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Terry Shaunessy.Chris Bolin/The Globe and Mail

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

Top Picks:

BMO Equal Weight US Bank Index ETF (ZBK.TO)

We have a 5-per-cent position in this ETF in our family accounts at an average cost of $16.10. U.S. banks are cheap and should rally back to the recent high of over $20. We like the unhedged version, but for those not interested in assuming currency risk, ZUB is the same ETF, but currency-hedged.

iShares US High Yield Bond Index C$ Hedged (XHY.TO)

We hold a 5-per-cent position in this ETF at an average price of $19.81 and continue to buy it at current levels. Yield to maturity is 7.34 per cent with a duration of just four years. The 2015 sell-off was overdone. This ETF could easily get back to the $21 level.

Horizons US Dollar Currency ETF (DLR.TO)

We have recently introduced a 5-per-cent cash position into our family accounts and have chosen to hold the cash in U.S. dollars. While there is a 0.5-per-cent fee for this ETF, it is significantly cheaper than paying 1.5-2.0 per cent to a bank to convert into U.S. dollars. Our weighted average cost on this ETF so far is $13.75, but we continue to buy at current levels.

Past Picks: January 21, 2015

iShares U.S. Preferred Share Index (PFF)

Then: $39.71 Now: $38.55 -2.92% Total return: +3.76%

iShares MSCI Europe IMI index ETF (XEU.TO)

Then: $20.76 Now: $20.83 +0.34% Total return: +2.70%

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

Then: $28.10 Now: $28.75 +2.31% Total return: +4.26%

Total Return Average: +3.57%

Market outlook

For Canadian investors, the key to achieving positive investment returns in 2015 could be summed up in two words: "avoid Canada." Unfortunately, the investment call for 2016 will not be quite so simple.

After last year's 16-per-cent decline in the CAD/USD exchange rate, the Canadian dollar is expected to trade in a range of 70-75 cents U.S., assuming that crude oil trades in the $40-$45 (U.S.) per barrel range. If crude falls significantly below $35 per barrel, the loonie could again break below 70 cents (U.S.) and perhaps retest the 2002/03 low of $0.63. Beyond the influence of crude oil, the Canadian dollar will have to endure another sizable current account deficit in 2016 as well as sharply rising fiscal deficits at both the federal and provincial level. In a world of modest total return expectations for global equity and bond markets, a 15-per-cent absolute swing in the Canadian dollar could make a big difference to portfolio returns in 2016.

A modest increase in 10-year bond yields on improved activity in the domestic U.S. economy, as well as further increases in the Fed funds rate, will underpin the U.S. dollar and the S&P 500. We expect that the S&P 500 will finish the year at 2,200-2,300 on stronger second-half earnings. The move to new highs will not be smooth, as the 2,150 resistance level will be a formidable challenge that will take several attempts to surmount. (This is a very conducive environment for option strategies.) Confidence in the U.S. financial services sector will have to return if there is any hope in achieving new highs on the S&P 500. In Canada, we forecast that the TSX composite will be range-bound between 12,500 to 13,750 and entirely dependent on movements in crude oil. Overall TSX index earnings will remain flat, so there will be no help there. U.S. short covering has been a big influence on the TSX and Canadian dollar so far this year, but we expect the shorts to return when this relief rally is over.

Assuming that our asset allocation continues to minimize fixed income (30%-35%) and maximize equities (65%-70%), 2016 total portfolio returns should be in the 6%-8% range. However, we will continue to experience above-average market volatility from the same influences as in 2015 (the Fed, China and commodities).

Canada should have a better year in 2016, but investment returns will be modest and lagging global peers, so the Canadian equity allocation will remain minimal (0-5%) unless the crude oil market changes abruptly. In addition to an unstable energy market, the Canadian economy will be affected by higher taxes, a heavily indebted consumer and untested political policies. For investors that did not diversify out of Canada in 2015, the current lift in the loonie and TSX are a great opportunity to lighten up.