CanETF Portfolio February 2019 Update: More Gains

Market Highlights

In February, markets mostly built onto a strong start to the year. 2019 has so far been quite friendly to risk assets, and last year’s concerns over a looming recession are seemingly nowhere to be found.

A big part of the shift in sentiment can be attributed to dovish turns from central bankers, most notably the U.S. Federal Reserve. Minutes from the January 29-30 meeting (released February 20) were consistent with that pivot. Perhaps the most interesting tidbit was a comment on the balance sheet unwinding: “Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year”. Just recently, this balance sheet runoff has taken the Fed’s assets to under $4 trillion .

Fed Total Assets 2272019

Meanwhile, the U.S.-China trade dispute appears to have made favourable progress in February, including the postponing of U.S. tariffs that were set to rise from 10% to 25% on March 1. Reuters has some interesting charts on the topic.

NameTickerFebruary 2019 Return2019 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN3.15%12.12%
BMO MSCI EAFE Index ETFZEA2.61%5.21%
BMO MSCI Emerging Markets Index ETFZEM-0.61%5.02%
iShares Core Canadian Universe Bond Index ETFXBB-0.07%1.28%
iShares Canadian Corporate Bond Index ETFXCB0.04%1.71%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.35%1.13%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD1.60%1.05%
Vanguard FTSE Canadian Capped REIT Index ETFVRE3.97%12.38%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY3.20%11.45%
Vanguard FTSE Developed Markets ETFVEA2.18%9.68%
Vanguard FTSE Emerging Markets ETFVWO0.65%9.25%
iShares Core U.S. Aggregate Bond ETFAGG-0.07%1.01%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.02%3.16%
Vanguard Short-Term Corporate Bond ETFVCSH0.39%1.49%
iShares iBoxx $ High Yield Corporate Bond ETFHYG1.65%6.43%
iShares U.S. Preferred Stock ETFPFF1.34%6.25%
Fidelity® MSCI Real Estate ETFFREL0.74%12.52%
USD/CAD0.19%-3.47%

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

Monthly Portfolio Activity

February BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$3,724.75$3,729.95$5.20
CPD$1,247.00$1,265.00$18.00
CAD TFSA Total$4,971.75$4,994.95$23.200.47%
USD RRSP
Cash$2,377.82$2,384.59$6.77
PFF$1,446.40$1,448.00$1.60
VWO$835.60$832.40($3.20)
FREL$500.20$503.80$3.60
USD RRSP Total$5,160.02$5,168.79$8.770.17%
CAD Total$11,754.08$11,801.73$47.650.41%

iShares U.S. Preferred Stock ETF (PFF) and iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) paid out a distribution each. Both ETFs pay monthly.

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,729.9531.61%
CPD$1,265.0010.72%
CAD TFSA Total$4,994.9542.32%
USD RRSP
Cash$3,140.2726.61%
PFF$1,906.8716.16%
VWO$1,096.199.29%
FREL$663.455.62%
USD RRSP Total$6,806.7857.68%
Grand Total (CAD at $1.3169 per USD as of 2/28/2019)$11,801.73100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF40$36.16$36.20$0.169350$8.370.58%0.07%
CPD100$12.47$12.65$0.052$23.201.86%0.20%
VWO20$41.78$41.62$0.0000($3.20)-0.38%-0.03%
FREL20$25.01$25.19$0.000$3.600.72%0.03%

The CanETF Portfolio experienced solid performance from the ETF holdings and a small boost from the Canadian dollar weakening relative to the U.S. Dollar.

Trade Summary

No trades were placed in January.

Looking Ahead

Very little has changed in the past month to alter the attractiveness of various asset classes. The status quo of patiently waiting for opportunities continues.

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 2019 Update: Resounding Rebound

Market Highlights

After a brutal December, markets rebounded vigorously to start 2019. Both stocks and bonds had strong returns, and of the ETFs tracked below only Canadian preferreds were in the red (and barely so).

In part, this rally was supported by market expectations that the U.S. Federal Reserve would lighten up or outright pause interest rate increases and/or consider normalizing the balance sheet at a larger size.

In line with this dovish turn, the Fed kept rates steady as announced at the end of their meeting on January 30.

