The financial sector has generated untold wealth for Canadian investors, but there's a limit to how much exposure you should have to banks, insurers and investment firms.
Without realizing it, you may have crossed the line. What's worse is that you probably did so unwittingly through your exposure to bonds and preferred shares. Canada's stock market is heavily weighted to financial stocks, and most of us realize that. Less well known is the fact that the corporate bond and preferred share markets are dominated as well by financials.
In researching the latest installments of the Globe and Mail ETF Buyers' Guide (see below for links), I've been struck by the pervasiveness of financials in all kinds of ETFs. I've been monitoring the influence of financials for a while now and it seems worse than ever today.
Here's a hypothetical portfolio that would give you an excessive total combined weighting of 50 per cent to financials:
-20 per cent in the RBC 1-5 Year Laddered Canadian Bond ETF (RLB), with a 46 per cent weighting in financials
-20 per cent in the Vanguard Canadian Short-Term Corporate Bond Index ETF (VSC), with 67 per cent of its assets in financials
-30 per cent in the iShares Canadian Select Dividend Index ETF (XDV), which is 60.5 per cent weighted to financials
-10 per cent in the BMO Laddered Preferred Share Index ETF (ZPR), with 50 per cent in financials.
-20 per cent in the Vanguard FTSE Global All Cap ex Canada Index ETF (VXC), with 20.5 per cent in financials
There's a case for investing in any one of these ETFs, or several. But grouping all of them together provides an example of how you can inadvertently produce a portfolio that is overly tilted to financials. This is no comment on the prospects for bank and insurance stocks in the months or years head. Rather, it's a warning that no one sector should ever be allowed to take control of your portfolio. Don't make special allowances for financials. These stocks have been deluxe wealth builders over the years, but we know from the 2008-09 crash that they're not immune from a good thrashing.
Suggestion: Try to get your financials exposure down to one-third of your portfolio. If your stocks or equity funds are heavily tilted to financials, try to minimize exposure to the sector in your bond funds. Diversification doesn't just mean mixing stocks and bonds. Sometimes, it means pushing back against a bully sector that threatens to take over your portfolio.
The 2016 ETF Buyer's Guide
Coming in the weeks ahead
-Canadian dividend and income
-global dividend and income