The first quarter of 2021 delivered positive returns for most portfolios. The period reflects the optimism of “getting to the other side of the pandemic”. While there will still be challenges and it may not be an easy journey, optimism and hope is wining the day. We also continue to see that great rotation of investment sentiment. What worked best in 2020, might not rule in 2021. Investors are turning their attention to the reflation trade. Fears of inflation and higher rates hang over the markets. All said the first quarter for Canadian investors was quite generous for stock investors. Bonds are having a rough go due to fears of inflation and rising rates.
First off, let’s have a look at the iShares asset allocation ETFs, to use as a benchmark for balanced ETF portfolios.
The portfolio returns for the first quarter of 2021.
- XINC -2.36%
- XCNS -0.33%
- XBAL 1.57%
- XGRO 3.30%%
- XEQT 5.05%
We see negative returns for the bond-heavy XINC and XCNS. The traditional balanced portfolio XBAL (60% stocks to 40% bonds) was able to squeeze out a modest gain for the quarter.
The asset returns in the first quarter of 2021.
I will use the iShares ETFs as benchmarks.
- XBB Canadian bond universe -5.09%
- XSH Canadian short corporate bonds -0.5%
- USIG US corporate bonds -4.5%
- GOVT US Treasuries -4.3%
- XIC Canadian stocks 8.1%
- ITOT US stocks 6.4%
- XEF Developed market stocks 2.2%
- IEMG Developing market stocks 2.8%
For the above, the US and International assets are priced in US dollars. That said, the CAD vs US dollar was flat over the first quarter. The Canadian dollar is much stronger compared to the US over the last year.
The local currencies of International assets would also affect returns, slightly.
Other assets in 2021.
- ZRE REITs 8.6%
- XEG Energy 28.9%
- Bitcoin 101%
- KILO Gold -12.3%
- PRA Real Assets 4.7%
- VDY Canadian dividends 15.3%
And let’s have a look at those value ETFs.
- FXM Canadian value 13.8%
- IUSV US value 11.2%
Again, we are seeing a shift away from tech, there is a movement from growth to value. Certainly reflation and inflation-friendly sectors and assets continue to perform well.
The portfolio tilts.
For many months I have suggested that investors consider the Canadian energy producers. The producers are woefully represented in the core Canadian stock indices. A top up was required if one wanted meaningful exposure. The energy ETF XEG is up about 95% from that time of that post. Many energy experts suggest there is much more to come from that sub sector.
Real estate was beat up quite bad during the pandemic (thanks to the work from home, stay at home, and shop from home economy). They are performing well. Real estate is known a very solid inflation hedge as well. That is an ongoing theme (inflation that is).
Here’s investing in Canadian REITs – they can prosper in a rising rate environment.
That PRA from Purpose is a nice one-stop inflation hedge basket.
Readers will know that I am a big fan of investing in bitcoin as a portfolio asset. For me investing in bitcoin is a no-brainer. Investors and advisors might consider a modest allocation given its position as digital gold and its explosive nature. The widespread acceptance of bitcoin continues and even accelerates. Can we easily dismiss a $1.1 trillion global asset?
Gold has lost its shine in recent months. Many think that the rise of bitcoin is contributing. I am happy to hold real gold and modern gold. We should not forget the benefit of gold in many economic conditions including robust inflation or stagflation.
Please have a read of the permanent portfolio that uses a 25% weighting in gold.
For quite some time we’ve been suggesting the comeback for Canadian dividend stocks and dividend ETFs. From October of 2020, on MoneySense I had offered that the Canadian dividend stocks were on sale. There was certainly more pent up value to go along with those juicy dividends.
The greater balanced portfolio.
Here’s the portfolio with tilts. The portfolio is 55% stocks and 45% bonds and other tilts.
That portfolio would have delivered 8.7% in the first quarter of 2021. That type of mix might be better prepared for any inflationary environment. It’s certainly a much more sensible mix, prepared for a change of economic conditions. One might add in US Treasuries for even greater balance.
As per reader request, here’s the greater balanced portfolio beating the snot out of global stocks from January of 2020.
55% stocks and REITs vs 100% stocks in a period of very generous stock returns.
Looking to the rest of 2020.
There is certainly the possibility (and likelihood) of more pain for bond investors. Many predict that the the US 10-year treasury could reach the 2.2% area or more. It currently sits in the area of 1.7%. Canadian yields might continue to follow along.
Be prepared. Bonds can get hit hard, and Balanced Portfolios can deliver negative returns for years on end. But bonds are still a meaningful part of a sensible balanced portfolio IMHO. To manage the risks of a rising rate environment you might consider a bond barbell, short and long.
Buckle up. I think we should be prepared for most anything in 2021 and beyond.
I would suggest that investors and advisors consider moving beyond the traditional stock and bond balanced portfolio. That mix can fail in many environments.
Thanks for reading. How was your first quarter? I see that my personal RRSP balanced portfolio was up 7.7%. We’ll see you in the comment section.
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