Ditching XIU and replacing with...

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thedude99
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Ditching XIU and replacing with...

Post by thedude99 »

I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
2)As Canadian investors we should have exposure to Canadian equities. Each one can decide how much of their portfolio should be reflected as such.

So with that said, how can we construct a Canadian portfolio that is diversified as best as it can be? I guess I'll take a kick at the cat first. Of your Canadian equity portfolio a possible breakdown could be:

Financials 20% - pick three of the banks and one of SLF or MFC
Industrials 20% - One of the rails, Magna and SNC
Consumer 15% - Dollarama and Canadian Tire
Telco 15 %- Telus, Rogers and Bell
Utilities 15%- CU, FTS and AQN
Energy 10% - Enbridge, Suncor and TransCanada
REIT 5% - XRE

Thoughts?
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Re: Ditching XIU and replacing with...

Post by IdOp »

XIC and friends do their job of mirroring the Canadian equity market very well. Some may not like to have a large exposure to that market by itself. But even so, they could put part of their Canadian equity money into the market to get a fair bit of diversification, and use the rest to fill up the sectors they feel are too low ... at least those sectors where they feel there is something worth buying in Canada.
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Re: Ditching XIU and replacing with...

Post by ig17 »

Is it registered or taxable account? If registered, Beating the TSX strategy is a popular alternative to indexing:

http://www.finiki.org/wiki/Beating_the_TSX

Some people tweak BTSX rules to achieve more balance across sectors. See FWF discussion for details:

http://www.financialwisdomforum.org/for ... f=33&t=995

BTSX may or may not be viable in a taxable account, depending on your tax situation.
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Re: Ditching XIU and replacing with...

Post by Peculiar_Investor »

thedude99 wrote: 10 Feb 2018 14:17 I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
I will disagree. The Canadian stock market isn't diversified, with concentration in three sectors. That doesn't make low cost ETFs such as XIU, XIC, VCN, etc. poor financial products.

I would argue the converse, they are very good financial products, when used correctly as part of a properly constructed and diversified portfolio. More details can be found in our wiki article on Diversification and also below.
2)As Canadian investors we should have exposure to Canadian equities. Each one can decide how much of their portfolio should be reflected as such.

So with that said, how can we construct a Canadian portfolio that is diversified as best as it can be?
Funny you should ask. I just was answering the question here.

So how does one deal with the sector concentration that exists in Canada? Simple answer is don't focus solely on Canada, take a broader portfolio view across all your equity holdings. That's one of the reasons to diversify with US and International equities such as this simple index portfolio.
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Re: Ditching XIU and replacing with...

Post by nisser »

thedude99 wrote: 10 Feb 2018 14:17 I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
2)As Canadian investors we should have exposure to Canadian equities. Each one can decide how much of their portfolio should be reflected as such.

So with that said, how can we construct a Canadian portfolio that is diversified as best as it can be? I guess I'll take a kick at the cat first. Of your Canadian equity portfolio a possible breakdown could be:

Financials 20% - pick three of the banks and one of SLF or MFC
Industrials 20% - One of the rails, Magna and SNC
Consumer 15% - Dollarama and Canadian Tire
Telco 15 %- Telus, Rogers and Bell
Utilities 15%- CU, FTS and AQN
Energy 10% - Enbridge, Suncor and TransCanada
REIT 5% - XRE

Thoughts?
Why don't you do a backtest and see what those ~15 stocks would have done in comparison to just holding XIC?
I personally wouldn't have the balls holding Dollarama or Crappy tire or any other "perceived best" option when there's only a handful to pick from in the first place.

I don't think there's anything wrong with holding XIC. You can and should diversity elsewhere by holding ETFs of Nasdaq/FTSE/S&P/World. A good chunk of XIC is still NOT energy/financials/mining. A person has to have the discipline of trimming it and putting the proceeds elsewhere as the commodity cycle booms and it outperforms everything else.
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Re: Ditching XIU and replacing with...

