Foresight - Winter 2018

Investors certainly have noticed the increased volatility in global stocks in recent months, as well as their recent correction from annual, and in many cases, all-time-high prices. At writing, global stock markets have corrected by approximately 10% to 15% from their recent highs. Stock market corrections are never enjoyable for investors. It is very easy for investors’ sentiments to turn negative towards the equity side of their portfolio. During corrections like the current one, it is important to remember and appreciate all of the good work stocks have been doing in your portfolios over the last 5 years. With the bond side of the portfolio earning only 1-2% per annum, stocks have been a very welcome saviour of overall portfolio returns over these last 5 years.

Table 1 on the back page provides some interesting perspective. The regional and global industry sector ETF list in Table 1 shows price corrections ranging from -3% to -15% (column 3), as measured by the value at November 29th vis-a-vis its own high in the previous twelve months. However, those ETFs still have positive price appreciation over the last 5 years (column 4) of +18% to +95%, despite the recent corrections in the last twelve months in column 3. Note also that these return statistics do not include the annual dividends the stocks have paid, nor the growth in those dividend payments over the last 5 years. ...which we turn to now….

What counts is “total return”, which is the price appreciation above plus dividend receipts. Column 5 of Table 1 shows the dividend yield as if each security was bought five years ago (which is the fraction of 2013 dividends paid divided by 2013 market price). Column 6 uses the dividend paid today divided by that same 2013 market price (which is the cost of your investment). Thus, the column 6 yield is actually YOUR dividend yield based upon what YOU paid. Dividend yields in Table 1 have seen growth from 22% to 85% over these last five years (column 7).

Dividend growth may not look like much over a single year; however over the long term it can have a very meaningful impact on the returns of your portfolio. As an example, $1 million dollars invested 5 years ago in US Total Dividend (DTD) yielding 2.4% would produce dividends of $24,000 per year. Five years later, that same investment would see its dividends grow by 83% to $44,000 per year, effectively returning 4.4% on the original investment for dividends–alone, before any price appreciation. Savvy investors  recognize that long term growth in company earnings supports dividend growth and growth in the company’s share price, as well.

CANADIAN EXCHANGE TRADED FUNDS

This is our third—and final—in the series of helping you to understand exchange-traded funds (ETFs). In the two previous issues of Foresight, we covered foreign equity and fixed income ETFs. We complete the series by covering Canadian equity ETFs. We use ETFs in the Canadian market to strategically target specific sizes of companies (large, medium or small capitalization companies), high dividend payment companies and specific industry sectors. ETF portfolios typically are re-set quarterly or semi-annually to mirror the underlying market index they represent. Following is a sample of some of the various market index and industry sector ETFs we use in the Canadian equity portfolio.

 iShares S&P/ TSX 60 Index ETF (XIU)

The iShares S&P TSX 60 Index ETF invests in the 60 largest and most established companies in Canada trading on the TSX, and is designed to replicate the S&P TSX 60 Index. This ETF started trading in 1990 and is the first ETF in the world. XIU provides low cost-effective access to the 60 largest publicly traded companies in Canada. Top holdings include the Royal Bank of Canada, Toronto Dominion Bank, Bank of Nova Scotia, Canadian National Railway, Suncor Energy Inc, Enbridge Inc, Bank of Montreal, Canadian Imperial Bank of Commerce, Brookfield Asset Management Inc. and BCE Inc. Top industry sector weightings include Financials (39.9%), Resources (28.9%), Industrials (10.2%), Consumer Products (8.2%), Communications ( 6.8%) and Technology (4%).

iShares S&P/ TSX Completion Index ETF (XMD)

