth is expected, the forward P/E is even lower.

TSX SPX MXEA MXEF Trailing P/E 06292018

Although it is unnerving to think of emerging markets as the sole equity exposure in the Portfolio from a risk perspective, further declines may warrant initiating a small allocation.

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.

CanETF Portfolio May 2018 Update: Missing Out?

Market Highlights

Stocks and REITs in both Canada and the U.S. led generally positive markets in May.

NameTickerMay 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN3.10%0.25%
BMO MSCI EAFE Index ETFZEA-0.94%1.87%
BMO MSCI Emerging Markets Index ETFZEM-2.35%0.10%
iShares Core Canadian Universe Bond Index ETFXBB0.81%-0.01%
iShares Canadian Corporate Bond Index ETFXCB0.54%0.09%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.06%0.25%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD0.99%0.22%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.56%2.76%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY2.40%1.98%
Vanguard FTSE Developed Markets ETFVEA-1.61%-1.20%
Vanguard FTSE Emerging Markets ETFVWO-2.84%-2.85%
iShares Core U.S. Aggregate Bond ETFAGG0.71%-1.53%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.57%-3.61%
Vanguard Short-Term Corporate Bond ETFVCSH0.42%-0.48%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.16%-0.24%
iShares U.S. Preferred Stock ETFPFF0.87%-0.46%
Fidelity® MSCI Real Estate ETFFREL3.43%-2.52%
USD/CAD0.87%3.21%

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

The loss turned in by emerging markets was a notable outlier.

VWO 05312018

After an impressive run since the early 2016 lows, emerging markets look to be taking a breather.

Two market milestones occurred in May:

  1. The S&P 500 dividend yield was surpassed by the 3-month Treasury bill yield for the first time since 2008.
  2. Oil (Brent crude) traded above $80 for the first time since late November of 2014.

Monthly Portfolio Activity

May BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,822.98$3,826.59$3.61
PFF$742.60$745.00$2.40
FREL$460.40$476.20$15.80
USD RRSP Total$5,025.98$5,047.79$21.810.43%
CAD Total$11,451.35$11,535.88$84.530.74%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.34%
USD RRSP
Cash$4,954.6742.95%
PFF$964.638.36%
FREL$616.585.34%
USD RRSP Total$6,535.8856.66%
Grand Total (CAD at $1.2948 per USD as of 5/31/2018)$11,535.88100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.13$37.25$0.180445$6.010.81%0.05%
FREL20$23.02$23.81$0.00$15.803.43%0.14%

The CAD weakened relative to the USD in May, resulting in the USD RRSP balance being translated at a more favourable rate. Although both ETF holdings had a positive return, this positive currency translation provided the bulk of the gain in Canadian dollar terms for the Portfolio this month.

Trade Summary

No trades were placed in April.

Looking Ahead

Five months have passed since inception of the CanETF Portfolio. Looking at the year to date column in the returns table above, one can’t help but wonder if the cautious approach employed thus far was wise. Over 86% of the Portfolio remains in cash (CAD and USD combined in CAD terms). Some of this balance could have been invested in equities on dips even if valuations are elevated. Much of it could have found a home, even if temporary, in some short term bonds.

In hindsight, it is easy to call out caution as unwarranted. Given the absolute return, loss avoiding nature of this strategy, it is appropriate to err on the side of prudent deliberation. In any case, the cash balance is so high that it will be difficult to achieve a positive return after inflation even if the ETFs currently held have an excellent year. This alone is telling and speaks to the need to continue finding attractive assets to buy. The Portfolio will look for investment opportunities with this in mind.

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.

Mutual Funds vs. ETF Benchmarks: RBC Select

In the Mutual Funds vs. ETF Benchmarks series, we compare the past performance of mutual funds to the performance of ETF portfolios composed of the mutual funds’ stated benchmarks. The aim is to assess the investing experience of popular Canadian mutual funds in contrast to investing in index ETFs that track the benchmark the mutual fund is trying to outperform.


The Product

With $29.9 billion in assets RBC Select Balanced Portfolio is the largest mutual fund in the country, followed by RBC Select Conservative Portfolio ($27.9 billion). The five RBC Select asset allocation fund of funds total $82.1 billion in assets (all three figures from RBC GAM as of 4/30/2018). For comparison and perspective, Canadian ETFs as a whole tally $153.2 billion (CETFA as of 4/30/2018). The mammoth size of the product makes it a natural starting point for the Mutual Funds vs. ETF Benchmarks series.

