The U.S. market is where top performing Canadian-market investing strategies meet their match.
The latest example is the low volatility exchange-traded fund, which has been the best performing Canadian market strategy over the past five years for investors using exchange traded funds. For investing in the U.S. market, low volatility funds have been less dominant.
Low volatility ETFs typically build portfolios by screening the broader market for stocks that are less variable in price. Volatility runs two ways – declines in price, and gains. This may explain why the Canadian market has seen more success for the low volatility strategy. We've had weaker markets here, which means that the benefit investors received from reduced downside risk more than offset what they gave up by not having exposure to the hottest stocks.
The U.S. market has far outperformed Canada in the past 10 years, and the trend has remained in place this year. This gives you some context for understanding why U.S. low-volatility funds have been disappointing.
Consider the BMO Low Volatility U.S. Equity ETF (ZLU), up an annualized 14.2 per cent over the three years to Oct. 31. You'd have had a better result with the plain old BMO S&P 500 ETF (ZSP), up 15.4 per cent over the past five years, or the BMO U.S. Dividend ETF (ZDY), up 15.7 per cent.
To some extent, low-volatility investing in the U.S. market depends on which ETF you use.
The iShares Edge MSCI Min Vol USA Index ETF (XMU) averaged 16.1 per cent annually over the past three years, compared to 15.4 per cent for the iShares Core S&P 500 Index ETF (XUS). But there are other examples of U.S. low-volatility ETFs lagging. The PowerShares FTSE RAFI U.S. Fundamental Index ETF - CAD hedged ETF (PXU.F) averaged 13.7 per cent over the past five years, while the PowerShares S&P 500 Low Volatility Index ETF - CAD hedged ETF (ULV.F) averaged 12.9 per cent.
The long stretch of outperformance for low volatility ETF in Canada should make investors cautious about buying these funds at today's prices. But U.S. low-volatility ETFs might be different. The U.S. market has been ferociously strong in recent years and there are growing concerns about a pullback. Could low-volatility ETFs outperform if this happens?
One further example of a successful Canadian strategy struggling in the U.S. market is the Two-Minute Portfolio, where you invest in the two largest dividend paying stock in each industry sector of the stock market. The 2MP has outperformed the S&P/TSX composite total return index over the long term, but a U.S version tested a few years ago was a bust.