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number cruncher

What are we looking for?

ETFs and DIY mutual funds that made notable changes to their defensive-sector exposure over 2022.

The screen

The year is off to a great start for equity investors, with most equity indexes posting single-digit gains on a year-to-date basis, perhaps fuelled by investors’ reinvigorated confidence that the world’s central banks have inflation under control. That said, a new economic environment of higher interest rates might prompt some investors to have a look at their sector exposures, perhaps allocating more to defensive sectors for risk-reduction purposes, or to more cyclical sectors if they’re bullish on market prospects. To help identify potential candidates, I thought to analyze funds that have made noticeable moves over the course of last year. To start with, I screened the Morningstar Direct database for Canadian-domiciled equity ETFs and DIY mutual funds for those that have a reasonable track record, denoted by their Morningstar Rating for Funds or “star” rating of three stars or better, implying that the initial universe performed at least as well as category peers.

I then looked at the sector allocations of each fund as they appeared at the end of 2022 and 2021. Specifically, I used Morningstar’s “super-sector” definitions to determine which funds have the largest changes in exposure to defensive sectors. Recall that Morningstar’s classification structure for stocks divides global companies into three “super sectors”: (1) cyclicals, which include basic materials, consumer cyclical, financial services and real estate stocks; (2) defensive, which includes consumer defensive, health care and utilities stocks; and finally (3) sensitive, which includes communications services, energy, industrials and technology companies. I used the change in exposure to the defensive sector over the 2022 calendar year as the sole metric to rank the list of three-star-or-better funds.

What we found

20 funds moving into, and away from defensive sectors

NameTickerMorningstar CategoryAnnual Report Management Expense Ratio (MER)Morningstar Rating for FundsTotal Ret YTD (%)Total Ret 1 Yr (%)Total Ret Annlzd 3 Yr (%)Total Ret Annlzd 5 Yr (%)Defensive Supersector (12M % Change)Equity Econ Super Sector Defensive % (Net) 2022-12Equity Econ Super Sector Defensive % (Net) 2021-12Sensitive Supersector (12M % Change)Equity Econ Super Sector Sensitive % (Net) 2022-12Equity Econ Super Sector Sensitive % (Net) 2021-12Cyclical Supersector (12M % Change)Equity Econ Super Sector Cyclical % (Net) 2022-12Equity Econ Super Sector Cyclical % (Net) 2021-12
Funds Moving to Defensive Sectors:
Fidelity US Momentum ETFFCMO-TUS Equity0.320.3-1.741.748.46.7-30.131.761.8-11.819.631.4
Invesco S&P 500 Momentum ETF CADMOM-NEUS Equity0.532-1.04.01.63.538.349.310.9-11.136.948.0-27.812.940.7
iShares MSCI USA Momentum Ftr ETFXMTM-TUS Equity0.323-1.1-0.94.929.946.216.3-13.236.850.0-16.516.833.3
Purpose Global Innovators ETFPINV-TNorth American Equity1.2314.0-24.7-3.828.843.314.5-28.437.165.5-5.54.610.1
CI Munro Global Growth Equity ETFCMGG-TGlobal Equity1.063.5-4.722.638.415.8-18.434.753.1-6.721.828.5
CI Global Climate Leaders ETF C$CLML-TGlobal Equity0.931.4-3.621.539.618.0-8.343.852.1-16.49.525.9
SmartBe U.S. Quantitative Momentum ETFSBQM-NEUS Equity0.991.312.218.630.111.618.558.339.8-36.711.348.0
Fidelity International Low Vol ETFFCIL-TInternational Equity0.4832.4-1.3-0.716.750.433.7-0.423.824.2-16.724.841.4
CI WisdomTree Intl Qual DivGrETFIQD-TInternational Equity0.5856.60.75.66.216.642.125.5-4.230.734.9-11.927.039.0
SmartBe Canadian Quantitative Mmntm ETFSBCM-NECanadian Equity0.082.41.715.120.35.29.448.439.0-24.430.955.2
Funds Moving away from Defensive Sectors:
Leith Wheeler Intl Equity Plus Series BInternational Equity1.5926.3-1.91.0-0.8-12.015.127.15.225.920.812.730.117.4
Invesco S&P 500 Hi Div Low Vol ETF CADUHD-NEUS Equity0.3921.610.25.46.1-12.140.352.4-3.622.325.816.336.920.6
Beutel Goodman North American Focus Eq DCanadian Focused Equity1.4944.44.88.77.2-12.318.430.711.534.923.40.144.244.1
Fidelity US Value ETFFCUV-TUS Equity0.366.012.2-12.918.331.37.446.439.04.634.229.6
Fidelity US Value Currency Neutral ETFFCVH-TUS Equity0.397.55.1-13.018.331.37.346.239.05.234.829.6
Horizons NASDAQ-100 Cov Cll ETFQQCC-TInternational Equity0.8516.7-4.10.6-1.1-16.215.631.836.868.732.0-19.215.234.5
TD Q Canadian Dividend ETFTQCD-TCanadian Dividend & Income Equity0.3917.49.35.5-16.711.528.26.640.934.410.347.136.8
Invesco S&P GlbexCndHiDivLowVol ETF CADGHD-NEGlobal Equity0.6724.36.31.53.2-18.833.352.15.822.116.311.539.027.5
First Trust Morningstar Div Lrs ETF CADHFDL-TUS Equity0.663.28.311.37.8-19.431.150.59.445.035.710.722.111.4
Guardian Fundamental All Country Eq ETFGGAC-TGlobal Equity1.057.72.4-25.22.127.4-20.612.032.6-23.213.937.1