The RBC Select product predates ETFs, with the Conservative, Balanced, and Growth Portfolios having launched in late 1986. The funds have broad appeal because it is easier to choose an appropriate fund between the Very Conservative Portfolio and the Aggressive Portfolio rather than to piece together a group of mutual funds into a portfolio. As a result, the product has captured a huge amount of assets over the years (side note: RBC has quickly established itself as a player in ETFs as well, ranking 5th among ETF providers by AUM according to the CETFA Monthly Report as of April 30, 2018).

RBC Select is managed by Sarah Riopelle, CFA – Vice President & Senior Portfolio Manager at RBC Global Asset Management (RBC GAM) and her team. They publish a useful quarterly newsletter with insights on markets, portfolio performance and positioning, and outlook. In the Spring 2018 newsletter, she notes “For a global, balanced portfolio, we took advantage of the recent increase in yields to reduce our underweight position in fixed income by one percentage point sourced from cash.” reminding us of the active management her team employs.

The Analysis

Benchmark information was gathered from the relevant Monthly Update reports on RBCGAM.com. The following tables lay out the ETFs we will be using and the breakdown of each ETF benchmark:

RBC Select vs. ETF Benchmarks - Components

RBC Select vs. ETF Benchmarks - Portfolios

The following return presentation consists of the last 3 full calendar years and a year to date figure for 2018:

RBC Select vs. ETF Benchmarks - Performance

RBC Select had the superior performance in only 2 of 20 periods. On average, the ETF Portfolio consisting of the respective benchmark components was ahead by 0.7%. This data brings two findings:

  1. Better returns would have been realized by investing in the ETF version of RBC Select benchmarks rather than the RBC Select mutual funds themselves.
  2. However, the portfolio management team of RBC Select performed well on a gross of fees basis. This is clear since the difference in returns is less than the difference in MERs. Unfortunately, investors cannot get gross of fees returns. While a fee cut would be encouraging, it is unlikely they could be lowered to a level comparable to the passive ETFs we are using as a comparison given the active management at both the underlying and top fund levels. In other words, the ETF Portfolios came out ahead due to the fee advantage, but they did not capture the entire fee advantage because of the value added by the active management of RBC Select.

How much better off would investors have been to invest in the ETF portfolios instead of RBC Select? To assess the investor experience, we compare what a lump sum invested in either alternative would have grown to. For this exercise, we are looking at the growth of $10,000 invested over the most recent 3 year period.

RBC Select vs. ETF Benchmarks - Growth

The difference is substantial, especially for the Aggressive Growth comparison. Should this performance gap continue, ETF investors would come out well ahead. Sticking with the Aggressive Growth example, $10,000 invested at 6.4% for 30 years would become $64,306, and at 8.0% would become $100,627!

Note this analysis does not address risk, largely due to the limited length of the performance period and the fact that it is during a bull market. The 2018 YTD figures give some sense of performance in a negative environment, and here the ETF portfolios came out ahead in all five instances. Also interesting is that Growth and Aggressive Growth investors would have avoided a year to date loss by investing in the ETF portfolio.

It would be interesting to look back further, but this analysis was limited to 3 years in order to:

  • allow for the fact that the asset mix and benchmark may have been significantly different in the past
  • recognize that the more recent period has greater relevance today when ETFs are more mainstream and have greater acceptance in forming the basis of a portfolio

The Conclusion

Should every investor in RBC Select rush to sell their mutual fund and buy an ETF portfolio of the benchmark components? Not so fast. There are valid reasons for staying put. For starters, past outperformance for the ETFs does not guarantee future outperformance and it is possible (albeit unlikely, especially for longer time periods) that RBC Select will overcome the fee disadvantage and outperform the ETF portfolios going forward. As well, some investors may enjoy the convenience of contributing regularly to a mutual fund and not having to worry about making multiple trades and rebalancing. Even so, these investors may benefit from considering the findings of this analysis carefully and reassessing their plans.

For those already interested in managing their own portfolios, this comparison illustrates the value of ETFs when tested head to head against a top mutual fund product. Lower fees are a real and lasting advantage of the ETF route and over time should compound into a significant reward. Active management has value too, but unlike a fee advantage, it can be a negative as well as a positive. Had the RBC Select team underperformed on a gross basis, the advantage of the ETF portfolios would have been that much greater.

As for RBC GAM, given that they have built up an ETF business, an opportunity to give investors the best of both worlds is within reach. They could launch an ETF of ETFs with the same team and process that manages the RBC Select product, but using RBC ETFs and where needed, ETFs from other providers. If they could come out with a management fee below 1% (or ideally, below 0.50%), they could make a compelling case as one of the better offerings in the country.

Such an idea would cannibalize more profitable mutual funds but in launching the ETF suite, RBC GAM has recognized the realities of the marketplace and shown a willingness to adapt with the times.

