Daniel Straus, head of ETF research and strategy at National Bank Financial
Focus: ETFs

MARKET OUTLOOK

With rates rising and trade wars simmering, how did ETF investors react to the surge in market volatility last week? The answer: They reacted intensely, but more so in the U.S. than in Canada.

While major U.S. and Canadian benchmark indexes dropped by multiple percentage points, overall trading volume increased by around 40 per cent in both markets. In the U.S., where ETF trading accounts for typically 25 per cent of all dollar turnover, that figure suddenly grew to 36 per cent of all value traded. When everyone moves en masse to ETFs rather than stocks during selloff conditions, this could signify a market where information is thinly distributed and investors don’t know where to go—they just want to put their money somewhere quickly.

In Canada, markets were also choppy and volumes high, but ETF trading was much calmer. Despite the growing assets and headline ink that Canadian ETFs have garnered, the landscape is still comparatively smaller than in the U.S. and ETF trading generally accounts for only 11 per cent of all value traded on all exchanges. ETFs may have become the vehicle of choice during selloff conditions south of the border, but their share of trading remained stable at 11 per cent in Canada.

This suggests to us that much of the risk during this period may been confined to the U.S. Indeed, our bank’s strategists believe that U.S. equity is running on fumes and is vulnerable to downward earnings revisions. In market conditions of higher interest rates, a strong U.S. dollar, rising oil prices and a tight labour market, margin expansion seems an unlikely path to justifying still-lofty valuations.

National Bank’s Economics & Strategy team recently observed that from a valuation perspective and in terms of price-to-earnings multiples, most regions outside of the U.S. are already in-line or at a discount relative to their respective long-term (five- and 10-year) averages. In fact, it has been P/E compression that has been weighing down the S&P/TSX Composite Index’s performance in Q3, despite strong economic fundamentals. They attribute part of this price action to concerns over U.S. trade negotiations, which could dissipate in the face of the new deal’s announcement.

That said, indicators for global equity performance are still telegraphing considerable risk: downward earnings revisions are becoming increasingly acute for emerging markets and in the MSCI All Country (AC) index, the majority of companies (55 per cent) are revising downward.

So in keeping with a backdrop of strong long-term support for energy commodities and always tumultuous global markets, we’re highlighting broad Canadian equity, global value and multi-asset low volatility for this edition of Market Call.

TOP PICKS

HORIZONS S&P/TSX 60 INDEX ETF (HXT.TO)

VANGUARD GLOBAL VALUE FACTOR ETF (VVL.TO)

INVESCO LOW VOLATILITY PORTFOLIO ETF (PLV.TO)

PAST PICKS: MARCH 29, 2017

HORIZONS SEASONAL ROTATIONAL ETF (HAC.TO)

• Then: $18.79
• Now: $20.11
• Return: 7%
• Total return: 7%

VANGUARD U.S. TOTAL MARKET INDEX ETF (VUN.TO)

• Then: $43.89
• Now: $50.70
• Return: 16%
• Total return: 18%

ISHARES EDGE MSCI EAFE MINIMUM VOLATILITY INDEX ETF (XMI.TO)

• Then: $34.02
• Now: $34.83
• Return: 2%
• Total return: 6%

Total return average: 10%