Tuesday, May 13, 2008

canadian investment styles diverge

An interesting trend has emerged in the Canadian market this year to date. The Toronto Stock Exchange Index is near a record high, while investors in Canadian dividend paying stocks are in negative territory year to date. To illustrate this point let's look at some year to date returns:

XIC (Barclays ETF that tracks the largest most liquid names in Canada)
Year To Date = +5.8%
Some Highlights = Encana (ECA) +35%, Research in Motion (RIM) +25%, Potash Corp. of Saskatchewan (POT) +38%

XDV (Barclays ETF that tracks the 30 highest yielding dividend growing Canadian firms)
Year To Date = -2.7%
Some Lowlights = Bank of Montreal (BMO) -12.5%, Manitoba Telecom (MBT) -10.8%, National Bank of Canada (NA) -0.3%

It's no wonder the Canadian index is soaring while dividend paying stocks flounder. Commodities have been on fire lately, while banks remain under the dark clouds of the credit crunch. Financial services firms make up a much larger portion of the dividend paying universe in Canada than they comprise the total index.

One might assume that these two ETFs would perform quite similarly but this year to date is really showing that this would be a false assumption. Does this mean now is a great time to buy some of the growthy companies that make up the Canadian index? Who really knows, but as a dividend growth investor it is much easier to find value in some of the beaten down constituents of the boring old XDV. When most investors are ignoring these dividend paying firms, is usually the best time to get involved. The Canadian XDV will have its days in the sun in future years and that is perhaps when you want to be accumulating cash or diversifying into other areas. The nice thing about many of the Canadian financial service industry stocks is that at the end of the day they should benefit from any successes that the commodity economy in Canada garners through increased economic activity.


pitz said...

ECA, RIMM, and POT collectively make up 15% of the index.

If they went up, on average, by 30%, is that not essentially implying that the rest of the index has gone essentially nowhere this year?

I don't have the intestinal fortitude (nor the balance sheet, really) to short ECA/RIMM/POT, but surely theres plenty of good money made by investing in the 'rest' of the index.

MG (moneygardener) said...

Without running the numbers pitz I see your point. Does that not inherently make XIC a riskier proposition as these few firms get bigger.

Sami said...

this debate of market weighted index vs equal weighted index has been researched a lot.

Equally weighted indexes are far superior for this exact reason. Even better there are fundamental weighted indexes that can outperform market weighted indexes as they are rebalanced based preset fundamental criteria.

Dividend Growth Investor said...

Well, remember last time when Canada's largest company of the late 1990's early 2000's was a technology stock.. How did dividend investments perform in the following 7-8 years?

Dividend Growth Investor said...

..[The Money Gardener presented Canadian investment styles diverge. Basically canadian dividend stocks are underperforming the broad market average. Does short term market fluctuations concern MG? Not at all. He believes that when most investors are ignoring these dividend paying firms, is usually the best time to get involved]..