This followed the Bank of Canada doing the same earlier in the month on January 9, when they also lowered estimates for 2019 GDP growth.

NameTickerJanuary 2019 Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN8.69%
BMO MSCI EAFE Index ETFZEA2.53%
BMO MSCI Emerging Markets Index ETFZEM5.66%
iShares Core Canadian Universe Bond Index ETFXBB1.35%
iShares Canadian Corporate Bond Index ETFXCB1.68%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.50%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-0.54%
Vanguard FTSE Canadian Capped REIT Index ETFVRE7.77%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY7.99%
Vanguard FTSE Developed Markets ETFVEA7.34%
Vanguard FTSE Emerging Markets ETFVWO8.54%
iShares Core U.S. Aggregate Bond ETFAGG1.07%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD3.14%
Vanguard Short-Term Corporate Bond ETFVCSH1.09%
iShares iBoxx $ High Yield Corporate Bond ETFHYG4.71%
iShares U.S. Preferred Stock ETFPFF4.85%
Fidelity® MSCI Real Estate ETFFREL11.70%
USD/CAD-3.65%

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

Monthly Portfolio Activity

January 2019 BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$3,714.65$3,724.75$10.10
CPD$1,253.00$1,247.00($6.00)
CAD TFSA Total$4,967.65$4,971.75$4.100.08%
USD RRSP
Cash$2,377.82$2,377.82$0.00
PFF$1,369.20$1,446.40$77.20
VWO$762.00$835.60$73.60
FREL$447.80$500.20$52.40
USD RRSP Total$4,956.82$5,160.02$203.204.10%
CAD Total$11,729.74$11,754.08$24.340.21%

iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) paid out two distributions in January. Much like iShares U.S. Preferred Stock ETF (PFF) paid two in December, the year-end timing of these monthly payers is a bit off. They are expected to revert to a regular one a month schedule in February.

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,724.7531.69%
CPD$1,247.0010.61%
CAD TFSA Total$4,971.7542.30%
USD RRSP
Cash$3,125.4126.59%
PFF$1,901.1516.17%
VWO$1,098.319.34%
FREL$657.465.59%
USD RRSP Total$6,782.3357.70%
Grand Total (CAD at $1.3144 per USD as of 1/31/2019)$11,754.08100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF40$34.23$36.16$0.000000$77.205.64%0.66%
CPD100$12.53$12.47$0.101$4.100.33%0.03%
VWO20$38.10$41.78$0.0000$73.609.66%0.63%
FREL20$22.39$25.01$0.000$52.4011.70%0.45%

The CanETF Portfolio received a strong contribution in January from the ETFs holdings. This was welcome given the negative currency impact of the Canadian dollar strengthening relative to the U.S. Dollar. CAD essentially gained back what it lost during December.

USDCAD 1212018-1312019
Source: Bank of Canada

Combining the two factors led to the Portfolio eeking out a small gain for January in CAD terms.

This relationship between USD exposure and the ETF (and general market) performance raises an interesting observation. In December, when markets were in sell-off mode, safe haven flows into USD boosted the CAD value of the Portfolio. In January, markets rallied and CAD gained. These forces can act in a diversifying manner as they have in the last two months.

Trade Summary

No trades were placed in January.

Looking Ahead

It is now clear that opportunities were missed in the market panic of late 2018. What was purchased in the latter half of the year could have been had for cheaper, and what was almost purchased is now more expensive. Still, market timing is not the aim of this strategy and the search for attractive opportunities continues.

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 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.

CanETF Portfolio November Update: Dovish Signal Helps Risk Assets

Market Highlights

November provided some welcome relief after the losses endured in October. Notable events include:

U.S. midterm election results came in as expected on November 6, with the Democrats gaining control of the House and the Republicans keeping the Senate.

Oil prices fell into a bear market and then some, sparking renewed production cut talks.

BRENT 11292018

Prices are roughly double those of the early 2016 lows, but this most recent move still represents a sharp decline.

On November 28, just days after the S&P 500 entered its second correction of the year, U.S. Federal Reserve Chairman Jerome Powell offered markets a dovish turn, sparking a powerful rally.

