investing

Announcing The All Canadian Portfolios

August 31st, 2015

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Maple Leaf Canadian Flag, courtesy of Shutterstock

Up until now, all types of MoneyGeeks portfolios have contained U.S. listed stocks and/or ETFs. But because of certain situations which Ill discuss later, some members have asked for portfolios that consist solely of ETFs listed in Canada. (If you dont know what an ETF is, please read our free book).

Today, Im happy to announce the introduction of the All Canadian portfolios to address that need.

Even though all the ETFs in the All Canadian portfolios are listed in Canada, that doesnt mean the ETFs invest in only Canadian stocks and bonds. In fact, half of the ETFs that make up the portfolios today invest in stocks that trade outside of Canada. Therefore, investing in the All Canadian portfolios will not make you any less diversified than if you invest in MoneyGeeks regular portfolios.

While the All Canadian portfolios have some advantages over the regular portfolios, primarily in the convenience of not having to exchange currencies, the All Canadian portfolios have a significant drawback as well.

The big negative with regards to the All Canadian portfolios is the lack of value investing ETFs. As long term readers know, Im a value investing devotee, so I look to include ETFs that implement sound value investing strategies whenever I can.

While Ive been able to find good value investing ETFs that trade in the U.S., I havent had much luck finding similar ETFs in Canada. I know there are several Canadian ETFs that implement some versions of value investing strategies, but not all value investing strategies are equal. Some strategies are much more well thought-out than others, and I dont think its worth investing in an ETF that implements a mediocre strategy. For example, many Canadian ETFs implement the RAFI strategy, of which Ive been critical of in the past.

Not having found a good value investing ETF, Ive elected to include more traditional market-cap weighted ETFs in the All Canadian portfolios. Market cap refers to the size of the stocks, so market cap weighted portfolios allocate money towards stocks according to the sizes of the companies. For example, since Apple is four times bigger than IBM, a market cap weighted ETF would spend four times as much money to buy Apple stocks as it would spend to purchase IBM stocks.

The difference in performances between a good value investing ETF and the market cap weighted ETF is significant. Since I introduced CAPE, a value investing ETF, into MoneyGeeks regular portfolios, CAPE has outperformed the equivalent market cap weighted ETF by around 2% per year. I expect CAPE to continue to outperform in the future, though of course theres no guarantee. Therefore, I expect the regular portfolios to outperform the All Canadian portfolios in the future.

Despite this drawback, the All Canadian portfolios might still appeal more than the regular portfolios to some people because they wont have to exchange their currencies to buy the ETFs that make up the All Canadian portfolios. These people might be especially reluctant to exchange their currencies today, given how cheap the loonie is compared to the U.S. dollar.

While I certainly understand the desire for convenience, I would caution against expecting higher returns from the All Canadian portfolios when the loonie goes up. When you buy a Canadian listed ETF that invests in U.S. stocks, the ETF will take your Canadian dollars and exchange the currency themselves to buy U.S. stocks.

Now, I should mention that there are other ways to benefit from a rising loonie. Some Canadian listed ETFs hedge their currencies so as to factor out the effects of the currency fluctuations. While investing in these ETFs wont help you make any money from a rising loonie,it wont hurt your returns either. Ive decided to include one such ETF in the All Canadian portfolios.

However, Im not convinced that hedging currencies is always desirable. As I wrote a while back, the U.S. dollar tends to rise when stocks around the world fall, which has the effect of cushioning any losses from stocks. Indeed, this is exactly what has happened in the past few months. Because of the higher U.S. dollar, the U.S. stocks in the ETF included in the All Canadian portfolios dont hedge the Canadian dollar, which means that the investor who buys the ETF wont benefit from a rising loonie.

Instead, the All Canadian portfolios could be useful when the investor either cant buy U.S. listed ETFs, or when its too expensive to do so. For example, if youre with Virtual Brokers and if you have only a small sum of money in your RRSP account, you may not want to pay $60 a year to be able to hold U.S. listed ETFs.

In summary, if youre looking to generate higher returns, I dont think the All Canadian portfolios is necessarily the answer, at least in comparison to the regular portfolios I offer on this site. Of course, anything can happen and the All Canadian portfolios could outperform in the short term, though I dont think thatll hold in the long term.

That said, the All Canadian portfolios can be especially useful in certain situations, and thats why we offer it to our regular members. Note that I also believe that the All Canadian portfolios will outperform most portfolios that consist of mutual funds in the long term.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.