Memo from the ETF frontlines (TWTW Mar 8-12, 2021)

So I recently let you know that I was back online, so to speak, as far as keeping tabs on what’s happening in the wonderful world of Canadian ETFs. As I pointed out at the time, I am rebuilding my database and overall infrastructure, so I hope you bear with me.

In the meantime, if you’ll indulge me, I will highlight a few things as well as share my thoughts in relation to what I observe.

Looking at data to the end of February 2021 (through a BMO ETF lens as it is what I have updated in my DB thus far), here are a few thoughts prefaced by an important caveat emptor:

Past performance – is no guarantee, or indication of future performance … or some disclaimer to that effect. You’ve all seen it before, and well, it’s true, we can never vouch for what future performance might turn out to be.  That simply throws one into situations that give everyone a bad name and cause potentially bad blood, respectively lands one into litigation with clients. Who needs any of that.

Humour me though … when I suggest the following to you: How about while it is certainly no guarantee of future returns, it could in fact be a meaningful marker of what you might well want to pay attention to. Plus, well, when we consider “momentum” based strategies … isn’t the underlying principle that what has momentum (aka has been shown to work …) might continue to move in the direction it is already headed in until … well it stops. ERGO – I pay attention to past performance for what could be “signals” or “markers”.

Here are some interesting ones, in my books:
o Metals: The BMO S&P/TSX EW Global base metals Hedged to CAD Index ETF (ZMT) dominates the 1-year performance rankings (+66.40%). 6-month trailing returns are also impressive, as are 3-month; and 1-month returns, for that matter. All-in, I’d say it looks like something has changed – call me “reopening economy play”, or … “from depression to strong GDP growth framework”, I guess.

o Technology/biotech/healthcare: In contrast, the 3rd place 1-year performance holder, the BMO NASDAQ 100 Equity Hedge CAD Index ETF (ZQQ) at +49.9% from the end of Feb 2020, was pretty much flat YTD to the end of Feb, end well, you know what the following period has brought: heightened volatility, downward pressure, and sharp rebound. What I get out of it though is that everyone knows the dominance of megacap tech, in particular, came generally at a price, namely multiple expansion. THAT phase is probably over. So something has changed here also.

o Energy – in contrast with both of the above, looks to be coming into its own in 2021, a process that looks to have kicked off in earnest once the outlook around reopening became clearer. The BMO S&P/TSX EW Oil and Gas Index ETF is up 19+ % the 3-month period to the end of February, and up around 11% so far in March.

o Financials – specifically Banks – US Banks dominate the year to end of February numbers. Market participants may not like developments in the 10-year yield, and fears of inflation, but banks look like the prospect of reopening and strong economic activity coupled with the potential for margin improvement (NIM) aren’t exactly something to dislike. US Banks, incidentally, are leaving Canadian banks in the dust over the past 6 months, as well as year-to-date. No surprise then, that analysts covering Canadian banks seem to favour those Canadian banks with meaningful US presence aka TD; BMO; and RY. Canadian banks, though, it should be noted, blew past expectations for their Q1, 2021 quarterly numbers – every single one of them. More upside? In one word: Likely.

o Factors – unless you’ve been hiding under a rock, you’ve gotten the memo: Value and Size are having the mother of all rebounds from being neglected/dismissed, whatever you want to call it, for ages. US Small Cap, give or take, up around 40% in trailing 6-month period to Feb 26, 2021. Value, for its part, looking at the BMO MSCI USA Value Index ETF is up 24.75% over the period, and the BMO MSCI Canada Value Index ETF up 19.35%. Contrast this with Low Vol: up 6.2% for Canada in past 6 months; US Low Vol? actually down 0.57% – or, ok, call it basically flat.

