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ETFs of Note
Invesco Senior Loan CAD Hedged ETF (TSX: BKL.F) – Last time around, I noted that I continue to favour this ETF for exposure to the leveraged loan space largely on the higher quality portfolio it offers. During an extremely challenging period for credit markets, this ETF held up better than the other floating rate ETFs, gaining 1.10%. This narrowly outpaced the Mackenzie Floating Rate Income ETF. I continue to follow the Mackenzie offering closely and am looking to see how it continues to perform in a challenging environment.
Invesco Tactical Bond ETF (TSX: PTB) – One of the reasons I liked this ETF was my thesis that the tactical adjustments to the asset mix would allow it to outperform in a challenging bond environment. During the most recent three month, year-to-date, and one-year period, this these has not played out as expected. During the past three months, it was down 0.95%, narrowly trailing the return of the iShares Cor Canadian Universe Bond ETF (TSX: XBB), which was lower by 0.92%. Year to date, this discrepancy is even larger, with PTB falling by 2.3% compared to a 1.2% drop in XBB.
Heading into a period of rising bond yields, the ETF increased its exposure to long-term government bonds, the most sensitive to rising yields at precisely the wrong time, moving it from 28% in August to nearly 35% in September. In fact, it was this long-term government bond exposure that was the biggest detractor of returns over the past three months.
I am placing this ETF UNDER REVIEW and will monitor it closely to see if this is a pattern or was more of a one-off scenario that resulted in the significant underperformance.
Horizons Active Canadian Dividend ETF (TSX: HAL) – With volatility returning to the market, funds and ETFs with a focus on valuation, quality, and better than average fundamentals outperformed in the period, while higher beta investments trailed.
This dividend focus strategy uses a systematic approach that scours the Canadian dividend universe looking for stocks that are reasonably valued, growing sustainable dividends, and offer the potential for strong capital growth. The focus is not solely on the dividend yield of a stock, but also the growth potential and its sustainability. The process evaluates several quantitative and qualitative factors and looks to identify companies undergoing an increase in the rate of change of these factors.
The result is a portfolio that holds approximately 50 names, with the top ten making up less than a third of the Fund. The sector mix is the result of the stock selection process, and at the end of October was overweight in the more defensive utilities, real estate and telecom sectors. It was also overweight energy, which has been a headwind in the recent oil price drop. Interestingly for a dividend focused fund, the exposure to financials is roughly half that of the index and peer group. The dividend yield is sharply higher than the index and peer group.
Despite a rough October the longer-term prospects for the Fund remain strong. The focus on fundamental quality would be expected to allow it to outperform the cap-weighted indices in a more volatile market environment. Further, it has demonstrated the ability to protect capital better in a down market. For the five years ending October 31, the Fund participated in 75% of the downside of the market.
It was recently announced that starting December 1, the management fee on HAL would be reduced from 0.70% to 0.55%, a very meaningful reduction in cost. This will certainly have a positive effect on the performance of the Fund on a go forward basis and this, combined with the disciplined and repeatable investment process, it reinforces its place as one of the most attractive dividend ETFs available.
iShares MSCI EAFE Minimum Volatility Index (TSX: XMI) – Low volatility funds have promised to deliver market like performance over the long term, with better downside protection and less overall fluctuation. With the recent bouts of market volatility, these funds have largely lived up to the promise. The Invesco S&P/TSX Composite Low Volatility ETF (TSX: TLV) has significantly outperform3ed the broader Canadian equity market falling by 3.9%, compared with the 7.8% fall in the S&P/TSX Composite for the three months ending October 31. The trend has also held when looking at the international equity low volatility offerings. For the three months ending October 31, this ETF was down 5.4% compared with the 8.1% drop in the MSCI EAFE Index, which translates to two thirds of the downside of the index. Looking out over the past year, XMI is down 1%, compared with the 4.6% fall in the index. This translates to a downside capture ratio of 22%.
Given these numbers, it certainly appears that the low volatility ETFs are living up to their promise. As we head into a new year, which has the potential to be a very challenging one for investors, those worried about losses, yet still want to have some exposure to equities in their portfolios may be wise to consider including some low volatility ETFs.