A SPECIAL REPORT FROM FUNDATA
The annual Fundata FundGrade™ A+ Awards presentation is coming up in January, so I thought I’d check in on some of the front-running exchange-traded funds (ETFs) so far in 2015. The Fundata A+ Award is given to funds that have consistently achieved high monthly FundGrade scores throughout the year. ETFs are graded together with mutual funds according to their Canadian Investment Fund Standards Committee (CIFSC) category, and three risk-adjusted performance measures go into the ratings: the Sharpe, Information and Sortino ratios. Here’s a look at a couple of strong contenders on the A+ ETF leaderboard for 2015.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB)
This year hasn’t been a great one for the Canadian equities so far. Dragged down by oil prices and so-so economic data, the S&P/TSX Composite Total Return Index is down 3.47% to the end of August, with the CIFSC Canadian Equity category average down 2.83%. There haven’t been too many positives for Canadian Equity funds, but one of the bright spots has been the BMO Low Volatility Canadian Equity ETF.
Capitalizing on a strategy to select the 40 lowest-beta stocks of the 100 largest and most liquid securities in Canada, the fund has managed to outperform the TSX and the Canadian equity average in six of the eight months ending in August 2015. The year-to-date return of 4.5% is almost eight percentage points better than the Index and over seven percentage points better than the category average.
The ETF has only been around since late 2011, so the track record is still relatively minimal, but the results over the past three years have been great, with an average annual compounded rate of return of 20.0% (as of Aug. 31) compared with 8.3% for the TSX and 9.3% for the category average.
The fund has lived up to its “low volatility” moniker with a 3-year standard deviation of 6.7%, which is lower than both the TSX at 8.1% and the Canadian Equity average at 7.8%. Keep in mind that up until early July, the markets had been going through a period of extremely low volatility, so it will be interesting to see how the fund reacts to the bout of late-summer volatility.
The “low beta” portfolio consists of some big names at the top, including discount retailer Dollarama Inc. (TSX: DOL), insurance holding company Fairfax Financial Holdings Ltd. (TSX: FFH), and convenience store/gas station giant Alimentation Couche-Tard Inc. (TSX: ATD.B).
iShares MSCI World Index ETF (TSX: XWD)
In a world of increasingly active ETF strategies, this one is a fairly straightforward index tracker seeking to replicate the performance of the MSCI World Index. This broad index has 1,643 constituents covering approximately 85% of the market cap in each of the 23 developed markets. In order to replicate the index, the ETF actually invests in three other iShares ETFs: 57.89% in iShares Core S, 38.69% in iShares MSCI EAFE (TSX: EFA), and 3.39% in iShares MSCI Canada (TSX: EWC), with allocations shown as of Sept. 9, 2015. This mix results in a geographic breakdown of 57.6% in the United States, 8.7% in Japan, and 7.7% in the United Kingdom, and the remainder fairly evenly split among other developed markets.
Over the past five years, this passive index-tracking fund has outperformed the Global Equity category average with an annualized return of 15.6% compared with 11.4% for the category, which is an obvious checkmark on the passive side of the active-passive debate. When ranked against the 5-year return and standard deviation of other mutual funds and ETFs in the Global Equity category, XWD comes in at 15th and 49th respectively out of 165 funds. This is the type of solid risk-return profile that you look for in a long-term investment.
Both these ETFs have achieved the monthly Fundata FundGrade A Rating for the first eight months of 2015 and are well on their way to attaining the Fundata A+ Award for 2015. These are the type of investments that allow for solid growth while minimizing downside risk, which could be key with volatility creeping back into the markets.
Reid Baker is Director, Analytics and Data, at Fundata Canada Inc., a leading source for investment fund information, and is Chairman of the Canadian Investment Funds Standards Committee (CIFSC). This article first appeared in the Fall 2015 issue of Your Guide to ETF Investing, published by Brights Roberts Inc.
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The foregoing is for general information purposes only and is the opinion of the writers. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.