Dividends? Well, not all created equal, gauging by the action there: BMO Canadian Dividend ETF: up 15.5%; BMO US Dividend ETF: up 10.85%; BMO International dividend ETF: up 11.17%. BMO Tactical Dividend ETF Fund: -5.04 (yes, that’s negative). That last one: not sure what happened there … tactical aspect out of synch? Actually had a peek … does look like a big bet on gold stocks, which … hasn’t exactly been a barnburner in trailing 6-month period at -27.9% for the last 6 month period. +, doesn’t look to pay much of a dividend (2020 distribution was mostly capital gains…) = well, happy I don’t own, and for those who do, can’t say I hope the tactical aspect comes back into focus … because frankly, that would mean way too much pain for everyone else. What does this say about that one to me? Limit position size, recognizing this is actively managed and may deviate significantly from what you might expect in terms of what it delivers. Don’t shoot the messenger here, please, just observing …

o Gold equities – November 3, 2020: US Elections … November 9, 2020: Pfizer / Bio NTech announce COVID 19 vaccines efficacy … An eternity ago … Looking back performance-wise, to the period immediately preceding this (Oct 31, 2020 NAVs) and contrasting this with end of Feb, 2020 NAVs, the Gold equities space as illustrated by both ZJG and ZGD brought up the performance rear at -20.6%, respectively – 19.3%. Markets positioning for reopening combined with recent rebound in the USD has not been kind to gold equities, which are unlikely to enjoy much interest or strength until such a time as gold bullion itself starts to find a bottom (Bitcoin interest not helpful there, since, as some have observed elsewhere, Gold ought to be at $3,000 / oz, were it not for Bitcoin). Bad new for those “long” gold and gold equities: recent losses. Good news – that’s an uncorrelated exposure, and recent underperformance spells opportunity at some stage to go for some exposure there for diversification purposes. That – plus, well, after this sooner or later some technical support should kick in, looking at the longer term charts and trends …

o Final uncomfortable observation …… Not judging, not blaming, just pointing to a state of affairs. So this past Monday marked International Women’s Day. And relatively recently, we all got the yearly “wage inequality” (or is it inequities or both…) report, which yet again points out to a significant discrepancy in compensation between women and men, for the same work. Of course, last year, in the midst of the pandemic, the world at large became rightly outraged by racial inequity, following the death of George Floyd at the knee of a murderous American policeman. WE all need to learn from this, clearly, but learning is one thing … putting in practice another, and when it comes to people and societies putting our money where our mouths are, well, there seems to be quite a distance at times. Where am I going here? As you know, ETFs need AUM to make it. No AUM = no proof of concept, respectively validity = scrap yard.

Flat illustration with business ladies climbing together on mountain peak top on blue clouded sky background. Team work, achievement, reaching aim, partnership, motivation, support, – metaphor.

Now, I think we’re also all told that companies with greater diversity, and with a higher proportion of women amongst its leadership team fare better than those that aren’t quite there. This, obviously, suggests taking this into account when investing. A few years ago, several ETFs were launched to provide access to portfolios of companies scoring higher on the women in senior roles category. One of them, as I recall, from Evolve, ended-up being terminated in relatively short order. BMO has one as well: the BMO Women in Leadership Fund (WOMN).

Question: How is it that it has less than ½ the units outstanding it had a year ago? Less than it did in its second month of existence back in the middle of 2018, despite trailing 12-month performance near that of the S&P/TSX Composite, with meaningfully less cyclicality? Yes, I get it, it is a roughly 50/50 concentrated portfolio of some 40 companies in the US and Canada, but what gets to me is: CAD 1.8 Million of AUM after close to 3 years of existence in a world that “cares”? So the question is: who cares? And as famously uttered by Tom Cruise in the movie Jerry McGuire: “show me the money”! Incidentally, if it was my ETF, I’d probably be looking at what re-engineering I might perform so it gains both greater relevance and Assets. I don’t believe this is an idea or ideal to give up on by any stretch, rather, it is one to be committed to in more than words. If anyone cares to hear some thoughts I have with regards to what could be done here – by all means 😊

That’s it for now, folks. Enjoy the better weather, family, friends (while cognizant of health restrictions and risks), and the weekend.