NameTickerNovember 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN1.38%-3.67%
BMO MSCI EAFE Index ETFZEA1.18%-3.59%
BMO MSCI Emerging Markets Index ETFZEM5.37%-7.20%
iShares Core Canadian Universe Bond Index ETFXBB1.03%-0.06%
iShares Canadian Corporate Bond Index ETFXCB0.39%-0.41%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.25%0.49%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD-5.98%-6.91%
Vanguard FTSE Canadian Capped REIT Index ETFVRE1.66%5.80%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY2.03%4.98%
Vanguard FTSE Developed Markets ETFVEA0.40%-9.66%
Vanguard FTSE Emerging Markets ETFVWO4.48%-11.98%
iShares Core U.S. Aggregate Bond ETFAGG0.59%-1.83%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD-0.32%-5.36%
Vanguard Short-Term Corporate Bond ETFVCSH0.01%0.12%
iShares iBoxx $ High Yield Corporate Bond ETFHYG-0.51%0.29%
iShares U.S. Preferred Stock ETFPFF-2.20%-3.30%
Fidelity® MSCI Real Estate ETFFREL4.73%3.74%
USD/CAD1.21%6.03%

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

Monthly Portfolio Activity

November BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$3,719.55($1,280.45)
CPD$1,284.00$1,284.00
CAD TFSA Total$5,000.00$5,003.55$3.550.07%
USD RRSP
Cash$2,341.41$2,352.57$11.16
PFF$1,445.60$1,407.20($38.40)
VWO$757.20$793.80$36.60
FREL$468.20$490.20$22.00
USD RRSP Total$5,012.41$5,043.77$31.360.63%
CAD Total$11,587.31$11,712.27$124.961.08%

Income was earned from PFF (pays monthly) and CPD (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,719.5531.76%
CPD$1,284.0010.96%
CAD TFSA Total$5,003.5542.72%
USD RRSP
Cash$3,129.1526.72%
PFF$1,871.7215.98%
VWO$1,055.839.01%
FREL$652.025.57%
USD RRSP Total$6,708.7257.28%
Grand Total (CAD at $1.3301 per USD as of 11/30/2018)$11,712.27100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF40$36.14$35.18$0.156483($32.14)-2.22%-0.27%
VWO20$37.86$39.69$0.0000$36.604.83%0.31%
FREL20$23.41$24.51$0.000$22.004.70%0.19%
CPD100$12.85$12.84$0.049$3.900.30%0.03%

Portfolio holding iShares U.S. Preferred Stock ETF (PFF) had a poor month, and the timing of the add-on purchase of 20 shares on October 3 proved early. Fortunately, Fidelity MSCI Real Estate ETF (FREL) and Vanguard FTSE Emerging Markets ETF (VWO) delivered strong returns in November, more than offsetting the decline in PFF.

The Canadian dollar weakened again relative to the U.S. dollar, not surprising given the drop in oil prices. As a result, the Portfolio received a boost from translating the USD-denominated ETF holdings and cash held in the RRSP portion of the Portfolio at a higher exchange rate.

Trade Summary

After calling out Canadian preferred shares last month as a potential asset class to add, on November 26 the opportunity arose to purchase 100 shares of iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) at $12.85.

Looking Ahead

It was a relief to put some of the untouched CAD TFSA cash balance to work into CPD. As mentioned in the October update, international stocks are close to attractive valuations and could be the next purchase. Otherwise, it feels appropriate to wait and see how the near future unfolds and to patiently await the next opportunity.

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 Trade #5: Patient Purchase of (Canadian) Preferreds

In the October update, Canadian preferred shares were mentioned as a potential new holding. They have fallen substantially since then. The initial dip below $14 was tempting, but patience paid off and within weeks a much better price was available.

