Last April, troubles at alternative mortgage lender Home Capital Group came
to light, and its stock value plummeted. You’ll recall that investors sold
off heavily after the Ontario Securities Commission announced it had filed
disclosure allegations against the firm and key management.
Many worried that this was just the tip of the iceberg and there were other
Canadian lending institutions, including the big banks, that could be hurt
by troubled mortgage loans. The result was the Canadian banks faced selling
pressure, with financials losing ground in April and May. Financials traded
in narrow range until early September, and then rallied strongly until the
steep general market selloff in late January and early February.
Markets have recovered somewhat since bottoming in early February, and
financials staged a powerful rally, with XFN delivering a 1-year return of
10.9% compared with 6.7% for the S&P/TSX Capped Composite Index, but
whether the financial sector will continue its blistering outperformance
remains to be seen. Canadians continue to carry very high levels of debt,
which could result in problems as interest rates begin to climb, or if we
see a slowdown in the economy. Although we’ve been seeing street-beating
quarterly earnings from the big banks, there are also tangible signs of a
slowdown in the Canadian housing market, after federal mortgage rule
tightening and provincial government actions in B.C. and Ontario appear to
have put a chill on those markets.
Looking ahead, I still see the potential for near-term headwinds for the
banks. If you have realized gains from your XFN holdings, you may want to
consider taking some money off the table and trim your position. If you
have a longer-term outlook, a higher appetite for risk, and are looking to
add some financial services exposure to your portfolio, it may be a decent
time to start dipping your toes in the sector. This remains one of the best
ways to play the broader financial industry in Canada.
iShares S&P/TSX Capped Financials ETF
BlackRock Asset Management
Financial Services Equity
FundGrade A+ Awards:
2012, 2014, 2015
Large Cap Value
iShares Management Team
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products. He is also the publisher
Dave Paterson’s Top Funds Report,
offering regular commentary and in-depth analysis of Canada’s top
investment funds. He uses a unique analytical approach to identify
funds with strong, risk-adjusted returns, and regularly publishes his
insights and analyses in Fund Library.
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