The most successful ETF strategy for investing in the Canadian stock market over the past five years is the low volatility fund.
A surprise, right? A lot of investors who favour exchange-traded funds might have guessed dividends, or maybe just using a fund that tracks the broad Canadian stock market. But both those strategies were mostly beaten over the five years to Oct. 31 by the low volatility fund.
This pattern is seen most dramatically in the BMO family of ETFs, which includes BMO S&P/TSX Capped Composite Index ETF (ZCN), the BMO Canadian Dividend ETF (ZDV) and the BMO Low Volatility Canadian Equity ETF (ZLB). ZLB's five-year annualized total return was 15.5 per cent, compared to 7.2 per cent for ZDV and 8.3 per cent for ZCN.
Much the same pattern can been elsewhere in ETF-land:
- The iShares Edge MSCI Min Vol Canada Index ETF (XMV) made 9.6 per cent annually over the past five years, compared to 8.8 per cent for the iShares Canadian Select Dividend Index ETF (XDV) and 8.3 per cent for the iShares Core S&P/TSX Capped Composite Index ETF (XIC).
- The PowerShares S&P/TSX Composite Low Volatility Index ETF (TLV) made 11.2 per cent over past five years, compared to the same 11.2 per cent for the PowerShares Canadian Dividend Index ETF (PDC) and 9.1 per cent for the PowerShares FTSE RAFI Canadian Fundamental Index ETF (PXC).
- The First Asset MSCI Canada Low Risk Weighted ETF (RWC) has a three-year annualized return of 6.6 per cent over the past three years (it hasn't been around for five years), compared to 5.1 per cent for the First Asset Active Canadian Dividend ETF (FDV) and just over 4 per cent for the First Asset Morningstar Canada Momentum Index ETF (WXM) and First Asset Morningstar Canada Value Index ETF (FXM).
The holdings in low volatility ETFs are generally chosen using a process in which a particular index is screened for stocks showing the least risk in terms of price variability. You're missing those stocks that would shoot the lights out in a strong bull market and lead the retreat in a weak market. This style has been ideal for the past five years, an up and down period where Canadian stocks have lagged some other global markets.
Do not buy these ETFs with the expectation of outperforming for the next five years. What we've learned about low-volatility ETFs is that they are strong in a cautious or weak investing environment. In a more bullish market, like we've seen lately, they can be laggards. Remember ZLB's killer five-year numbers? In the past six months, its 2.7 per cent gain trails ZDV's 4 per cent and ZCN's 4.3 per cent.