The iShares S&P/ TSX Completion Index ETF seeks to provide long term capital growth through replicating the S&P/TSX Completion Index, which invests in all of the TSX Composite Index that are not in the TSX 60. XMD provides exposure to mid and small capitalization Canadian companies. Top holdings include Fairfax Financial Holdings, Shopify, Intact Financial Corp, Brookfield Infrastructure Partners, Canopy Growth Corp, Aurora Cannabis Inc, Great West Life Property Partners, Riocan Real Estate Trust and Onex Corp. Top industry sector weightings include Resources (28.9%), Financials (16%), Real Estate (12.9%), Industrials (12.1%), Utilities (10.5%), Consumer Products (7.1%), Technology (5.4%) and Healthcare (4.5%).

iShares Canadian Select Dividend  Index ETF (XDV)

The iShares Canadian Select Dividend Index ETF seeks to provide long term capital growth and dividend income by replicating the Dow Jones Canada Select Dividend Index. XDV provides cost-effective exposure to 30 of the highest yielding Canadian companies.  XDV uses a rules-based methodology to analyze stocks by dividend growth, yield and payout ratio. Payout ratio measures the dividend per share (DPS) to the company’s earnings per share (EPS). Companies that have a DPS/EPS close to 1 or  less than 1 are less desirable, as they are paying out close to all or more than their earnings to support their dividend obligation, leaving very little for maintaining their plant and equipment or growing the company. XDV pays dividends monthly. The top holdings are Canadian Imperial Bank (9.1%), Bank of Montreal (6.7%), Royal Bank of Canada (6.3%), Bank of Nova Scotia (5.1%), BCE Inc. (4.79%), TransCanada Corp (4.3%), Toronto Dominion Bank (4.1%), National Bank of Canada (4%), Emera Inc. (4%) and Rogers Communications (3.9%). Top industry sector weightings are Financials (59%), Communications (15.5%), Resources (11%), Utilities (9.6%) and Industrial Products (3%).

iShares S&P TSX Capped* Utilities Index ETF (XUT)

The iShares S&P TSX Capped Utilities Index ETF seeks to provide long term capital growth and steady dividend income by replicating the performance of the S&P TSX Capped Utilities Index.  XUT is a targeted industry sector ETF focusing on utilities companies. XUT pays dividends monthly. We use industry sector ETFs like XUT to target and maintain specific industry sector weightings within your equity portfolio. Top holdings are Fortis (22.5%), Brookfield Infrastructure Partners (16.6%), Emera (11.5%), Algonquin Power Utilities Corp (7.5%), Hydro One Ltd (7.1%), Brookfield Renewable Partners (5.4%), Altagas Ltd. (5.4%), Canadian Utilities Ltd (4.5%), Atco Ltd. (3.5%) and Capital Power Corp  (3.4%).  

iShares S&P TSX Capped* Energy ETF (XEG)

The iShares S&P 500 TSX Capped Energy Index ETF seeks to provide long term capital growth by replicating the S&P TSX Capped Energy Index. XEG is also a targeted industry sector ETF providing exposure to Canadian energy companies. Top holdings are Suncor Energy Inc. (24.8%), Canadian Natural Resources (23%), Encana (6.7%), Cenovus Energy Inc. (5.9%), Imperial Oil Ltd (5.1%), Husky Energy Inc (2.9%), Vermillion Energy Inc (2.8%), Tourmaline Oil Corp (2.5%) and Arc Resources Ltd (2.3%). Sub-industry sector weightings are oil & gas exploration and production (55.3%), integrated oil & gas (38.8%) and oil & gas equipment and services (4.9%).

iShares S&P TSX Capped* Materials Index ETF (XMA)

The iShares S&P TSX Capped Materials Index ETF seeks to provide long term capital growth by replicating the performance of the S&P TSX Capped Materials Index. XMA is another a targeted industry sector ETF focusing on Canadian companies making up the diverse Materials Index. Top holdings are Nutrien Ltd (19.8%), Barrick Gold Corp (8.9%), Franco Nevada Corp (7.1%), Teck Resources (6.3%), Aginco Eagle Mines (5%), Goldcorp Inc. (4.8%), Wheaton Precious Metals (4.4%), First Quantum Ltd (4.1%), CCL Industries Inc. (3.7%), and Methanex Corp (3.1%).The sub-industry sector weightings are gold (42%), fertilizers and agricultural chemicals (19.7%), diversified metals and mining (9.6%), silver (7.1%), copper (6.6%), forest products (4.9%), metal and glass containers (4.8%) and commodity chemicals (3.7%).