Vanguard has recently done something similar with their asset allocation ETFs.

This post 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.

CanETF Portfolio April 2018 Update: Stocks Up, Bonds and Preferreds Down

Market Highlights

April was another silent month for activity within the CanETF Portfolio, but as always the markets kept things interesting.

NameTickerApril 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN1.81%-2.76%
BMO MSCI EAFE Index ETFZEA1.17%2.84%
BMO MSCI Emerging Markets Index ETFZEM-2.13%2.50%
iShares Core Canadian Universe Bond Index ETFXBB-0.89%-0.82%
iShares Canadian Corporate Bond Index ETFXCB-0.62%-0.45%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.03%0.18%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-0.50%-0.76%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-0.77%0.20%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY0.38%-0.41%
Vanguard FTSE Developed Markets ETFVEA1.56%0.41%
Vanguard FTSE Emerging Markets ETFVWO-2.07%-0.03%
iShares Core U.S. Aggregate Bond ETFAGG-0.74%-2.22%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-1.23%-4.16%
Vanguard Short-Term Corporate Bond ETFVCSH-0.11%-0.90%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.74%-0.39%
iShares U.S. Preferred Stock ETFPFF-0.68%-1.32%
Fidelity® MSCI Real Estate ETFFREL0.32%-5.75%
USD/CAD-0.45%2.32%

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

The most notable market event in the month occurred on the 24th, when the U.S. 10-year Treasury interest rate rose above 3% for the first time in four years.

U.S. 10 Year Treasury Yield 04272018

On the same day, the U.S. 2-year Treasury note yield hit 2.5% for the first time since 2008. Thomas Franck from CNBC put together an informative write-up.

Canadian market interest rates were broadly higher as well.

BoC 5-10 Year Average Bond Yield 04302018
Government of Canada Marketable Bonds – Average Yield – 5 to 10 Year
Source: Bank of Canada

Monthly Portfolio Activity

April BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,819.66$3,822.98$3.32
PFF$751.20$742.60($8.60)
FREL$457.60$460.40$2.80
USD RRSP Total$5,028.46$5,025.98($2.48)-0.05%
CAD Total$11,483.70$11,451.35($32.35)-0.28%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.66%
USD RRSP
Cash$4,907.1842.85%
PFF$953.208.32%
FREL$590.975.16%
USD RRSP Total$6,451.3556.34%
Grand Total (CAD at $1.2836 per USD as of 4/30/2018)$11,451.35100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.56$37.13$0.165853($5.28)-0.70%-0.05%
FREL20$22.88$23.02$0.00$2.800.61%0.02%

The CAD strengthened relative to the USD, although it remains weaker year to date. The negative return from the U.S. denominated ETF holdings led to a loss in the Portfolio in base currency terms, and the negative currency translation further added to this loss in Canadian dollar terms.

Trade Summary

No trades were placed in April.

Looking Ahead

The need to build out the Portfolio is balanced by a lack of compelling valuations across asset classes. Because the Portfolio has such a high cash balance, the idea of initiating small positions in potentially expensive assets grows in appeal with the passage of time. If the asset class was indeed overvalued and corrects to fair value, there will still be plenty of opportunity to average down. If it gets more overvalued, the Portfolio will not miss out entirely on the gain.

However, the absolute return nature of the strategy and preference for avoiding losses over participating in gains calls for more patience than appropriate in most cases. Still, the Portfolio’s 86.52% cash balance (CAD and USD combined in CAD terms) suggests there are fewer appealing ETFs than is likely the case. The Portfolio will seek to invest the cash balance in ETFs where the likelihood and magnitude of positive returns fairly outweighs the risk of loss.

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.

CanETF Portfolio March 2018 Update: Equity Losses Continue

March was a quiet month for trade activity in the CanETF Portfolio, but plenty happened in the markets.

Market Highlights

NameTickerMarch 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-0.15%-4.49%
BMO MSCI EAFE Index ETFZEA-0.38%1.65%
BMO MSCI Emerging Markets Index ETFZEM-0.09%4.73%
iShares Core Canadian Universe Bond Index ETFXBB0.77%0.08%
iShares Canadian Corporate Bond Index ETFXCB0.50%0.17%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.05%0.16%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-0.76%-0.26%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.66%0.97%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY-2.55%-0.78%
Vanguard FTSE Developed Markets ETFVEA-0.47%-1.13%
Vanguard FTSE Emerging Markets ETFVWO-1.19%2.09%
iShares Core U.S. Aggregate Bond ETFAGG0.62%-1.49%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.31%-2.97%
Vanguard Short-Term Corporate Bond ETFVCSH0.03%-0.79%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-0.58%-1.13%
iShares U.S. Preferred Stock ETFPFF0.49%-0.64%
Fidelity® MSCI Real Estate ETFFREL3.77%-6.06%
USD/CAD0.66%2.78%

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

Worries over potential for a trade war shook Canadian markets early in the month by the announcement of steel and aluminum tariffs coming from the United States. Fortunately, fears were quickly extinguished when Canada turned out to be exempt.

