Outperformance? Anyone? Anyone …

Outperformance? Anyone? Anyone …

Bottom line – No hard evidence of any performance chasing here, either in terms of sectors or factors ETFs. This is somewhat surprising to me, as I’d have expected more investors/managers to have taken note of the unfolding relative performance picture, and the takeways associated with that, which in my mind, unescapably lead to an understanding that more exposure to specific areas is warranted…

You know the saying: past performance is no indication, or guarantee of future performance.

And of course, investors are generally admonished against performance chasing, lest they find themselves buying high … and ultimately possibly selling low.

Where am I going with this?

Coming out the COVID-19 pandemic, the world, unfortunately is a much different place, with investors facing challenges related to persistent inflation worries, continuing supply chain issues, a determinedly less friendly FED, all of this of course against the backdrop of a horrific war in the Ukraine …

Bonds aren’t providing much solace these days, many stocks have sustained severe corrections, and markets just went thru their worst quarter since Q1, 2020. At that, the outlook increasingly includes reference to that dreaded R word, recession, which presumably would see stocks correct sharply from still elevated levels overall.

So here we go, remembering in terms of context, that Canada’s stock market is performing relatively well, as it enjoys significant energy, materials, and precious metals exposure, all of which have begun delivering meaningful performance offsets to several challenged areas – most notably in Canada Technology (faring significantly worse than US Tech in the recent correction).

So here we go:

As you can see in the latest top and bottom performing ETFs tables below (iShares Canada ETFs), Energy and Materials, in particular, continue to dominate the performance tables:

Top and bottom 10 ETFs iShares Canada March 2022:

  • Agriculture – By now not lost on anyone that the Ukraine being attacked and its production being taken offline is going to have meaningful repercussions across the “food chain”, with inflationary implication we don’t need at a time when inflation was already a problem …
  • Gold – the Bullion, last I checked, hasn’t yet moved much after briefly touching USD2,000 per oz. THAT, hasn’t prevented the stocks from reaching higher (in an expression of bullish expectations, in my opinion …)
  • Materials / Base Metals – alongside Energy, areas that are contributing to significant relative performance on the part of Canada’s stock market, versus US equities, for instance
  • China / EM – Worst performing geography, both last month and y/o/y: CHINA, dragging EM in the process. Doesn’t help, I am guessing, that many might be questioning their “commitment” to Chinese equities in light of the exceedingly poor performance they’ve provided of late, as well as the Regime’s failure to condemn Russia’s war of aggression and genocide in the Ukraine.

Top and bottom 10 performing ETFs iShares Canada YTD:

  • The top 10 performing ETFs picture probably tells us most everything we need to know in terms of understanding the significant shifts underway in markets overall

  • Sector Leadership – The “sector” picture above, similarly illustrates the new leadership to be found in Energy; Materials (and precious metals), while possibly showing us that the key financials have hit the pause button for now. Is the pause a function of having been overbought on account of rising dividend expectations, respectively share buybacks? OR, possibly more concerning, does it reflect recession fears associated with a recently flattening yield curve?
  • Flows into Sector ETFs – Getting back to that “performance chasing” worry above, I thought I’d scan through the sectors and see where significant “unit creation” had taken place, if at all, in the past 6 months. For perspective, I estimate there to have been inflows into XIU and XIC combined, amounting to some $3.1 Billion since last September. With that, REITs; Gold; AND Energy (get that … less outstanding units in XEG NOW than 6 months ago … Base Metals (XBM) and Materials (XMA) both saw some creations, but here too, a fraction of what went into XIU/XIC in total, and for that matter, also significantly less than what still found its way into the the NASDAQ ETF (XQQ). Bottom line: no performance chasing here … (if anything … some “chasing” Technology (NASDAQ) exposure … aka “chasing” old(er) performance?

FACTORS performance, trailing 6 months:

Interesting to me, is the fact that several factors have bested the TSX in recent months, yet … again, there doesn’t appear to have been any meaningful additional uptake seeking to capitalize on what I believe is reflective of an overall market shift that ought to continue supporting these factors on a relative basis. For instance, combined, XCV and CRQ barely have $5M of additional units outstanding. Dividend (XDIV) though did attract (est) +$167M, but Min Vol only recorded some $11.8M of inflows (and for perspective, has units outstanding that have barely moved from their 2 years ago level (1.26% up …). So all-in, again, not sufficient inflows to suggest anyone has redeployed capital in a meaningful way to reflect on the relative performance expectations for these factors going forward …

Here, by the way, are charts showing the relative performance of these factors through the COVID-19 pandemic:

  • Growth dominated, into the end of October 2020 … a mere 9 days or so pre-COVID-19 vaccine news

  • Value and Fundamentals now solidly in the lead, followed by dividends (always ? desirable …)

  • Y/o/Y – again, Fundamental indexing and Value neck and neck, followed by dividends, and Min vol.
  • Growth, despite a decent bounce last month, solidly in last place through the past 12 months …

What is leading all of this?

With the “thematic” category generally in a bear market, the key “driver” of market performance, including factors relative outperformance, in my books is clearly “sector” performance. In this table, I update a number of factors ETFs in terms of looking at their exposure to Canada’s top 3 sectors: Financials; Energy; and Materials.

The percentages indicated at right represent each respective ETFs exposure to Financials; Energy; and Materials, relative to the sector weights to these sectors found in the traditional S&P/TSX Composite benchmark (ZCN here).

Bottom line: I would expect sector dynamics to continue to drive relative performance from factors versus benchmark, which … I’d have expected by now to have resulted into greater flows into both these sectors as well as the factors strategies shown here. THAT, possibly is still on the horizon – as the dynamics driving them aren’t likely to reverse in short order …

Be careful out there 🙂

Enjoy your week-end!