CPD 11262018

The CanETF Portfolio bought 100 shares of iShares S&P/TSX Canadian Preferred Share Index ETF (CPD) at $12.85. (This is the first trade to include a commission, which cost an extra $0.35 CAD. Although Questrade offers free purchases of ETFs, this additional cost is not covered as explained by their footnote “Other fees, such as data, Exchange and ECN fees may apply”.) The solid current trailing yield of 4.6% and the diversification potential are appealing. To the extent the fund holds a majority allocation to rate reset preferred shares, rising interest rates are be beneficial since the dividend rate is expected to reset at a higher level. This should pair well with existing CanETF Portfolio holding iShares U.S. Preferred Stock ETF (PFF), which is primarily perpetual preferreds. CPD also holds some perpetual preferred shares, which typically decline with rising interest rates.

Trade 5 Order CPDTrade 5 Filled CPD

Trade 5 Confirmation CPD

At long last, some of the Canadian dollar cash balance of the Portfolio has been invested.

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$3,714.6531.92%
CPD$1,282.0011.02%
CAD TFSA Total$4,996.6542.94%
USD RRSP
Cash$3,105.9726.69%
PFF$1,871.2516.08%
VWO$1,028.248.84%
FREL$633.455.44%
USD RRSP Total$6,638.9157.06%
Grand Total (CAD at $1.3230 per USD as of 11/26/2018)$11,635.56100.00%

The Canadian ETF market offers a deep roster of viable candidates for the Canadian preferred share asset class. In fact, CPD is only the third largest fund, behind BMO Laddered Preferred Share Index ETF (ZPR) and Horizons Active Preferred Share ETF (HPR). Other passive and active offerings are also available. CPD was chosen because it provides the broadest coverage of the Canadian preferred share market and does so at the lowest cost (both CPD and ZPR have a management fee of 0.45%).

Tracking the Solactive Laddered Canadian Preferred Share Index, ZPR invests only in rate reset securities. This means perpetual, retractable, and floating rate preferred shares are excluded. The result is a more focused ETF for those interested only in the rate reset issues, but at the expense of being an incomplete representation of the overall Canadian preferred share market.

What is admirable about HPR is that its of 0.55% is only 10 basis points more than the cheapest passive alternative. That’s not the only impressive thing about this active approach to the Canadian preferred share market. The fund has outperformed the two passive giants (ZPR and CPD) with less volatility since inception (source: Morningstar.ca data as of 10/31/2018). This is a compelling active fund, demonstrating a strong track record and charging a tiny premium to do so. The only hesitation in choosing HPR was the preference for a passive approach as a foundational piece of the Portfolio. If future funds are allocated to this asset class, this fund will receive serious consideration.

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 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.

CanETF Portfolio Trade #4: More U.S. Preferreds

Hot on the heels of trade #3, the CanETF Portfolio seized the opportunity to add to the iShares U.S. Preferred Stock ETF (PFF) holding. The purchase of 20 more units was done at $36.30, only a penny above the new 52-week low established today at $36.29.

PFF 10032018

The 12 month trailing yield at this price is 5.7%. The buy even took advantage of the ETF trading at a discount to NAV, a welcome bonus given that the fund typically trades at a small premium (as per the Morningstar.com PFF page).

Trade 4 Order PFF

Trade 4 Filled PFF

Trade 4 Confirmation PFF

This purchase represents a milestone for the Portfolio: the USD cash balance is now more than half invested.

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0043.50%
USD RRSP
Cash$2,988.2426.00%
PFF$1,865.2616.23%
VWO$1,034.779.00%
FREL$605.415.27%
USD RRSP Total$6,493.6956.50%
Grand Total (CAD at $1.2832 per USD as of 10/3/2018)$11,493.69100.00%

At over 16%, the allocation to U.S. preferred shares is a full one for now. The Portfolio will more likely bear the brunt of any further declines in price rather than using it as an opportunity to average down.

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 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.

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.

CanETF Portfolio August 2018 Update: Emerging Markets Down Again

Market Highlights

August provided a number of notable events and milestones:

The Bank of England raised interest rates on August 2 to 0.75%, the highest since 2009.

The S&P 500 bull market became the longest in history on August 22.

Meanwhile, emerging markets equities continue to face pressure, with crumbling currencies in several countries contributing to the latest round of weakness and leading the MSCI EM index to nearly bear market territory.

The United States and Mexico reached a tentative agreement on a new trade deal on August 27, and ongoing negotiations between the U.S. and Canada will determine the fate of NAFTA.

