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Terry Shaunessy.Chris Bolin/The Globe and Mail

Terry Shaunessy is president and portfolio manager, Shaunessy Investment Counsel. His focus is exchange-traded funds.

Top Picks:

iShares U.S. Preferred Share Index (PFF-NYSE)

This name is for investors looking for fixed income within an RRSP. Current yield is 5.5 per cent. It offers a large spread over 5 year government bonds and is not subject to withholding tax in an RRSP. We expect that the Canadian dollar will gradually decline over the next year or two, so this security offers possible foreign exchange gains. It has very low correlation with the S&P 500 so is a good choice in a balanced portfolio.

iShares MSCI Europe IMI index ETF (XEU-TSX)

This index is dominated by the financial, consumer staples and health care sectors. Regionally, the U.K. weighs in at 33 per cent while Switzerland and Germany represent 14 per cent each. It's a good compliment to the technology-heavy U.S. market and the resource-heavy Canadian market. We do not think Canadian dollar currency hedges are necessary as foreign exchange should be mildly accretive. Europe could be big surprise in 2015 with favourable policy shifts.

Vanguard FTSE All-World ex Canada Index ETF (VXC-TSX)

This is for investors who are looking for a simple way to diversify their equity portfolios outside of Canada. VXC offers an effective and inexpensive way to accomplish this goal. The index is comprised of 3,000 stocks and is regionally split U.S.: 54 per cent, Europe: 23 per cent and Asia: 19 per cent. MER is only 25 basis points.

Past Picks: January 14, 2014

Horizons S&P/TSX Equal Weighted 60 ETF (HEW-TSX)

Then: $11.81; Now: $12.28 +3.99%; Total return: +6.69%

Guggenheim S&P 500 Equal Weight Index ETF (RSP-NYSE)

Then: $71.03; Now: $78.77 +10.90%; Total return: +12.59%

iShares Europe ETF (IEV-NYSE)

Then: $47.42; Now: $42.94 -9.45%; Total return: -6.36%

Total return average: +4.31%

Market outlook:

2015 global GDP is expected to benefit from an accelerating U.S. domestic economy, new stimulus policies in Europe and renewed confidence in Asia. Benchmark 10-year bond yields in both Canada and the U.S. should rise from current levels but only be marginally ahead of 2014 closing rates. As long as 10-year government yields stay below 1 per cent in Germany and Japan, foreign investment flows will continue to favour U.S. Treasuries despite a robust economy.

Crude oil prices should rally from current depressed levels but remain well below recent averages, putting downward pressure on cash flow and capital expenditures for Canadian energy companies. Bloomberg reports a brewing price war between Canada and Latin America due to a supply glut at U.S. Gulf Coast refiners which could keep local prices low for an extended period. Since energy is the number one source of Canadian export earnings, this could be trouble for the Canadian dollar and Canadian stock market in which energy represents 22 per cent of the TSX composite. We expect 2015 TSX earnings to decline by at least 3 to 5 per cent on an annual basis. The TSX is unlikely to rise in a weak or declining earnings environment.

Given our outlook for 2015, portfolios will remain at maximum equity allocation with U.S. stocks representing at least 50 per cent of the total equity slice. International equities will rank second with a tilt toward Europe while Canadian equity allocations will fall to minimum levels. In fixed income, portfolio allocations will remain at minimums with below average duration. We continue to prefer U.S. corporate securities both for higher yield and the positive impact on total returns of a declining Canadian dollar.

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