I am risk averse when it comes to stock selection. Stocks that have a wide moat or operate in an oligopoly sector, sign me up. And I’ll invest in a fewer number of stocks as the number of wide moat and moat stocks is a select list. It is counterintuitive to many to suggest that one can create less risk with few stocks. I understand the concentration risk and I am willing to accept that risk. The strategy is working very well, but that is no guarantee that history will repeat, of course. In this post BMO’s Low Volatility ETF takes on that wide moat portfolio.
With our US and Canadian stock holdings we suffered no dividend cuts in the pandemic. We’ve enjoyed many dividend increases. I believe that would best any index ETF on the market. The US stock portfolio delivered a sizeable beat of the market in 2020. The Canadian portfolio lagged with respect to total return, but offered that perfect dividend record.
The wide moat and more moats portfolio.
I initially started with 7 stocks. These are stocks that I had held for quite some time and a few stocks that I had held off and on through the last couple of decades. At one point I had made the move to Canadian stock ETFs embracing more of the passive approach. I noticed that my small basket of favourite stocks outperformed the market, and I uncovered ‘the why’.
Several years ago I began the slide to these seven oligopoly or wide moat stocks. It contains banks, telcos and pipelines. I did not expose my wife’s accounts to this concentration risk. She holds iShares TSX 60 XIU and Vanguard’s High Dividend ETF – ticker VDY.
Bell Canada , Telus.
Canada’s two big pipelines are Enbridge and TC Energy (TransCanada Pipelines).
I hold the 3 largest of the big 6. Royal Bank of Canada, TD Bank and Scotiabank.
The more moats portfolio.
On Seeking Alpha (where I also write) I had offered a portfolio idea that would cover more oligopoly or moat sectors. This of course will lessen that portfolio concentration risk. The more moats portfolio will add the Canadian railways, the grocers (that also own pharmacy outlets), and utilities. I threw in two outlier picks that offer their unique form of moat or repeatable successful business model.
Here are the more moat adds.
Metro and Loblaws.
Fortis and Canadian Utilities.
Canadian National Railway Co. and Canadian Pacific Railway.
The two picks were Alimentation Couche-Tard, a North American and international fuel retailer growth behemoth and Brookfield Asset Management. It operates four successful business models.
The more moat portfolio offers 15 names. It is covering more sectors. When one is building a stock portfolio, and when quality is the core, 15 to 20 names can be enough IMHO.
The strength of the portfolio is the defensive nature. While there is risk, that risk is tempered by the lack of competition, and regulation that often supports these oligopolies. There is less chance of failure (IMHO) among this grouping compared to a broad market index fund or a dividend index.
Better returns. Less volatility.
The portfolios are equal weighted and rebalanced on a semi annual basis. For the ‘More Moats Less Picks’ portfolio that is the more moats 15 with Brookfield and Couche-Tard removed.
The above chart (courtesy of portfoliovisualizer.com) starts from January of 2018. That is when some volatility was introduced into the market, including The Grouch xmas correction, and of course the pandemic related market correction of 2020.
We see the More Moat portfolios outperform with much less volatility and drawdown in both corrections.
The annualized volatility for the More Moat portfolio (including picks) was 11.6% compared to 17.1% for the TSX Composite. That is a massive advantage of course.
Let’s go back to 2015, a year that also introduced a market correction and a test for quality and resilience.
You’ll see that all of the portfolios were beating the market for most of this period. The TSX Composite played some catch up in the pandemic, largely thanks to the blistering returns of the unprofitable Shopify. Of course, Shopify did go on to post its first profit in recent quarters. That is a wonderful success story.
And if we go to a 10-year period.
The moats in BMO’s Low Volatility ETF.
When I search for a comparable approach or ETF offering, I land on that BMO ETF. You’ll find the same sectors or sub sectors. You’ll find many of the same companies. I reported on that ETF during the pandemic, here is checking in on BMO’s Low Volatility ETF.
Let’s run BMO’s Low Volatility ETF (ticker ZLB) against the More Moat portfolio. Even though there is severe survivorship bias with the two picks, we’ll keep them in to make it an unfair fight.
Incredibly, the low volatility ETF keeps pace for most of the period. The BMO ETF has also delivered a crazy beat over the market. Defense first. Defense wins Championships! You can win by losing less. I could go on 🙂
As I have suggested in the past, the BMO Low Volatility ETF would make a wonderful core Canadian position. Yesterday I posted on the incredible Permanent Portfolio. That offering demonstrates a simple risk management technique, protecting from inflation and all economic conditions.
An investor does not have to completely reconstruct the portfolio to manage the risks as does the Permanent Portfolio. You could simply bolt on the gold or other risk managers to a portfolio that includes the BMO ZLB. And in fact, if history repeats ZLB would be a big plus (over market XIC), especially for the retiree or near retiree.
I am more than impressed with this ETF.
The weekend reads.
On MoneySense six ways to make your tax return bullet proof.
Here’s my weekly for MoneySense – Making sense of the markets.
Also on my least favourite subject and chore, from My Own Advisor, tax tips every Canadian should know.
That said I just love this Wealthsimple Tax commercial. That almost makes me miss the advertising business.
Another incredible post from The Sunday Investor. In today’s Sunday Newsletter, a look at the 10-year performance and other trends for sectors in the US.
Mike The Dividend Guy answers how many sectors you might hold within your portfolio.
Banker On Wheels with investing in bonds in a rising rate environment. That post also includes a great tool that allows you to input your bond ETF characteristics to see how rising rates might affect performance.
On Findependence Hub, how to preach about money. Yes that’s why I started an investment blog, so that I would stop pestering folks in line at the grocery store.
Investors might profit from the experience (and success) of Bob at TawCan – here is 5 lessons he’s learned over the last decade.
On the ETF front GenYMoney looks at the global funds – VXC vs XAW.
A timely offering on lowestrates.ca, should you use a broker or a bank for your mortgage?
And an absolutely incredible post from John Mauldin on the history of the US Dollar and the removal of the gold standard. That post shows why the events set in motion in 1970 are still in play. The 1970’s never ended.
If that doesn’t make you want to invest in bitcoin and gold, nothing will, ha.
I remember going to the movies and Mom would give me a quarter so that I could buy popcorn and candy. The dentist bill was to soon follow.
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