Tag Archives: TSX

Beat the TSX portfolio, Canadian Wide Moats rule

Posted By Financial Independence Hub | July 10, 2024

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

In this Sunday Reads we’ll begin with a look at the first half returns for the Beat The TSX Portfolio and the Canadian Wide Moat Portfolios. The Beat The TSX Portfolio is a pure value play, discovered by those big dividends. The Canadian Wide Moat Portfolio relies on the moats – a lack of competition. There are a few key oligopoly sectors in Canada. While both Canadian stock portfolio approaches have a nice history of beating the market, the BTSX is more volatile, while the Wide Moats are more low volatility by design. The BTSX Portfolio continues to struggle while the Wide Moats continue to best the market.

Here’s the updated post on The Beat The TSX Portfolio.

For the first half of 2024, it’s 6% vs 1.3% in favour of the passive TSX Composite.

And here’s the updated post for the Canadian Wide Moat Portfolios.

The wide moat portfolio has beat the TSX by some 1.6% annual over the last decade. That said, it has underperformed from 2023. I can still find no better model for the large cap Canadian space. It tracks closely to (but slightly outperforms) the BMO Low Volatility ETF – ZLB.TO.

Shareholder yield

I really liked this post and screen in the Globe & Mail (sub required). Companies that have a lot of free cash flow typically perform very well. They can buy back shares (increasing your ownership) and pay bigger and increasing dividends. We call that combination the shareholder yield. The screen also looked at valuation, quality and more. Here’s where it landed. It’s a nice sixpack …

And check out the buy back and dividend history for Canadian Natural Resources. My favourite oil and gas stock …

The markets last week Continue Reading…

The TSX Composite Index: No longer a Second-Class Citizen?

Posted By Financial Independence Hub | March 15, 2022

By Noah Solomon

Special to the Financial Independence Hub

Canadian stocks have had a very decent run since the global financial crisis of 2008. From December 31, 2008, through the end of last year, the TSX Composite Index returned an annualized 10.1%. This pales in comparison to the performance of the S&P 500 Index, which has risen at an annualized rate of 16.1%. Had you invested $1 million in the TSX Composite Index at the end of 2008, your investment would have been worth $3,477,264 at the end of last year. By comparison, the same investment in the S&P 500 Index would have a value of $6,873,269, which is a stunning $3,396,005 more than the Canadian investment.

Looking for Love in all the wrong places

The composition of the Canadian stock market is dramatically different than that of its southern neighbor. As the table below illustrates, there are a handful of sectors that feature either far more or less prominently in the TSX Composite Index than in the S&P 500. Specifically, Canadian stocks are far more concentrated in financial, energy, and materials companies, while the U.S. market is more concentrated in the technology, health care, and consumer discretionary sectors.

TSX Composite Index vs. S&P 500 Index: Sector Weights (Dec. 31, 2021)

In 1980, the song “Lookin’ for Love,” by American country music singer Johnny Lee was released on the soundtrack to the film Urban Cowboy. The tune’s iconic lyric, “Lookin’ for love in all the wrong places,” serves as a fitting description of the dramatic underperformance of the TSX vs. the S&P 500. The majority of disparity in performance between the two indexes can be explained by their different sectoral weightings. When financial, energy, and materials stocks outperform their counterparts in the information technology, health care and consumer discretionary sectors, it is highly likely that the TSX will outperform the S&P 500, and vice-versa.

Over the past two years ending December 31, 2021, the information technology sector has been the star performer both in Canada and the U.S. Interestingly, the TSX technology index fared better than its U.S. peer, returning 113.9% vs. 92.4%. However, due to the far greater weighting of tech companies in the S&P 500 than in the TSX (23.2% vs. 5.7% as of the end of 2019), tech stocks have had a far greater impact on the returns of the S&P 500 than on the TSX. On the other hand, financial, energy, and materials stocks were all underperformers on both sides of the border, which served as a drag on the performance of Canadian relative to U.S. stocks.

Macro Drivers and Tipping Points: It’s About Growth & Oil

Given that differing sector weightings account for the lion’s share of performance disparities between Canadian and U.S. stocks, it is essential to determine the macroeconomic factors that have historically caused certain sectors to out/underperform others, and by extension TSX outperformance or underperformance. Continue Reading…

Should you own a lot or a little in Canadian stocks?

Posted By Financial Independence Hub | October 15, 2021

By Steve Lowrie, CFA

Special to the Financial Independence Hub

It’s not easy being a Canadian investor, is it? Given recent elections, we’re unlikely to see a pro-business surge anytime soon … to say the least. (It’s not investable info, but did you notice I happened to accurately forecast this?)

Plus, we’ve had to watch other countries’ stock markets beat the pants off our own during the past decade. U.S. glamour or FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) have been living especially fat and larger than life lately.

It’s no wonder I’ve been fielding questions about how to best allocate among the global equity markets these days. How much is too much in Canada? Should we just dump everything into the U.S. market? Is diversification dead?

My short answers are: It depends. No. And, I wouldn’t bet on it. This is an admittedly incomplete response, so let’s consider four points and counterpoints to fill in the blanks.

1.) Canada’s market cap is tiny, and concentrated

While we’re rich in land mass, Canada represents just 3% of the world’s stock market capitalization. Plus, that 3% isn’t very well-diversified, with relatively heavy exposures to banking and natural resources.

2.) Canadians and everyone else have a home bias

Home bias means we prefer familiar objects close to home. If (like me) you’re rooting for your kid’s hockey team, cheer on. But in the markets, this tempts most investors – and many financial professionals – to pile too heavily into their own countries’ stocks.