Source: Morningstar Direct | Data as of January 27, 2023

The accompanying table includes 10 funds that have shifted their exposure toward defensive sectors the most, and the 10 funds that have shifted the furthest away from defensive sectors. The table also displays fees, trailing performance, ratings and inception dates. It is worthwhile noting that the three funds that have moved most into defensive sectors (XMTM-T, FCIL-T and IQD-T) are “smart beta” products, which are rules-based in nature and do not follow the discretion of a portfolio manager. Interestingly, the three funds are exposed to quite different factors. Also noted is the fact that several smart beta products that look for exposure to dividends (such as FCUD-T, XHU-T and VIDY-T), have shifted away from defensive sectors, while RBC’s actively managed mutual funds have increased their exposure to defensive sectors.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is director of investment research for Morningstar Canada.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 08/03/24 11:59pm EST.

SymbolName% changeLast
GGAC-T
Guardian Fundmntl All Country Equity ETF
+0.32%21.64
FDL-T
First Trust Morningstar Div Ldrs ETF Hgd
-1.25%31.7
TQCD-T
TD Q Canadian Dividend ETF
-0.24%16.55
QQCC-T
Horizons Nasdaq 100 Cvrd Call ETF
+0.7%11.49
FCVH-T
Fidelity US Value Currency Neut Idx ETF
+0.31%16.44
FCUV-T
Fidelity US Value Index ETF
+0.64%17.3
IQD-T
CI Wisdomtree Intl Qlty Divd Growth Index ETF
+1.02%34.77
FCIL-T
Fidelity Intl Low Vol Index ETF
+1.08%29.01
CLML-T
CI Global Climate Leaders Fund ETF
+2.04%26.51
CMGG-T
CI Munro Global Gwth Equity Fund ETF CAD
+3.01%26.33
PINV-T
Purpose Global Innovators Fund
-1.45%22.45
XMTM-T
Ishares Edge MSCI USA Momnt Fctr ETF
0%29.73
FCMO-T
Fidelity US Momentum Index ETF
+0.15%13.43
FCUD-T
Fidelity US High Div Index ETF
+0.36%33.64
XHU-T
Ishares US High Div Equity Index ETF
+0.2%30.44
VIDY-T
Vanguard FTSE Dev Ex Na High Div Yld ETF
-0.46%30.32

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