Spring is in the air (in some parts of Canada, and certainly in much of the US). Vaccines are going into arms. More lockdowns are being lifted. Jobs are being created well beyond expectations. Economic growth is ready to flourish. Planes are ready to take off. Hotels and resorts can’t wait to welcome you, almost as much as you can’t wait to get the heck out of your house or condo or apartment to go somewhere – anywhere. Yes, they’re calling this the Great Recovery. And you might want to pick up iShares High Dividend ETF, XEI to go along for the ride. It appears to be built for the times.
The Great Recovery also includes the great stock rotation as I outlined in my weekly MoneySense post. This past week marks the one year anniversary of the great COVID stock market crash. It happened in a hurry, and it was essentially ‘over in a hurry’. We set records on the way down and on the way up.
Essentially, the markets appeared to be tapped out in late 2019. They enjoyed a long run and were perhaps a bit tired. It is quite strange and more than tragic that a pandemic was just what the markets needed. It was a reset button.
MoneySense
And throughout that stock market bust and boom we’ve had stay at home stocks and recovery stocks. The themes and the rotation have played out to script, and right on schedule. It was not a difficult stock rotation to ‘play’.
COVID stocks, crushing the market.
Jim Cramer’s COVID-19 Index crushed the market in 2020. But those COVID-friendly stocks are negative in 2021. We’ve experienced the great sector rotation, the great stock rotation.
Sectors that were set up well for the stay at home economy are largely out of favour. Sectors that will benefit from the reopening of the North American and global economies are flying high. The Canadian market and especially certain Canadian ETFs are set up well for the Great Recovery. iShares High Dividend ETF, XEI is one ETF that is well positioned.
Tim Shufelt penned a very good great reopening piece for the Globe and Mail. (paywall, but I’ll give you the juicy bits).
Forecasters and investors are madly revising their estimates, and repositioning portfolios, to keep up with the scope of the economic megaboom that is taking shape. Financial markets are seeing a wholesale rotation out of the stocks and sectors that benefitted from pandemic-fuelled lockdowns, and into those industries that have the most to gain from a burgeoning global economy.
Tim Shufelt, Globe and Mail
Jobs, savings and earnings, oh my.
That post mentioned the cocktail of jobs growth, the high COVID savings rates in Canada and the US, the earnings beats for companies on both side of the border, the GDP growth, and the projections for even greater earnings and revenue growth in 2021.
The roaring 20’s might get a redux, at least a test drive.
You’re likely to see explosive earnings growth from financials, energy, materials and industrials, on top of the potential for re-rating,” Mr. Lingard said. “You get valuation and excess earnings growth.
Stephen Lingard, the head of investment research of CI Investments’ multi-asset team.
And from JP Morgan.
Cyclical stocks are companies whose underlying businesses tend to follow the economic cycle of expansion and recession. Some of these include sectors such as finance, energy and industrial. Defensive stocks — such as health care and consumer staples — typically provide consistent earnings and dividends regardless of stock market conditions.
Here’s the sector rotation, pre and post vaccines.
The portfolio tilt.
If you want to go along for the ride, go with the flow, you might consider iShares High Dividend XEI. You don’t have to blow up your portfolio, but you might do a little portfolio shading, a portfolio tilt.
It’s a simple story, a simple theme. XEI is sitting on hundreds of millions of barrels of oil, it’s holding the banks and other financials, it calls on those telcos, and it offers some real estate exposure. Real estate (being a real asset) can perform well during inflation and periods of rising interest rates. That’s all the chatter these days.
Here’s the sector breakdown for iShares High Dividend XEI.
The top 2 holdings in XEI are energy producers Suncor and Canadian Natural Resources. Those companies and that energy sector have been so out of favour. And that might have set the stage for incredible value. XEI is single-minded. At times it might go where others fear, and that can be the definition of value investing at times.
It’s all about the sectors.
From this week’s wonderful The Sunday Investor Newsletter. That newsletter offers and wonderful evaluation that demonstrates the portfolio success (or underperformance) is often due more to sector selection compared to stock picking.
“XEI is a great opportunity right now because it is so unconstrained by its methodology. It focuses on high-yielding stocks and that’s it. While other dividend ETFs screen out companies that fail to raise their dividends each year or have positive free cash flow, XEI’s yield-focus positions it to take advantage of the very stocks investors sold in bulk in 2020.
The Sunday Investor
I was early to the energy party as my readers will know. From mid October, here’s …
Looking to Canadian energy stocks.
The oil producers are up about 85% from that posting. I was late to eat my own cooking, but got in some 25% ago (meaning I have a quick 25% gain). We don’t have to catch the tops and the bottoms, there’s a lot of money to be made in-between. There may be more to come from the beaten up sectors. We are early stages for the Great Recovery.
iShares XEI has been an underperformer, but it is recently the best-performing Canadian dividend ETF along with Vanguard’s High Dividend Yield ETF, VDY. That is also well positioned, but I would guess that XEI many have more torque thanks to greater exposure to Suncor and Canadian Natural Resources and the energy sector.
Once again, you might choose to tilt your portfolio for the Great Recovery. XEI is one way by way of a Canadian Dividend ETF.
Out of interest you might have a read of The Canadian Dividend ETFs in 2020.
And of course, if you’re invested in a passive index approach in and ETF Portfolio or one ticket asset allocation portfolio, carry on. You don’t have to get more active. Your one ticket will take care of the rebalancing, you can rebalance your ETF Portfolio on schedule.
As always I’d suggest readers consider the New Balanced Portfolio.
The Weekend Reads.
On Findependence Hub, the resilience of dividends.
And speaking of successful dividend growth investing here’s the February income update from Mark on My Own Advisor.
And a dividend update on GenYMoney.
Mike The Dividend Guy takes a look at the financial services sector. Mike’s favs are Visa and National Bank. He’s not a fan of insurance names.
On the National Bank theme, Savvy New Canadians looks at their discount brokerage offering.
On the Retirement Manifesto blog, Fritz is taking a break from blog deadlines. Because HE CAN. That’s why.
On Money Coaches Canada – RSP, TFSA or paying down debt?
And last but not least, the Q1 financial freedom update on Million Dollar Journey.
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Dale
I hope you’re right about XEI. I have over 1200 shares bought spread out over the years, but it’s pretty much always been around $20 to $21, always dropping in price just after I buy a few hundred. Then a year ago when it was closer to $14. I have it for dividends but it’ll be nice to see some growth.
How would you stack up XEI vs. HAL? Do you feel HAL’s AI could outsmart itself out of returns moving forward?
Hi Alan, it’s a different approach. One is a total returns approach, actively managed. The other more a play on financials and resources. You could even do both, a HAL or other growth and an XEI slice for a bit of inflation hedge.
You would get some nice sector balance beyond a core Canadian stock ETF.
Dale