It looks like the Canadian Dollar is still considered a petrodollar. That is, our dollar is tied to resources and more specifically, oil and gas prices. The price of oil is on a massive run, and the Canadian dollar is going along for the ride. Most Canadian investors will hold US stocks and other US-priced assets. Those US assets (if not currency-hedged funds) have taken a hit equal to the fall in the US dollar vs the Canadian dollar. Canadian assets are getting a boost. Today, we’ll have a look at the Canadian Dollar and your portfolio. There might be an opportunity to rebalance and fix some portfolio holes.
And the Canadian Dollar vs the US Dollar
The CAD has bested the USD by 15% over the last year. That means that in Canadian dollar terms your Canadian assets have a 15% boost over your US assets. Also the Canadian stock markets have been gaining against the US markets. Folks like our dollar and our stocks. It’s the reflation trade.
Year to date, the TSX 60 XIU is up 9.4%. The US S&P 500 is up 4.6% in US Dollars. Due to the strong CAD, for a Canadian investor, that recent outperformance is closer to 20%. We’ve bested US stocks by almost 5% and we have that 15% currency boost.
Keep that in mind as you assess your asset allocation and consider any regular rebalancing.
Fix that home bias.
Most Canadians suffer from a home bias, our portfolios are weighted to Canadian stocks and bonds when Canada is only 3% of the global economy. This might be a great opportunity to rebalance to US and International assets to create a more balanced portfolio.
We will all have our biases or guesses as the the ‘appropriate’ ratio of Canada to US to International assets. I’ll leave that personal bias to you. You’ll see some of my biases on the ETF Portfolio page. I favour Canadian and US stocks.
What about the valuation?
One of the reasons for the underperformance of the US stocks is due to valuation, they became very expensive, especially compared to the Canadian stocks that were out of favour for many years. The US tech giants carried the US market in 2020 and they drove the overall market to extreme valuations that rivalled the valuations of the late 90’s and led to the dot com crash.
Keep in mind that your rebalancing purchasing power is getting a 20% boost that might become a 25% or 30% boost if the trends continue. That increased purchasing power takes care of some of that US valuation ‘problem’.
And you might do any rebalancing in stages, taking advantage of this trend that might be seen as positive for a Canadian investor who needs to fix some portfolio holes. Many market analysts think the trends will continue through 2021.
For those who create their own stock portfolio, the valuations might not be a problem as they can cherry pick the destination of the rebalancing proceeds.
And keep in mind that you don’t have to buy ‘the market’. You might choose a US value fund, small cap or mid cap fund or even a dividend fund such as Vanguard’s Dividend Appreciation ETF that is not overweight to those US tech giants. That fund is marginally less expensive compared to the cap-weighted S&P 500.
The Dow Jones Dividend ETF offers those dividends and a value tilt. That is an interesting choice these days.
All said, those US tech companies that drove the S&P 500 – well that’s still where they keep the growth. You’ll want that long term exposure. Simply be aware of the valuations and the risk that can bring.
In addition to the US, consider those International assets and especially (perhaps) those emerging market ETFs.
And of course, rising stock markets are also an opportunity to rebalance to risk off assets. Ensure that you are investing within your risk tolerance level.
For short term goals.
I’ve mentioned this nuance upon occasion. If you have a shorter term goal (remember you’ll hold a more conservative portfolio) you might use currency hedged US ETFs. You’ll find that iShares S&P 500 currency hedged XSP is up 4.6% YTD.
A retiree might keep an allocation in currency hedged funds as near term spending needs have a short term goal. You would remove the short term currency risk.
The Weekend Reads.
I will be selfish this week and start with my MoneySense weekly, cause it’s just so darn good. 🙂 It was an incredible week. Investing in bonds is stupid? On …
And while I’m being selfish, here’s why investing in bitcoin is a no-brainer.
From TEBI some more than thoughtful perspectives on what is a meaningful retirement. Money is only one aspect. It’s about the retirement life plan.
I’ve added more volunteer work with Feed Scarborough (I’m in two days a week) and that just adds a wonderful layer and it feels to good to work hard and give back.
On the life and retirement life plan …
From lowestrates.ca and switching themes to real estate here is Ellen Roseman with the art of the bully offer.
My Own Advisor, with the help of Steve Bridge, how to generate retirement income.
There’s a lot of ‘great stuff’ on Findependence Hub this week, including the valuation journey.
Checking in with dividend growth investors.
Matthew has dividend increase #9 for 2021.
And Rob says fill ‘er up and doubles down on Couche-Tard, well played I say Mr. Passive Canadian Income. You’re likely to see some very good capital appreciation with that, if history repeats. And I’d see no reason for that not to repeat. It is a very simple but successful business model.
From Mike The Dividend Guy, getting the best of communication and financial services sectors (podcast).
It’s not a difficult task to build the simple but effective Canadian stock portfolio.
And as always The Sunday Investor Newsletter is a great read and a must follow.
On stocktrades, Canadian covered call ETFs and why they may not be the best option.
Canadian fund managers underperform.
And no surprise here, Canadian fund managers greatly underperformed the market again in 2020. Of course active managers will often suggest that market turbulence creates opportunity for stock picking, but nope.
In the Canadian Equity category 88% of Canadian fund managers underperformed in 2020. We see that underperformance mostly across the board. Small cap and dividend fund managers had some success, breaking a long term trend of providing no value.
The large cap managers mostly missed out on Shopify. Oooops.
For the most part you should avoid high fee actively managed mutual funds and any advisor that would recommend or use high fee funds.
For your financial plan, and for conflict-free advice, you might consider a fee for service advisor.
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