Next came the tech selloff, which began at Facebook and soon extended to other high flying information technology stocks. In the end, the first quarter of 2018 was a challenging one for equities as losses mounted in most markets.

In monetary policy, the Federal Reserve raised the overnight rate to a range of 1.50%-1.75%. Meanwhile, assets continue to roll off of the balance sheet as part of the Fed’s policy normalization. The effect is now clearly visible in the following chart although still minute compared to the expansion of the balance sheet since the Great Financial Crisis.

 Federal Reserve Total Assets 03282018
Monthly Portfolio Activity

March BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,810.99$3,819.66$8.67
PFF$750.60$751.20$0.60
FREL$447.20$457.60$10.40
USD RRSP Total$5,008.79$5,028.46$19.670.39%
CAD Total$11,415.76$11,483.70$67.940.60%

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

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.54%
USD RRSP
Cash$4,925.0742.89%
PFF$968.608.43%
FREL$590.035.14%
USD RRSP Total$6,483.7056.46%
Grand Total (CAD at $1.2894 per USD as of 3/29/2018)$11,483.70100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.53$37.56$0.172386$4.050.54%0.04%
FREL20$22.36$22.88$0.261$15.623.49%0.14%

It is encouraging that the best return from Market Highlights table came from portfolio holding FREL, while PFF also had a positive return. Meanwhile, avoiding equities once again helped avoid losses but the Portfolio missed out on positive returns from bonds.

The CAD continued to weaken relative to the USD. Put another way, the U.S. dollar denominated RRSP got a boost in Canadian dollar terms. Overall, the CanETF Portfolio recorded a positive return in March due to both positive performance from both holdings and the positive currency translation.

With the first quarter of 2018 now in the books, the CanETF Portfolio has its first quarterly return. In line with the stated goal of this benchmark free strategy, the Portfolio managed a positive return n the quarter.

Trade Summary

No trades were placed in March.

Looking Ahead

Economic fundamentals were so rosy heading into 2018 that the thought of buying stocks with fresh funds was an uncomfortable idea. Over the longer term, the Portfolio can be expected to have a substantial allocation to equities, but this will be built up when the price is right. That said, an opportunity for an equity ETF purchase may be near if selling pressure continues.

Canadian preferred shares could very well be the next investment for the Portfolio. Because the majority of Canada’s market is made up of fixed-reset preferred shares, rising interest rates are a positive. The reverse is true in the U.S. where preferred shares are expected to sell off with rising interest rates. Together, owning Canadian and U.S. preferreds could be compelling from a diversification standpoint assuming that Canadian and U.S. interest rates move mostly together.

As well, the appeal of putting some of the large cash balance into short term bonds is tempting, especially now that yields are higher.

BoC 1-3 Year Average Bond Yield 03282018
Government of Canada Marketable Bonds – Average Yield – 1 to 3 Year
Source: Bank of Canada

The attractiveness of short term bonds in this environment is that their sensitivity to rising interest rates is less than longer duration debt. Time will tell whether holding out for higher yields or initiating a position now is the right move.

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.

CanETF Portfolio February 2018 Update: Volatility Returns

The second month for the CanETF Portfolio brought a second trade, the purchase of 20 shares of the  Fidelity® MSCI Real Estate Index ETF (FREL). Not only that, but a new milestone was reached when the Portfolio earned its first income, a distribution from the iShares U.S. Preferred Share ETF (PFF) holding purchased in January.

Market Highlights

Positive returns were scarce in February, as shown by the market representative ETFs below:

NameTickerFebruary 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-3.00%-4.35%
BMO MSCI EAFE Index ETFZEA-0.82%2.04%
BMO MSCI Emerging Markets Index ETFZEM-1.26%4.83%
iShares Core Canadian Universe Bond Index ETFXBB0.14%-0.69%
iShares Canadian Corporate Bond Index ETFXCB-0.02%-0.32%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.18%0.11%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-1.09%0.50%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-0.36%-1.64%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY-3.69%1.82%
Vanguard FTSE Developed Markets ETFVEA-5.24%-0.67%
Vanguard FTSE Emerging Markets ETFVWO-4.72%3.31%
iShares Core U.S. Aggregate Bond ETFAGG-0.97%-2.10%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-2.07%-3.27%
Vanguard Short-Term Corporate Bond ETFVCSH-0.39%-0.82%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-0.97%-0.55%
iShares U.S. Preferred Stock ETFPFF0.21%-1.13%
Fidelity® MSCI Real Estate ETFFREL-6.95%-9.47%
USD/CAD4.20%2.10%

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

The big story in February was the return of volatility in markets, triggered by new worries over rising inflation. Reuters elaborates on the topic.  The chart below shows market inflation expectations are higher than they have been in several years. (The breakeven inflation rate is measured as the difference between the yield of a nominal bond and the inflation-linked bond of the same maturity.)

