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FundGrade A+® Award winner iShares S&P/TSX Capped Financials ETF outpaces broader market
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Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert

By Dave Paterson  | Wednesday, February 28, 2018


Financial stocks have long been the cornerstone of the Canadian equity markets, with the big five banks making up more than 20% of the total market capitalization of the S&P/TSX Composite Index. The financial services sector has been a stellar performer over the long-term, outpacing the broader market by a decent margin. For example, the iShares S&P/TSX Capped Financials Index ETF (TSX: XFN), which tracks the TSX financials subindex, has a 10-year average annual compounded rate of return of 8.2% (to Jan. 31), compared with 5.0% for the S&P/TSX Capped Composite. The ETF is also a regular FundGrade A+ Award winner, garnering awards in 2012, 2014, and 2015.

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
Fund Company:
BlackRock Asset Management
Fund Type:
Financial Services Equity
FundGrade Rating: B (January)
FundGrade A+ Awards: 2012, 2014, 2015
Style: Large Cap Value
Risk level: Medium
RRSP/RRIF suitability: Good
Manager: iShares Management Team
MER: 0.61%
Trading symbol: TSX: XFN

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 of 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.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.


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