When we build an ETF portfolio we can seek greater total returns beyond the market. That is, beyond the cap weighted funds such as those that track the S&P 500. You’ll find a greater growth ETF portfolio option in the Model ETF Portfolio page.
As always the ETF model portfolios are not recommendations, but perhaps they can be factored into your total decision making process. And please ensure that you understand all tax and risk considerations.
Past performance does not guarantee future returns.
Patience may be required.
Many of the strategies to ‘beat the market’ can take time. We know that value investors have been waiting for more than a decade for value investing to pay off again. These days, investors are fueled by growth aspirations. More money is still pouring into companies with greater growth potential. And investors will pay up handsomely to own growth companies with modest current earnings per share.
The poster child for that phenomenon is the famed FAANG stocks. The Facebook-Apple-Amazon-Netflix-Google gang. You can throw in the Microsoft’s and Texas Instrument’s and Cisco System’s and Intel’s and more. Or course those companies are also driving the returns of the S&P 500. If you own a core fund or a wonderful one ticket ETF portfolio, you have exposure to those ‘growthier’ names.
In the greater growth ETF portfolio on Cut The Crap Investing you’ll see the inclusion of the Nasdaq 100 fund, ticker QQQ from Invesco. That fund is certainly tech heavy. It’s also bio tech heavy. Here’s the top 10. We see almost 45% in those top 5 tech stalwarts.
Of course when you add the Nasdaq 100 you are increasing your exposure to the household name tech companies. But you are also adding greater bio tech and healthcare exposure, communications/entertain focus, plus consumer staples and consumer discretionary sectors.
The greater growth ETFs
Here’s the assets offered for consideration. Keep in mind that the ETFs are all US-listed in US dollars, save for the Canadian XDIV fund from iShares. Your US Dollar RRSP account or taxable account may be the best destination for your US dollar assets.
You can also find these greater growth ETF portfolio options in Canadian dollar versions.
The Nasdaq 100 had another stellar year. It outperformed the S&P 500 funds by more than 5% in 2019. US mid cap and small cap funds are still waiting to have their day. That approach will embrace the size premium as larger baskets of smaller and mid cap companies have a history of out performance over longer periods. Again, longer periods are the key words here. You may decide to also add a small cap weighting.
For 2019 iShares Core S&P 500 IVV delivered 31.4% in 2019.
- Mid cap IJH – 26.1%
- Small cap IJR – 22.8%
The equal weight RSP holds the S&P 500 constituents in equal weight fashion. Again, there is a long term history of out performance. That approach can embrace the size premium as the ‘smaller’ companies have more weight. That equal weight approach can also find value. There can be greater current earnings in the lesser caps.
The following chart is to end of November 2019.
RSP returned 25% in 2019.
The Canadian offering suggested is iShares smart beta Dividend ETF XDIV. That fund delivered a slight beat of the core Canadian ETF XIC. In 2019 XDIV delivered 24.9% compared to 22.9% for XIC.
Put it all together and the greater growth portfolio would be in a dead heat with a suitable benchmark. Greater growth did not deliver greater total returns.
But of course returns of near 28% would be nothing to sneeze at. Keep in mind the US bucket is in US dollars. There’s a lesser return for US assets by about 5% due to currency exchange. The Canadian dollar was ‘strong’ in 2019.
For International exposure one might use a developing markets fund. Once again that approach is looking to have its day. But we might acknowledge the greater long term growth prospects of developing markets.
XEM delivered 11.6% in 2019.
Of course, most would suggest that you include international exposure. If you have a longer term time horizon you may choose developing markets. It is difficult to find a growth oriented global ETF. I’ll will conduct a search in the land of mutual funds.
The Canadian dollar offerings …
Invesco offers the S&P 500 equal weight strategy in Canadian dollars.
The ticker is EQL. It delivered 22.3% in 2019.
iShares Canada offers XQQ for the Nasdaq 100. Than fund delivered 36.9% in 2019. The fund is currency hedged.
XMC delivered 19.3% in 2019. XMH returned 23.9%.
If we use the currency hedged mid cap offering, the Greater Growth ETF Portfolio delivered 25.1% in 2019.
When to use greater growth ETFs?
You might ensure that you have a very long term time horizon. Perhaps 15 years or more. You may decide to sprinkle in the QQQs in most situations. The lesser cap and value funds can take a market cycle or two to ‘do their thing’.
But in the long run, greater growth options might give your long term RRSP and other retirement accounts a boost. It might lead to a more prosperous retirement.
All said, you might use greater growth options even in portfolios that are designed to create retirement income. The 4% rule becomes the 4.5% rule when smaller/mid cap weighting is added to core holdings. The trick might be to use them sparingly in that retirement scenario. Think of it as a retirement funding growth kicker.
I’ll be back soon to look at the 2019 performance of other portfolios from the ETF Model Portfolio page.
Thanks for reading. Please offer your observations and suggestions by leaving a comment. Any shares of this post is greatly appreciated.
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