A Canadian stock market investment with not a bank to be seen it its top 10 holdings?
Four of the top 10 stocks in the S&P/TSX composite index are banks, and that means Canadian equity mutual funds and exchange-traded funds are almost certain to be well supplied with bank shares. An exception that bears watching if the stock markets act up is the BMO Low Volatility Canadian Equity ETF (ZLB). Its top holdings are Dollarama, followed by Metro Inc., Fairfax Financial, BCE and Alimentation Couche-Tard, Empire Co., Tim Horton's, RioCan REIT, Rogers Communications and Keyera Corp. Call it a rough mix of blue chips and more obscure names that many investors may not know well.
Low volatility investments have been launched in the past year or two for investors seeking to capture gains close to what the big stock indexes offer, with less vulnerability to the kind of correction many people are worrying about these days. Low-volatility products have not been battle tested yet, but the sharp decline of July 31 does offer a glimpse of what we might expect from them. ZLB fell 0.49 per cent that day. Its traditional Canadian market counterpart, the BMO S&P/TSX Capped Composite Index ETF (ZCN), lost 1.05 per cent.
ZLB's 12-month gain of 16.6 per cent is well behind ZCN's 22.7 per cent, and its comparatively low weighting in our vibrant financial sector probably has something to do with that. ZLB's weighting in the sector is 19 per cent, with ZCN at 35 per cent. That's low-volatility investing for you – you get a much different take on the market than benchmark stock indexes and the funds that track them. In rough markets, you may lose less. In strong markets, you will likely make less.
ZLB's holdings are determined by a screening process in which the 100 largest and most liquid TSX stocks are evaluated for their beta, or volatility compared to the S&P/TSX composite. The 40 lowest-beta stocks comprise ZLB's portfolio, and that explains the low weighting in financials. Typically, stocks in this sector are heavily traded and fairly volatile.
Low-volatility ETFs are available from companies like BMO, iShares and PowerShares. As ZLB shows, they're not for investors who want exposure to a particular benchmark index and all its dominant stocks. But if you're looking for a defensive way to remain in stocks through rough times ahead, they're starting to look interesting.
Rob Carrick