Rarely seen: Huge gaps in relative performance (Large Cap Canada; Value; Growth)

A few weeks back when I mentioned reviving ETFinsight, and backfilling my database, (a critical component as far as getting a good sense of what it going on, respectively what different product providers, methodologies, “engineering”, smart or otherwise bring to the table), I suggested a regime change in markets was underway. I still believe that to be the case, and it is still ongoing. Like anything in markets, nothing ever goes – or should – in linear fashion (see materials last month – XBM-4.03%). But if you catch the broader themes/shifts, at least, you aren’t left behind.

I just completed backfilling my Database with data and information pertaining to the largest provider’s line-up in Canada (and for that matter across the Globe) – namely BlackRock’s iShares ETFs.

A couple of points I feel worthy of mention would be the following, as I run through the data, and attempt to wrap my head around everything we see unfolding. Obviously the past 6 months data is particularly interesting, as at one end of it (Sept to Nov 9, 2021), it captures performance pre-vaccine news … and … well, after that, shows the markets and its participants’ reaction to the prospect of reopening the economy, respectively attempting to figure out what does and what doesn’t make sense as far as markets shifting to realign with the reality an earlier than anticipated reopening represents.

First off: you’ve read it here there and everywhere, VALUE is back … (was it inevitable? after being “away” for what? A decade, as far as relative performance?) Anyways, in terms of looking at Canada, either through a large cap broad market exposure (XIU), respectively a Value (XCV) or a Growth (XCG) lens – here is what it looks like:

The performance differential in the past 6 months? 2200 bps between Value and Growth (iShares Dow Jones Canada Select Value versus Dow Jones Canada Select Growth), respectively 1210 bps outperformance for Value here versus S&P/TSX Large Cap 60.

The Good old saying comes to mind here – past performance is no indication of … you know the rest. Why I am mentioning this here? Because the iShares Dow Jones Canada Select Value is for all intents and purposes a small ETF (<CAD 70MM of AUM), with outstanding units that just rose 41% as at the end of March 2021. Before anyone goes out calling for a bubble, this ETF still has less units outstanding than it did 3 years ago, and its AUM level certainly doesn’t scream “bubble” as much as “very few care”. As for its growth counterpart, by the way, it units outstanding level is unchanged from 3 years ago – as a reference point. Both ETFs, by the way, charge some 37 bps extra relative to a straight XIU (which after all these years, remains Canada’s largest ETF at CAD 9.6 Billion of AUM, even if … unlike pretty much the entire space, its outstanding number of units has declined significantly from its level 3 years back (-22.8% less units relative to Mar 31, 2018). Blame competitors’ products (including for that matter iShares’ own XIC) for this state of affairs, as either broader Canada exposure (XIC; XCN; VCN, etc) became increasingly available at lower price points, respectively the likes of either QCE or HXT compete with XIU’s large cap bias with lower costs.

To the specifics – both XCV and XCG are even more concentrated in terms of names, than XIU. 43 names for the Growth one; 32 constituents for the Value one.

So – what is that massive performance gap attributable to? (which likely also explains why $$$ haven’t piled into it …?)

Financials exposure: using Vanguard Canada‘s tool to compare holdings and sector exposure, XCV has some 65% exposure to Financials, versus 35% at XIU, and close to zero (ok fine – make that 8.3% for XCG). With financials (XFN) up 45%+ since the end of September, that kind of weighting difference will do that for you. As to why no outstanding unit growth – well, EVERYONE in CANADA probably has some banks or other financials in their portfolio already, respectively exposure through either a sector ETF like XFN, or through a dividend ETF like XDV, where financials also make up a chunk of exposure: 53.9%.

NEXT – the iShares MSCI Canada Minimum Volatility ETF (XMV) had a decent relative performance month in March, versus say an XIC (up 6.73% vs up 3.85% March/February). A welcome reprieve presumably for its holders, seeing that after keeping up with the market last year through the worst of the pandemic Bear (XMV down 15.63% versus XIC down 17.3% March/February), it has lagged on the rebound by a broader differential (XMV up 13.27% versus XIC up 17.78% on a trailing 6 months basis aka March 2021/September 2020).

I recall there being mentions made of outflows in that category – that would be the explanation. Although looking specifically at XMV – what looks to have happened gauging by the # of units outstanding, is that the pandemic in fact at some point resulted in inflows (June 2020), before seeing these flows going into reverse once the game changing implications of the vaccine were digested.

Other areas to explore: Dividends getting back in style (performance …); Bonds – yes, Karen – you can lose money with bonds … and the “losses” aren’t insignificant at that (Canada long bonds YTD: -10.79% = how many years of “yield”? 3? 3 1/2 … More of that to come? Energy – sizeable gains of the bottom (how about that XEG up 100% on trailing one year basis … with … maybe still more? (note trailing 2, 3, and 5 years all still negative on a compounded returns basis). US Mid-cap … YUP … that little 18% + relative gain being “CAD hedged” versus no is reflection of CAD rallying significantly off the bottom of the pandemic sell off in the loonie …

Have a browse here – see what jumps at you, and if you need anything, contact me!