Another “cut” through recent performance & sector weights within factors …

As earlier noted – OMICRON or not (Click HERE!); and EPIC Week (Click HERE!) – November ended on a concerning note, with regard to all the uncertainty surrounding what Omicron is, or isn’t about as far in particular as how lethal it is/could be, respectively whether it evades current vaccinations and protocols.

That, + of course, Jay Powell’s … what do we call it? backtracking, or pivoting … toward the notion that maybe inflation is not just transitory, respectively that as a results, FEDs will have to hike sooner than earlier factored-in.

Of course, in the meantime, by Tuesday, markets had managed to move up rather strongly, all, presumably, on account of the fact that OMICRON (is it just for the moment) doesn’t appear to be perceived as that much of a threat. Will that change? Who knows … Meantime, volatility has retraced sharply – with VIX index off close to 20% Tuesday alone.

Getting back to taking stock of November’s and YTD performance, here is what BMO ETFs top and bottom 10 performers looked like (to Nov 30, 2021):

Of note (for me, anyways …):

  • wrapping up November, clear offsets to market’s sudden “risk off setting” saw Long bonds, Golds, and Tech (particularly “unhedged”, given CAD weakness on USD safe harbour RS … presumably …)
  • On the flipside of that, evidently Canadian industrials got taken down noticeably (which interestingly contrasts with MSCI Tech and Industrial Innovation Index, something that is perhaps worth noting …)
  • China continued to not exactly produce stellar performance … joined last month by India, which had previously been a much stronger performer (still is for that matter on a YTD and y/o/y basis). Note that BMO ETFs recently amended the reference index for ZCH, moving toward an ESG framework => Read more: Click HERE!

  • Energy: despite month-end OMICRON induced weakness, Energy dominates the YTD performance chart for BMO ETFs as well. of importance, in my view, is to note that the relative performance of ZEO vs XEG favors the latter heavily year to date – which, well, if you are bullish Oil, you want to know, because the EW nature of ZEO and therefore greater allocation to effectively Pipelines … means a lot less leverage to actual commodity fundamentals. Conversely though, if you are less bullish, well, in a more challenging scenario for oil, ZEO should outperform. Personally, I am continuing on with a combo of XEG; XEG options, as well as on and off a top up of either Suncor, or Canadian Natural. There you have it!
  • Financials: are the other standout in terms of YTD performance, as well as another sector which … fingers crossed … has constructive fundamentals, respectively provides an embedded edge against inflation (NIM will rise with rates; dividends are back in growth mode, share buybacks are supportive; and capital ratios remain solid)
  • China: In the dog house? China. If looking for a “dispersion” of performance … that would be it: Moving out of some Energy or financial exposure  and into some China exposure. The problem there is that one isn’t necessarily looking at “Fundamentals”, but rather at political “regime” … and when we’re all looking at the Olympics 60 days away and talk of boycotts etc … well, all is not well in the state of … China. For myself, I a) won’t watch the Olympics … and b) not invest there anymore than I already have, because … well, how can one be sure of how it will pan out … (oh well …). Of additional note: evidently Chinese authorities continue to believe they can bully Canada – to wit, their ambassador here trying to teach Canadians that there are some learnings to be taken from 2 Michaels story, and that keeping Huawei out of country’s 5G will have consequences. An expression starting with an F comes to mind here, but I won’t bother …

FACTORS:

  • While “Fundamentals” (RAFI), and Value (XCV) underperformed the “Composite” (ZCN) in November, both remain solidly ahead YTD, and arguably are constructively positioned (certainly wrt Energy for instance)
  • Min and Low vol delivered on premise of lowering downside risk (aka reduced participation to “correction”)
  • “Value” comes in different packages … (see significant weighting differences wrt financials, for example, between XCV and ZVC). Clearly if you are planning on incorporating some “value” in your portfolios (I know I am) for the year ahead, sector exposure/concentration is something you need to be mindful of.

Now – the above two tables hopefully are of interest to some. On the one hand you have the YTD performance of factors (looking at value; growth; min vol / low vol; as well as ESG. On the other, I take a crack at looking at that sector “overweight” problem we have in Canada (you know the one, where financials; energy; and materials make up a large chunk of Canada’s market (see ZCN: 56.92% between the 3).

Anyways, here you have the various ETFs (factors), and how exposed they are to Financials; Energy; and Materials. Dependent on a) your views and expectations; respectively b) your starting position elsewhere … aka do you already have significant financials or energy exposure … Either or both of these will possibly mean a different answer as far as what “Canada” ETF you’ll want. Again interesting to note the significant differences in relative weights across these ETFs. If it were me … I’d pay attention (I know I am for myself …)

Be careful out there 🙂

Stay warm 🙂