Terry Shaunessy is president & portfolio manager at Shaunessy Investment Counsel. His focus is exchange-traded funds.
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 47 per cent of the index. On a sector basis the top 3 groups of the TSX 60 are Financial Services 37 per cent, Energy 22 per cent and Materials 12 per cent. The top 3 sectors of the TSX 60 EW are Energy 25 per cent, Materials 17 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 (+35 per cent) outperformed SPY (+32 per cent) in 2013 – and that outperformance should continue in 2014.
iShares Europe ETF
This ETF tracks the S&P Europe 350 Index which is the European equivalent of the S&P 500 in the U.S. Last year was a good year for IEV rising 25 per cent and we expect that European equities (including the U.K.) will produce attractive total returns again in 2014. We like European financial stocks, which represent the largest single industry category at 22 per cent of the index. Europe is about a year behind the U.S. in recovering investor confidence and we expect that will happen this year. This ETF achieved an all time high of $60 in September, 2007, and we think that new highs may be achieved this year.
Past Picks: January 16, 2013
iShares Russell 2000 Index ETF C$ Hedged
Then: $18.86; Now: $25; Total return:: +33.90%
Vanguard Canada S&P 500 Index ETF
Then: $25.64; Now: $35.68; Total return: +41.39%
iShares S&P/TSX Global Base Metals ETF
Then: $13.76; Now: $13.04; Total return: –3.59%
Total return average: +23.90%
It is commonly held that the mid-decade U.S. housing/banking crisis was the primary cause of the global recession. Moreover, it was the 2012 reconciliation of the housing glut in America that stabilized house prices, brought confidence back to the U.S. banking system and laid the foundation for a rally in stock prices. However, working off excess housing inventory did absolutely nothing for employment, trade and GDP growth. U.S. housing starts are now rebounding and could rise by 50-100 per cent over the next 18-24 months. Why is this important? A 2,100+ sq ft single family home takes 6-9 months to build, employs approximately 20-25 workers and consumes 16,000 board feet of framing lumber and 439 pounds of copper to name just a few key components. In other words, U.S. residential real estate construction is the major stimulus to the global economy that has been missing. Housing starts will boost GDP, employment and worldwide trade as well as corporate earnings. Similarly, global vehicle production, which fell to 62 million units in 2009, should range between 87-90 million units in 2014 with each unit using between 2,400 and 3,000 lbs of steel.
In fixed income, we look for the 10-year government bond yield to hit 4 per cent in 2014 and 5 per cent or more in 2015 as central bank open-market operations are wound down. Short-term rates will remain low, thereby maintaining a steep yield curve, which is further good news for U.S. bank earnings and investor confidence.
We expect that 2014 will be another good year for stocks but this time the rally will include resource/cyclical sectors and emerging markets The S&P 500 will continue to lead developed markets with the €350 also producing attractive returns. Mining, industrials and technology will be the leading sectors with energy being a wildcard.