Daniel Straus, head of ETF research and strategy, National Bank Financial
With a Q4 gain of 7.8 per cent, global equities ended 2019 with a bang. And at a 26.9 per cent total return, 2019 was the best year in a decade for the MSCI All Country World Index. Virtually all main equity regions posted double-digit returns. The U.S. has extended the longest (albeit one of the slowest) business cycles in history as it chugs along through an entire decade.
What should we expect for 2020? National Bank’s strategists remind us that business cycles don’t die of old age, but from other catalysts like restrictive monetary policies. They believe monetary policies of major central banks should remain accommodative in 2020, with the Federal Reserve and the Bank of Canada likely to keep their target rates unchanged. This could serve as a tailwind to risk assets with modest upward pressure on longer-term Treasury bond yields. Against this background, shorter-duration spread products should fare relatively well within the fixed income space.
Because bond yields have fallen (even though they may have bottomed out), our strategists’ models are responding to signals that there might exist value opportunities in favour of equities. In particular, the idea of shifting assets away from the U.S. market and into more cyclical indexes (the TSX or the MSCI Emerging Markets) might be a legitimate choice assuming that global growth does indeed accelerate. That said, U.S. economic fundamentals are still supportive of further growth, and the consensus is calling for an earnings per share rebound to take place in all four quarters of 2020 for U.S. benchmarks like the S&P 500. As a result, the overall geographical allocation still favours the U.S. more than other regions.
Turning to the foreign exchange market, our strategists expect the U.S. dollar to face some headwinds in the coming months, as global growth continues and a risk-on mood percolates through the FX space. This should, in turn, support the Canadian dollar, which has so far benefitted only slightly from the USMCA ratification and the sharp rise in interest rate spreads late last year.
This ETF has assets of $80 million and a management expense ratio of 0.60 per cent. FXM holds a fairly concentrated portfolio of 30 Canadian value stocks selected for low valuation ratios along dimensions of price-to-earnings, cash flows, book value, and sales. It attempts to avoid “value traps” by also selecting companies with upward earnings estimate revisions. Because of its equal weight and sector-constrained index-nature, it tends to show very high “active share” relative to more mainstream Canadian benchmarks, so its tendency to deviate from the market can be quite high. With that in mind, the resultant portfolio still screens well for overall exposure to the value factor.
VEE has assets of $980 million and a management expense ratio of 0.24 per cent. It is one of the main benchmark “bellwether” products for broad emerging market exposure, but it differs from other similar ETFs in key respects. For one, it is structured as a “wrap” of the U.S.-listed ETF VWO, which allows it to deliver enormous liquidity to the Canadian listing. Also, because of the way FTSE indexes categorize emerging markets, it has zero South Korea allocation. This is just something to keep in mind if an investor is using products that track other index families which might also be missing South Korea from developed market exposures. Finally, FTSE was early in including China A-share companies in its universe and VEE’s weight in the country at 31 per cent is slightly higher than other similar products.
XSB has assets of $2.3 billion, which makes it one of Canada’s largest bond ETFs. It is also one of the cheapest with a 0.10 per cent management expense ratio. We’re highlighting XSB to emphasize our strategists’ view that long-term rates might edge upwards in the coming months. XSB’s composition of 35 per cent corporate bonds and low duration of 2.7 years helps play into that theme while remaining a possible core “ballast” allocation in many kinds of portfolios.
PAST PICKS: MARCH 12, 2019
BMO LOW VOLATILITY CANADIAN EQUITY ETF (ZLB TSX)
- Then: $31.97
- Now: $36.01
- Return: 13%
- Total return: 15%
WISDOMTREE U.S. QUALITY DIVIDEND GROWTH VARIABLY HEDGED INDEX ETF (DQD TSX)
- Then: $26.47
- Now: $30.62
- Return: 16%
- Total return: 18%
HORIZONS ACTIVE CANADIAN BOND ETF (HAD TSX)
- Then: $10.05
- Now: $10.43
- Return: 4%
- Total return: 6%
Total return average: 13%