5 10 Year Breakeven Inflation Rate 02282018

Markets sold off sharply, with the Dow Jones Industrial Average dropping over 1,000 points on February 5th for the first time ever (an relatively easier feat now that the Dow is as high as it is; this was not nearly the largest single day percentage drop). The Chicago Tribute has a useful summary.

The U.S. equity market shortly afterwards reached an official correction (10% drop from the last peak) and although markets recovered some of the losses, it was not before a new tone was set. Perhaps the most memorable remnant of the sell-off, is the catastrophic loss of the short volatility trade, highlighted by the liquidation of the VelocityShares Daily Inverse VIX Short-Term ETN (XIV). Bloomberg details the carnage.

The Portfolio benefitted from not having equity exposure. Missing out on Canadian fixed income was a small negative as interest rates in Canada edged lower in the month. The sole holding going into the month, PFF, delivered a positive return thanks to the monthly distribution.

Monthly Portfolio Activity

February BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$4,247.20$3,810.99($436.21)
PFF$752.40$750.60($1.80)
FREL$447.20$447.20
USD RRSP Total$4,999.60$5,008.79$9.190.18%
CAD Total$11,146.01$11,415.76$269.752.42%

While the timing of the PFF purchase in late January was a bit early, the timing on FREL buy turned out to be solid as the ETF only briefly traded in the low $22/high $21 area. Nevertheless, the loss on PFF narrowed such that both the Portfolio’s positions had a positive return in February.

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation 
CAD TFSA
Cash$5,000.0043.80%
USD RRSP
Cash (USD translated to CAD)$4,881.5042.76%
PFF (USD translated to CAD)$961.448.42%
FREL (USD translated to CAD)$572.825.02%
USD RRSP Total in CAD$6,415.7656.20%
Grand Total (CAD at $1.2809 per USD as of 2/28/2018)$11,415.76100.00%

The strengthening U.S. dollar helped the portfolio to a gain overall, as the USD denominated RRSP balance is translated to CAD at a higher rate.

USDCAD 2018 YTD 02282018
Source: Bank of Canada

The overall portfolio value in CAD is now above the inception value after a decline in January.

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.62$37.53$0.189298$1.990.26%0.02%
FREL20$22.00$22.36$0.00$7.201.64%0.06%

Trade Summary

DateTypeTickerSharesPriceCommissionTotalInto
2/8/2018BuyFREL20$22.00$0.00$440.00USD RRSP

After a weak end to 2017 and negative January, U.S. REITs sold off sharply amid the volatility in the markets. The Portfolio seized the opportunity and 20 shares of Fidelity® MSCI Real Estate ETF (FREL) were purchased.

Looking Ahead

Equity valuations have reset, as the falling prices have not been joined by falling earnings. Further selling pressure may bring stocks to an attractive level for beginning to build a position. Most major markets look better than the U.S. on a valuation basis, and Canada’s P/E ratio has compressed more than other markets.

TSX SPX MXEA MXEF Trailing P/E 02282018

Trailing P/E, local currency

Bonds are arguably more attractive in the U.S. because of the negative return in February, but the higher nominal yields come with increased inflation expectations. Higher real yields are still needed to entice capital to this space.

Canadian preferred shares are another area of interest. The rate reset feature that exists in most Canadian issues gives the asset class a unique characteristic that can counteract the negative effect on rising interest rates in other parts of the portfolio.

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.

XIU May Be the Biggest and Oldest, but XIC and ZCN Are the Best Passive Canadian Equity ETFs

The iShares S&P/TSX 60 Index ETF (XIU) has nearly $10.9 billion in assets, making it by far the largest ETF in Canada according to the Canadian ETF Association January report. It is also the oldest, and not just in Canada. In fact, its roots go back to 1990 and it is considered the oldest ETF in the world. The Globe & Mail tells the story in “The Canadian investment idea that busted a mutual-fund monopoly“.