iShares S&P TSX Capped* REIT Index ETF ( XRE)

The iShares S&P TSX Capped REIT Index ETF seeks to provide long term capital growth and stable dividend income by replicating the performance of the S&P TSX Capped REIT Index. XRE is a targeted industry sector ETF invested in Canadian Real Estate Income Trusts. XRE pays dividends monthly. Top holdings are Riocan (15.7%), Canadian Apartment Properties (14.2%), H&R REIT (12%), Allied Properties (8.9%), Smart Centres (7.5%), Choice Properties (5.8%), Dream Global (5.4%), Granite  (5.2%), Cominar (4.2%)m and Boardwalk (3.9%). XRE provides exposure to different types of real estate such as retail, residential, office and industrial properties. The sub-industry sector weightings are retail (31.5%), residential (26.8%), diversified REITs (24.8%), office (11.4%) and industrial (5.2%). 

 *“Capped” ETFs establish a maximum proportion that any one holding can have in the  portfolio, and varies from 5-25%.

Sprott Physical Gold Trust (PHYS)

Sprott Physical Gold Trust’s goal is to provide a secure and convenient ETF for investors that wish to hold physical gold bullion. Holding physical gold can be inconvenient, requiring safety deposit boxes for secure storage.  PHYS is fully allocated and holds unencumbered precious metals. Unitholders of PHYS can redeem units for physical gold. The ETF’s gold bullion is securely held at the Royal Canadian Mint, a Federal Crown Corporation of the Government of Canada. Investors in PHYS can efficiently invest small-to-large dollar amounts by buying an exact amount of units, versus buying physical coins or bars of gold directly.

Table 2: Data on these Canadian ETFs

ETF	MER %	AUM ($M)	Average Yield	#Holdings	1 Year	3 Year	5 Year	10 Year
XIU	.18	8,593	3.2%	60	-2.7%	7.0%	6.1%	7.2%
XMD	.61	211	3.1%	188	-6.3%	4.6%	2.6%	7.9%
XDV	.55	1,270	5.7%	30	-7.8%	5.5%	3.4%	7.3%
XUT	.62	78	4.6%	16	-9.9%	6.0%	5.5%	n/a
XEG	.62	768	2.7%	37	-12.4%	-.6%	-7.3%	-1.9%
XMA	.61	99	1.2%	53	-11.9%	7.4%	-1.3%	1.5%
XRE	.61	1,168	4.8%	16	11.4%	9.5%	7.4%	12.1%
PHYS	.47	1,950	0	1	-4.8%	1.6%	-2.1%	n/a

Table 1: Thanking Stocks for 5 Years of  Portfolio Outperformance

Security	Symbol	Percentage Correction from 12 month High	5 Year Return to Post Correction Price	Dividend  to price in 2013	Current Dividend to Price 2013	Dividend Yield Growth
US S&P 500	XSP	-7%	+49%	1.5%	2.2%	+46%
US Total Dividend	DTD	-5%	+62%	2.4%	4.4%	+83%
MSCI Europe	XEH	-10%	+18%	4.1%	5.0%	+22%
MSCI Emerging Market	XEM	-15%	+22%	.9%	1.1%	+22%
Japan	CJP	-11%	+87%	2.0%	3.0%	+50%
Global Technology	IXN	-11%	+95%	1.1%	1.7%	+55%
Global Healthcare	IXJ	-3%	+44%	1.5%	2.0%	+33%
Global Consumer Discretionary	RXI	-10%	+32%	1.2%	2.0%	+67%
US Financials	IYF	-6%	+51%	1.4%	2.6%	+85%
TSX 60	XIU	-8%	+19%	2.8%	3.7%	+32%

Prices and calculations as at November 29, 2018