Global investing is all the rage right now, but there's another way to avoid the rotten performance of the Canadian stock market.
The BMO Low Volatility Canadian Equity ETF (ZLB-T) is example of how an investing product can be almost perfectly in tune with the markets at a particular moment in time. By virtue of its stock-selection methodology, it has managed to be light on the deadwood stock market sectors of the day and heavy on the sectors that are strongest. A change in market leadership could easily end this fund's run, but, for now, it's a rare example of a Canadian equity fund that is making decent money for investors.
ZLB has the second-best performer this year among exchange-traded funds tracking the broad Canadian market with a total return of 7.8 per cent to July 31. ETFs tracking the S&P/TSX composite index were up about 0.6 per cent over the same period, which is to say they've done pretty much nothing. ZLB is also a leader in 12-month and three-year returns, and its results have surpassed low volatility Canadian equity ETFs from other firms.
Enquiring investors will want to know how this outperformance has occurred, and whether it's likely to continue. ZLB's portfolio is made up of the 40 lowest beta stocks among the 100 largest and most liquid names in the Canadian market. Beta is a measure of volatility that compares a security to its benchmark index.
ZLB has the magic touch this year because its portfolio has just a 36-per-cent weight to three of the weakest Canadian sectors of late, financials, energy and materials. That compares to the 65-per-cent weighting in these three sectors in the BMO S&P/TSX Capped Composite Index ETF (ZCN-T). Two of the strongest sectors this year have been consumer staples and consumer discretionary. ZLB's combined weighting is 32 per cent, while ZCN is at 11 per cent. Banks and energy companies dominate the top holdings in ZCN; ZLB's top holdings include Dollarama (DOL-T), Alimentation Couche-Tard (ATD.B-T) and Fairfax Financial (FFH-T).
ZLB looks good to go for as long as long as we have a slow-growth economy in Canada and globally. When banks and energy snap back, ZLB's run could be over.
Rob Carrick