For example, despite recent underperformance, the typical Canadian still allocates 60% of their investments to Canadian stocks. The Behavioral Investor author Daniel Crosby reports that U.S. investors typically allocate 90% of their holdings to the U.S. market; U.K. investors allocate about 80% of their holdings to the U.K. No matter where you roam, home bias is right at home.

3.) Markets are unpredictable

Before you ship all your investments across the border or overseas, remember: Markets can turn on you, abruptly and without warning. While it might seem like a distant memory, it should be noted, from 1999–2009, Canadian stocks (S&P/TSX composite) returned 7.7% per year, whereas U.S. stocks (S&P 500 in Cdn$) seemed cursed in the new millennium, delivering –2.5% per year … yes that is a negative return for 10 years! Continue Reading…

Oil pumping up returns for Canadian investors

Posted By Financial Independence Hub | July 17, 2018

By Neville Joanes

(Sponsor Content)

We don’t just use it to drive. It’s in the roads we drive on. In fact, it is used in over 6,000 products that help make up modern life. “Oil,that is. Black gold. Texas tea …” And for a fossil fuel commodity supposedly going the way of the dinosaur, oil is looking pretty slick these days.

Oil hit $73 recently and then moderated down to a sweet spot in the mid-$60 range. But can $100 oil really be on its way down the pipeline? Spoiler alert: you might not be thinking big enough. $100 is just a number, not a cap.

As an example of the importance of oil to the Canadian scene, let’s look at the Horizons S&P/TSX 60 Index ETF, which holds the top 60 companies on the S&P 500 index as well as the Toronto Stock Exchange. (WealthBar holds HXT because it is an efficient way to have exposure to Canadian companies or businesses in our clients’ portfolios.) A significant number of those companies are energy producers (ie. oil companies). Indeed, on the TSX, nearly one fifth of the stocks represent energy companies.

Their success fuelled a bounce to a record high in late June. Oil is back — and that means Canadian investors (or at the very least, investors in Canada’s oil-fuelled economy), a steady pipeline of profits is bubbling up.

The recent history of oil. Before the boom, the bust

If you filled up your car recently, the dog days of oil might seem like a distant memory. But it wasn’t that long ago. Thanks to a glut of supply on the world market, oil was down at $30/barrel in 2016. How did it get so low? Mostly, fracking.

North American energy companies employed new technology techniques to bump up energy production by exploiting fields formerly deemed uneconomical. This reduced the need for importing oil from abroad.

The world did not adjust, at least not right away. Russia and the OPEC countries are addicted to revenues from exported oil. With few alternatives as a revenue pipeline, these nations had continued to pump oil even as the price was clearly sliding. Soon, the world had an ocean of cheap oil on its hands.

Moving forward to the dog days of August 2017 and that glut was still choking down the price per barrel. Note the final bolded conclusion in this Bloomberg article:

When OPEC and Russia first embarked on their strategy to clear a global oil glut, it was expected to succeed within six months. It now looks like the battle could last for years.

The Organization of Petroleum Exporting Countries and its partners plan to wrap up their production cuts next spring, already nine months later than originally expected. Yet oil prices are faltering again as data from the International Energy Agency show world inventories could remain oversupplied even after the end of 2018. ESAI Energy LLC predicts that, rather than months, draining the surplus may take years.

With oil priced so low, North American energy companies struggled to keep pumping. At the height of the crash, tens of thousands of Canadians, mostly in Alberta, lost high-paying jobs. By 2017, our Prime Minister was even talking about phasing out the oil sands.

But predictions of oil’s demise were premature.

Oil slides back from the brink

The rebound in oil happened a lot quicker than the experts expected. Today, it is welling up past $70/barrel. What happened? Supply met demand. Continue Reading…

Why the “T” in TSX should stand for Tokyo

Posted By Financial Independence Hub | July 5, 2018

By Jeff Weniger, CFA, WisdomTree Investments

Special to the Financial Independence Hub

Canada’s stock market construction may be more than just a portfolio risk; it is arguably a systemic one.

If, for whatever reason, the Canadian financial system were to encounter serious difficulty, investors would be hit by a one-two punch. The attendant economic weakness would hang over the stock market, and it would be the very companies that dominate the stock market that would be battling demons. Canada’s top-heaviness, where more than $2 of every $5 in the MSCI Canada Index is in financial stocks, is not normal or reassuring for a developed economy.¹ We should stop making like it is.

In fact, it would be better for the TSX if the “T” stood for Tokyo, at least on the sector diversification side of things, as we show below.

Stuck in the mud

Everywhere you turn, countries that are top heavy are doing something about it. Saudi Arabia, for example, sees the writing on the wall for fossil fuels; either the price mechanism may cause a phase-down in oil demand in the next quarter century, or environmental action groups will crush demand themselves. Either way, the ruling Crown Prince Mohammad bin Salman is keen to avoid state failure if a bleak future for oil comes to pass. That country will soon float an IPO of Aramco, the state-run oil behemoth that may be equal to several ExxonMobils. Proceeds will be diverted into tech, infrastructure—anything that isn’t oil.

China, too, realized it was turning into a one-trick pony. After building its export machine after Mao’s death, the time for middle-class demand eventually arrived. When it joined the WTO at the turn of the century, the country’s household consumption was 46% of GDP. It fell to 36% of GDP in 2007, but it has been rising ever since; sights are set on 40% this year.²

But not Canada. The hat is hung on the same two sectors, as always. Nine of this country’s top 10 corporations by market capitalization fit the bill (figure 1). This, in a country where the average investor has 86% of assets inside these borders.³

That is concentration on top of concentration.

Figure 1: Canada’s Sector Concentrations