Canadian MoneySaver ETF Model Portfolio Update

Since our last model portfolio update in June 2016, markets have trended higher and even touched all-time highs in the United States. However, over this period we have had our fair share of volatility. As we head into the final months of the year, we will look to capitalize on some gains and better position for the Canadian MoneySaver portfolio for what lies ahead.

All Eyes On The Federal Reserve (FED)

Very much a ‘will they, won’t they’ story, timing the next rate hike from the FED has captivated investors since the last hike in December 2015. Investors are increasingly betting this will likely take place within the year, if not by year-end. This will be a headwind for gold, as higher interest rates increase the opportunity cost of holding the asset class. This point, along with stellar gains in the precious metal YTD has led us to sell our allocation in Global Gold Index Fund (XGD). This will also help address the current overweight (15.4%) in the materials sector, a nice portfolio tailwind we enjoyed in 2016. The position will be replaced with US High Yield Bond Index Fund (XHY). We certainly like the income aspect from replacing an unproductive asset class with a position that yields 5.6%. Admittedly, any FED rate hike will likely hurt XHY in the short-term, as bonds with better credit become more attractive at a higher yield. However, over the medium-to long-term, as long as rates rise ‘slow and steady’ in response to an improving economy, increased business will allow high yield debtors to service debt loads.

The Best Offence Is A Good Defense

With a focus on the long-term investor, the model portfolio shows a growth asset mix with approx. an 80.0% equity allocation. This same tilt finds its way into the sector allocation with the financial, materials and industrial sectors being the top weights. Both the utility and telecommunication sectors represent less than 10.0% of the equity portfolio. We will increase the weight to these defensive sectors, given that market volatility appears to be here to stay – a FED rate hike, presidential election, higher valuation multiples in equity, etc. We will be adding BMO Covered Call Utilities ETF (ZWU) to help accomplish this mandate; you can read about the merits of the ETF in this issue’s ‘Fund Spotlight’. As this is predominantly a Canadian income-focused ETF, we will be taking capital from Claymore S&P/TSX Canadian Dividend ETF (CDZ) to fund the trade, as well as a small weight from VE. We had hoped quantitative easing on behalf of the European Central Bank would have helped with a regional market recovery, similar to the success of US financial markets. However, fiscal policy is still a mess and the long-term impact from ‘Brexit’ only complicates matters. Valuations are cheap and we continue to believe in a long-term recovery for the EU but also feel some capital could be better used elsewhere in the meantime.

Michael Southern is an Analyst with 5i Research in Kitchener, Ontario.