Despite these impressive accolades, the S&P/TSX 60 Index it tracks is not ideal as a broad based passive representation of the Canadian equity market. Two major reasons make it inferior to the S&P/TSX Capped Composite Index, which is tracked by both the iShares Core S&P/TSX Capped Composite Index ETF (XIC) and the BMO S&P/TSX Capped Composite Index ETF (ZCN). These are:

1. Breadth

2. Capping

Both of these contribute to higher concentration risk for XIU, a foundational theme for this analysis.

Breadth

XIU invests in the 60 largest publicly traded Canadian companies, while XIC and ZCN invest in the 250 largest and cover 95% of the Canadian equities market, according to S&P Dow Jones Indices. This fact alone suggests that the 190 extra companies accessed through XIC and ZCN do a better job of providing investors with broad Canadian equity exposure in a single ETF. By owning only the largest 60 companies, XIU places extra emphasis on the biggest companies. The following table of the top 10 holdings in each of XIU and XIC shows the concentration in the largest companies.

NameTickerXIUXICDifference
ROYAL BANK OF CANADARY9.016.842.17
TORONTO DOMINIONTD8.326.322.00
BANK OF NOVA SCOTIABNS5.724.351.37
CANADIAN NATIONAL RAILWAYCNR4.533.441.09
SUNCOR ENERGY INCSU4.423.351.07
ENBRIDGE INCENB4.393.331.06
BANK OF MONTREALBMO3.912.970.94
CANADIAN IMPERIAL BANK OF COMMERCECM3.182.420.76
TRANSCANADA CORPTRP3.102.350.75
BCE INCBCE3.092.350.74
Total49.6737.7211.95

Source: BlackRock.com on 2/27/2018

While XIC and ZCN provide a more balanced exposure to the very largest companies, they also include a wider reaching stable of companies. The following list is just a sample of the Canadian business mainstays that are ignored by the S&P/TSX 60 Index (full holdings can be found on the respective ETF sponsor websites):
-Fairfax Financial
-Intact Financial
-Great-West Lifeco
-CI Financial
-Riocan REIT
-Air Canada
-CAE
-Hydro One

-West Fraser Timber

Smaller names such as WestJet, Maple Leaf Foods, Cineplex, and Canfor do not constitute a large part of the S&P/TSX Capped Composite Index, but at least they are present. Their inclusion would be expected in any index tracking the Canadian market at large.

The sector makeup of XIU is also more lopsided than XIC/ZCN. As the following table shows, XIU holds a whopping 40.62% in financials compared to 34.93% for XIC. The next two largest sectors are mixed. Energy is larger in XIU, but materials is smaller. The three largest sectors sum up to over 70% for XIU and about 65% for XIC.

SectorsXIUXIC
Financials40.6234.93
Energy19.6118.70
Materials9.8311.54
Industrials9.169.88
Telecommunications6.054.59
Consumer Discretionary5.375.46
Consumer Staples3.813.57
Information Technology3.343.69
Utilities1.653.62
Health Care0.450.91
Real Estate0.002.96

Source: BlackRock.com on 2/27/2018; sorted by largest XIU sectors; may not add to 100% due to small cash and/or derivatives positions

Turning to the smaller sectors, it is clear that Canada’s market lacks a meaningful health care and information technology presence, and XIU barely has any exposure in these sectors. XIC/ZCN are a bit better. Real estate is entirely absent in XIU but makes up 2.96% of XIC. Together, the three smallest XIU sectors make up only a 2.10% weight, while those same sectors are 7.49% of XIC.

Capping

The S&P/TSX Capped Composite Index has a limit of 10% for any individual issuer. This is an important feature of a core passive fund, because it prevents things from getting out of hand. Although the largest weight in either XIU or XIC/ZCN is under 10% now, a history lesson will serve to highlight the importance of capping.

During the tech bubble, Nortel stock reached tremendous heights, peaking at around 35% of the S&P/TSX Composite in August 2000 before eventually filing for bankruptcy in 2009. The Bloomberg article Valeant’s Slide a Reminder of Canada’s BlackBerry, Nortel Legacy addresses Nortel and other past high fliers.

The surge in Nortel caused the capped the S&P/TSX Composite Index to underperform the uncapped modestly in 1999, but the capped outperformed the uncapped significantly in 2000 and 2001. In 2002, Nortel was below a 10% weight and returns converged. The chart below shows how performance differed in this period and the uncapped index suffered a more significant drawdown in the aftermath of the tech bubble.

TSX Uncapped Capped 1999-2002

It is possible that a stock could get massive and continue to outperform for a lengthy period, but a more prudent approach is to limit any single company to 10%.

