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Terry Shaunessy. (Chris Bolin for The Globe and Mail)
Terry Shaunessy. (Chris Bolin for The Globe and Mail)

BNN Market Call

Three top picks from Shaunessy Investment’s Terry Shaunessy Add to ...

Terry Shaunessy is president and portfolio manager at Shaunessy Investment Counsel. His focus is on exchange traded funds (ETFs).

Top Picks:

Horizons S&P/TSX Equal Weighted 60 ETF

Each stock represents 1/60th or 1.7 per cent of the portfolio which contrasts to the market-weighted TSX 60 benchmark in which Royal Bank represents 8.2 per cent and the top 10 positions account for 46 per cent of the index. On a sector basis, the top 3 sectors of the TSX 60 are Financial Services (36 per cent), Energy (24 per cent) and Materials (13 per cent). The top three sectors of the TSX 60 EW are Energy (25 per cent), Materials (18 per cent) and Financials (17 per cent). The bottom line: if cyclicals outperform banks, you win!

Guggenheim S&P 500 Equal Weight Index ETF

Same story as HEW but this time each holding is 1/500th or 0.2 per cent of the total portfolio (talk about breadth) which contrasts to Exxon at 2.8 per cent and Apple at 2.6 per cent in the market weighted S&P 500. The sector profile is similar to the S&P 500 with Financials, Technology and Consumer Discretionary topping the list in the mid teens range but the sheer number of stocks in the equal weight index gives you more opportunity to gain. RSP ( up 26 per cent) is outperforming SPY ( up 20 per cent) on a one year basis ended June 30 – and that pattern should continue for a while.

iShares MSCI Europe Financials ETF

U.S. financial stocks fried the large cap U.S. benchmarks in 2008/2009 and U.S. bank stocks led the recovery to new highs in 2012/2013. The same thing is happening in Europe. Every big European financial stock is in this ETF starting with HSBC at 13 per cent of the total.

Past Picks: January 16, 2013

iShares Russell 2000 Index Fund (CAD-Hedged)
Then: $18.86
Now: $22.40
Total return: +19.33 per cent

Vanguard Canada S&P 500 Index ETF
Then: $25.74
Now: $30.87
Total return: +20.83 per cent

iShares S&P/TSX Global Base Metals Index Fund
Then: $13.76
Now: $11.41
Total return: -16.40 per cent

Total return average: +7.92 per cent

Market outlook:

We remain at maximum equity exposure in all of our accounts which is defined by a range of 65-90 per cent of total assets depending upon the client mandate. We look for economic growth to accelerate in the next 12 months on a global basis as Europe emerges from its austerity program producing a positive export picture for Asia. The U.S. will continue to motor along so that by year end 2014 there will be synchronized expansion among major economies, which will be good for natural and as well as human resources. Mid and long-term government bond yields will move up by 75-100 basis points but nothing meaningful will happen to short rates. Higher interest rates will not de-rail the expansion. Under these circumstances, earnings and dividends will rise at a rate that is much faster than expected, fundamentally supporting higher stock prices. We expect the 10-year bond yield to rise to 3%-3.25 per cent in the next 12 months and forecast an S&P 500 index level of 1900-2000 by year end 2014. The TSX should also come back to life powered by natural resource stocks. The Euro 350 offers the best potential gain over the next six-to-nine months led by banks and forex gains. Our equity portfolios are 50-per-cent U.S., 25-per-cent Canadian and 25-per-cent EAFE.

In addition to rising equity markets, we look for the breadth of the market to widen so that ETF investors may want to allocate a portion of their large-cap Canadian and U.S. index holdings to equally-weighted index ETFs. Equal dollar indexes tend to significantly outperform the key large cap benchmarks (S&P 500, TSX composite) when the majority of the industry sub-sectors are advancing. A market cap weighted index is always selling losers and buying winners on a re-balance whereas an equally weighted index is always selling winners and buying losers, which produces the outperformance when sector leadership rotates.

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