NameTickerAugust 2018 Return2018 YTD Return
Canadian Listed ETFs
BMO S&P/TSX Capped Composite Index ETFZCN-0.82%2.27%
BMO MSCI EAFE Index ETFZEA-1.94%1.60%
BMO MSCI Emerging Markets Index ETFZEM-2.40%-3.72%
iShares Core Canadian Universe Bond Index ETFXBB0.78%0.56%
iShares Canadian Corporate Bond Index ETFXCB0.82%0.73%
Vanguard Canadian Short-Term Corporate Bond Index ETFVSC0.42%0.83%
iShares S&P/TSX Canadian Preferred Share Index ETFCPD0.77%2.34%
Vanguard FTSE Canadian Capped REIT Index ETFVRE2.17%9.18%
U.S. Listed ETFs
SPDR® S&P 500 ETFSPY3.24%9.84%
Vanguard FTSE Developed Markets ETFVEA-1.89%-2.35%
Vanguard FTSE Emerging Markets ETFVWO-3.51%-7.63%
iShares Core U.S. Aggregate Bond ETFAGG0.64%-0.99%
iShares iBoxx $ Investment Grade Corporate Bond ETFLQD0.30%-2.90%
Vanguard Short-Term Corporate Bond ETFVCSH0.50%0.22%
iShares iBoxx $ High Yield Corporate Bond ETFHYG0.70%2.00%
iShares U.S. Preferred Stock ETFPFF1.09%2.59%
Fidelity® MSCI Real Estate ETFFREL2.50%4.74%
USD/CAD0.29%4.07%

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

With the exception of the U.S., equities delivered negative returns in August, while bonds and preferred shares were in positive territory.

After five months of negative monthly returns (February to June), emerging markets equities (as measured by VWO) gained in July. The loss in August more than offset that gain and this asset class is currently the leading candidate for a new investment for the Portfolio. Though the sell-off has been far from unwarranted, at a certain point valuations and a willingness to buy when the situation looks most bleak compel the purchase of assets that are most disliked by the market.

Monthly Portfolio Activity

August BalanceBeginning ValueEnding ValueChange ($)Change (%)
CAD TFSA
Cash$5,000.00$5,000.00$0.000.00%
USD RRSP
Cash$3,835.52$3,839.05$3.52
PFF$751.80$758.80$7.00
FREL$493.60$506.00$12.40
USD RRSP Total$5,080.92$5,103.85$22.920.45%
CAD Total$11,613.83$11,663.07$49.240.42%

Income was earned from PFF (pays monthly).

Current Portfolio Allocation and Balance

 Current Value (In CAD)Current Allocation
CAD TFSA
Cash$5,000.0042.87%
USD RRSP
Cash$5,011.8742.97%
PFF$990.618.49%
FREL$660.585.66%
USD RRSP Total$6,663.0757.13%
Grand Total (CAD at $1.3055 per USD as of 8/31/2018)$11,663.07100.00%

Performance and Contribution

 SharesBeginning PriceEnding PriceIncomeReturn ($)Return (%)Contribution
PFF20$37.59$37.94$0.176215$10.521.40%0.09%
FREL20$24.68$25.30$0.000$12.402.51%0.11%

U.S. preferred shares (PFF) and REITs (FREL) continue to perform well for the CanETF Portfolio.

The CAD weakened relative to the USD in August, contributing a little more than half of the gain in CAD for the CanETF Portfolio.

Trade Summary

No trades were placed in August.

Looking Ahead

The valuation and mean reversion measures that power the Research Affiliates Asset Allocation Interactive forecast of future asset returns paints a dim view of prospective returns for investors. The expected 10 year annualized return of an all country equity portfolio is only 4.8% nominal and an unappealing 2.6% real (in USD). Only emerging markets equities can be expected to generate a substantial return according to their methodology.

RAAAI-08312018
Source: Research Affiliates Asset Allocation Interactive

This both supports the caution of holding off on buying equities at current valuations and the choice to elevate emerging markets to top candidate for a new purchase. Even though the clouds above emerging markets are darker than other asset classes, a long term perspective and a focus on valuations makes it possible to find the silver lining.

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.