Performance

Valid as the above points may be, the fact that the S&P/TSX 60 Index has outperformed the S&P/TSX Capped Composite Index means that investors would have been better off in XIU, especially in the last 5 years. Looking 10 years out, the difference is immaterial.

Performance (ending 1/31/2018)1 Year3 Year5 Year10 Year
S&P/TSX 60 Index6.94%6.41%8.56%5.04%
S&P/TSX Capped Composite Index6.67%5.90%7.85%5.01%

Source: BlackRock.com

The sector differences explain much of the outperformance. Over the past 5 years, the financials sector (which the S&P/TSX 60 Index is overweight relative to the S&P/TSX Capped Composite Index) outperformed, while the materials sector (which the S&P/TSX 60 Index is underweight relative to the S&P/TSX Capped Composite Index) underperformed. Past outperformance does not guarantee future outperformance, but investors with a strong bias to financials and away from materials may prefer XIU. On the other hand, materials outperformance of financials is a potential tailwind for XIC/ZCN. The materials sector is unlikely to underperform the broad market by double digits over the next 5 years like it has over the past 5.

Performance (ending 1/31/2018)1 Year3 Year5 Year10 Year
S&P/TSX Capped Financials TR11.59%14.23%13.61%8.86%
S&P/TSX Capped Materials TR-2.11%1.04%-3.11%-2.33%

Source: Morningstar.com

XIC or ZCN?

If the above arguments were sufficient to declare XIU inferior, which of XIC or ZCN is best? Both follow the S&P/TSX Capped Composite Index, both charge a tiny management fee of 0.05% and show a management expense ratio (MER) of 0.06%. Both are large, with over $4 and $3 billion in assets, respectively.

One point in favour of ZCN is that it has tracked the index better, with a 7 basis point lag over 5 years compared to 11 basis points for XIC (keep in mind ZCN tracked the Dow Jones Canada Titans 60 Index prior to September 21, 2012, so performance comparisons before this period are unreliable), but all in all it is a wash between these two ETFs.

Performance (ending 1/31/2018)1 Year3 Year5 Year
ZCN - NAV6.65%5.88%7.78%
XIC - NAV6.63%5.85%7.74%
S&P/TSX Capped Composite Index6.67%5.90%7.85%

Source: BlackRock.com and BMO.com

Where XIU Excels

XIU does not have the assets it does without good reason. This analysis was done through the lens of a long term passive investor seeking broad Canadian equity exposure. Not all market actors have this goal in mind. For short term trading and institutions requiring sizable liquidity, XIU offers a fast and efficient way to access to Canadian market.

Conclusion

XIC and ZCN are best in class passive Canadian equity ETFs. They offer broad exposure to 250 companies, cap holdings at 10%, charge low fees, and boast large asset bases with narrow bid-ask spreads.

On the other hand, XIU is limited to the 60 largest Canadian companies, does not cap holdings, and charges a higher management fee of 0.15% with an MER of 0.18%. But XIU is even more liquid and the fact that it has more in financials and less in materials may appeal to some.

This post 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.

CanETF Portfolio Trade #2: Dipping Into U.S. REITs

REITs have sold off significantly in the U.S. this year, and the chance to get the Fidelity® MSCI Real Estate Index ETF (FREL) at $22.00 (a new 52-week low)was a compelling opportunity. The following 1 year chart shows a substantial fall from the highs of over $25 reached not long ago, and an unmistakable breakdown of the uptrend.

Trade 2 Chart FREL

For FREL, the yield of the last year’s distributions is 3.67% at $22.00. A small position of 20 shares leaves room for adding if a yield closer to 4% arises.

Trade 2 Order FREL
Trade 2 Filled FREL

Trade 2 Confirmation FREL

In terms of what U.S. REIT was chosen, the rationale laid out in the article titled: Why I Sold XLRE And Bought FREL (Not VNQ) stands.  In fact, during the period from November 1, 2016 (the day after the article was published) to January 31, 2018 (the last day VNQ tracked the MSCI US REIT Index), FREL outperformed VNQ significantly, returning 6.63% annualized compared to the 2.76% of VNQ.

However, as mentioned VNQ has changed to the MSCI US Investable Market Real Estate 25/50 Transition Index starting February 1, 2018 (source: Vanguard VNQ page). This means FREL and VNQ should be essentially the same from here, as the MSCI USA IMI Real Estate Index followed by FREL and the MSCI US Investable Market Real Estate 25/50 Index are nearly identical.

