While not technically actively managed, this ETF uses a proprietary rules based approach designed by Morningstar to invest in a focused portfolio of Canadian stocks that exhibit favourable momentum characteristics. The stocks that trade on the Toronto Stock Exchange are rated and ranked on six fundamental factors. These factors are return on equity, earnings revisions, earnings surprises, and price changes over a three, nine and 12 month period. Once complete, the stocks are ranked first to worst, with the top 30 making up the ETF. The model is rerun on a quarterly basis, with necessary changes being made.
Performance has been excellent, handily outpacing the S&P/TSX Composite Index over a one and three year period, with levels of volatility that are in line with the broader market. This is somewhat interesting, given that the underlying holdings tend to skew towards mid-cap names. While the ETF has only been around for a little over three years, the model on which it is based has a track record dating back to December 2000. The model has also shown strong levels of outperformance.
Given the momentum focus of the ETF, valuation levels are on the high side when compared with the broader market. However, this may be somewhat justified by the higher levels of earnings growth shown by the portfolio, both on a historic and forward looking basis.
I would expect that this ETF to deliver above average returns with levels of volatility that are at or above the broader market. My reasoning is that with the concentrated, mid-cap focused portfolio, the potential for above average volatility exists. I would also be reluctant to use this as a core holding. Instead, it may be an interesting way to get some mid-cap exposure in your portfolio. It is also a good candidate to be used as a return enhancer in an otherwise well-diversified portfolio.