Current Allocation and Balance – February 8, 2018

TFSA

Cash: $5,000.00 CAD

RRSP

Cash: $3,807.80 USD

iShares U.S. Preferred Share ETF (PFF) – 20 Shares: $735.80

Fidelity® MSCI Real Estate Index ETF (FREL) – 20 Shares: $438.20

RRSP Total

$4,981.80 USD

Grand Total (CAD at 1.2566 per USD as of 2/7/2018)

$11,260.13 CAD

The total CanETF Portfolio value has increased since the January 2018 update even though both PFF and FREL have declined modestly. This is because CAD has gained relative to USD in the past week or so.

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.

CanETF Portfolio January 2018 Update: One Month In

It seemed like the first month of the CanETF Portfolio would pass silently, with no trades and a portfolio full of cash earning nothing. Then, on the third last day of the month, an opportunity presented itself and 20 shares of the  iShares U.S. Preferred Stock ETF (PFF) were purchased. They went on to decline a bit further, but a trade was made and the portfolio has some real investments.

Market Highlights

The following table shows market returns using representative  ETFs:

 TickerJanuary 2018 Return
Canadian ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-1.39%
BMO MSCI EAFE Index ETFZEA2.89%
BMO MSCI Emerging Markets Index ETFZEM6.17%
iShares Core Canadian Universe Bond Index ETFXBB-0.83%
iShares S&P/TSX Canadian Preferred Share Index ETFXCB-0.30%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC-0.07%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD1.61%
Vanguard FTSE Canadian Capped REIT Index ETFVRE-1.29%
U.S. ETFs
SPDR® S&P 500 ETFSPY5.71%
Vanguard FTSE Developed Markets ETFVEA4.82%
Vanguard FTSE Emerging Markets ETFVWO8.43%
iShares Core U.S. Aggregate Bond ETFAGG-1.14%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-1.22%
Vanguard Short-Term Corporate Bond ETFVCSH-0.43%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.43%
iShares U.S. Preferred Stock ETFPFF-1.34%
Fidelity® MSCI Real Estate ETFFREL-2.71%
Currency
USD/CAD-2.01%

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

The Portfolio missed out on gains from foreign equities, but benefitted from avoiding fixed income and Canadian equities.

At Davos, Ray Dalio said “If you’re holding cash, you’re going to feel pretty stupid.” A sentiment soon echoed by BlackRock’s Larry Fink. Indeed, holding so much cash meant missing out on strong gains in some assets in January.

On January 11, Brent crude hit $70 for the first time since 2014. For the whole month of January, U.S. monthly oil output average 10 million barrels per day for the first time since 1970.

On January 17, the Bank of Canada hiked the policy interest rate to 1.25%. Meanwhile, the ECB lowered its QE to 30B from 60B effective 2018.

Interest rates made sizable advances in January and over the past several months. As the following chart shows, short term U.S. interest rates have headed higher than the 10 year, compressing the term premium and flattening the yield curve.

2-5-10-year-treasury-01312018

Rates are up in Canada as well, with the 5 year Government of Canada benchmark yield surpassing 2%.

BoC-5-year-01312018
Source: Bank of Canada

Bonds look relatively more attractive than one month ago, but yields (and more importantly, real yields) need to move up further for if they are to become compelling buy.

Monthly Portfolio Activity

 Beginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash (CAD)$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash (USD)$5,000.00$4,247.20-$752.80
PFF (USD)$0.00$752.40$752.40
USD RRSP Total$5,000.00$4,999.60-$0.40-0.01%
Grand Total (CAD at 1.2293 per USD as of 1/31/2018)$11,272.50 CAD$11,146.01 CAD-$126.49-1.12%

The decline in the USD relative to the CAD is the main reason for the negative return in January. The Portfolio turned in a loss even on a constant currency basis as PFF decline modestly from the purchase price.

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash (CAD)$5,000.0044.86%
USD RRSP
Cash (USD translated to CAD)$5,221.0846.84%
PFF (USD translated to CAD)$924.938.30%
USD RRSP Total in CAD$6,146.0155.14%
Grand Total (CAD at 1.2314 per USD as of 1/31/2018)$11,146.01 CAD100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeChange in ValueReturnContribution
PFF20$37.64$37.62$0.00-$0.40-0.05%-0.004%

Trade Summary

DateTypeTickerSharesCommissionTotalLocation
1/29/2018BuyPFF20$0.00$752.80USD RRSP

Looking Ahead

Equity valuations are even more stretched, with the exception of Canada. Relative valuations in emerging markets are favourable, but the large advance since the February 2016 lows beckons for waiting for a retracement of some sort. There is a need for a pullback in varying degrees before committing capital to the various equity markets.

Short term corporate bonds may be appealing soon if interest rates continue to climb. Likewise, REITs in the U.S. will be interesting if they continue to sell off. Interest rate sensitive assets may provide buying opportunities sooner than later.

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.