Post by ig17 »

You can use factor ETFs if you are totally convinced that XIU is flawed. For example:

First Asset Morningstar Canada Value Index ETF (FXM.TO)
First Asset Morningstar Canada Momentum Index ETF (WXM.TO)

Price returns since inception (Feb 13, 2012)

WXM: +59%
FXM: +47%

XIU: +26%

50/50 combo of WXM/FXM doubled the return of XIU.

BMO Low Volatility ETF (ZLB.TO) is another factor ETF to consider. It returned +87% in the same time period.

You can do a three way split between low-volatility, value and momentum for better diversification.

The caveat is, you need to understand how factor strategies work and be a true believer. Individual factors can trail the broad market for years. For example, WXM and FXM did worse than XIU in the last three years. Mind you, they trailed by a small margin. Still, they can be uncomfortable to hold when they trail the benchmark.
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Re: Ditching XIU and replacing with...

Post by rharvey199 »

thedude99 wrote: 10 Feb 2018 14:17 I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
2)As Canadian investors we should have exposure to Canadian equities. Each one can decide how much of their portfolio should be reflected as such.

So with that said, how can we construct a Canadian portfolio that is diversified as best as it can be? I guess I'll take a kick at the cat first. Of your Canadian equity portfolio a possible breakdown could be:

Financials 20% - pick three of the banks and one of SLF or MFC
Industrials 20% - One of the rails, Magna and SNC
Consumer 15% - Dollarama and Canadian Tire
Telco 15 %- Telus, Rogers and Bell
Utilities 15%- CU, FTS and AQN
Energy 10% - Enbridge, Suncor and TransCanada
REIT 5% - XRE

Thoughts?
there is a bit of duplication in telco's - i don;t think all 3 need to be owned - pick 2. and i would carve out 10-15% from these and put towards technology - CSU, OTEX, KXS, etc

if i was pressed to make a change I would probably replace AQN with BEP just because it's bigger
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Re: Ditching XIU and replacing with...

Post by longinvest »

thedude99 wrote: 10 Feb 2018 14:17 I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
I disagree.
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Re: Ditching XIU and replacing with...

Post by longinvest »

Peculiar_Investor wrote: 10 Feb 2018 15:16 I will disagree. The Canadian stock market isn't diversified, with concentration in three sectors. That doesn't make low cost ETFs such as XIU, XIC, VCN, etc. poor financial products.
...
So how does one deal with the sector concentration that exists in Canada? Simple answer is don't focus solely on Canada, take a broader portfolio view across all your equity holdings. That's one of the reasons to diversify with US and International equities such as this simple index portfolio.
I agree.
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Re: Ditching XIU and replacing with...

Post by scomac »

The more important question is: does it matter?

I'm a stock picker or at least I attempt to pick stocks. I just compared my personal numbers versus the same time period using an appropriate asset mix on the Stingy Investor's Asset Mixer and the numbers are virtually the same over 13 years. That is against the imperfect Canadian market as a benchmark for about a third of the portfolio. If you use XIU as a proxy I don't think the returns are going to be more than a rounding error different.

No matter how you cut it there is very little incentive to search for perfection because what's available as flawed as it is , is still going to be good enough in the grand scheme of things over the fullness of time. William Sharpe was right! :idea:
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
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Re: Ditching XIU and replacing with...

Post by optionable68 »

I own HXT
3-time winner of FWF Annual Stock Market Predictions contest
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Re: Ditching XIU and replacing with...

Post by adrian2 »

thedude99 wrote: 10 Feb 2018 14:17 I think we can all agree on two things
1)TSX and XIU, XIC, etc are poor financial products with their over exposure to energy and financials. Sadly that is much of Canada's economy. I have seen many comments here and elsewhere that it is "very easy" to beat the index over time.
One more to disagree!
Next time, be more careful before stating that we "all" agree.
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Re: Ditching XIU and replacing with...

Post by DanH »

If you simply adopt a true indexing attitude, you should either buy a total world stock market ETF or simply hold a smaller percentage of Canadian vs. global stocks. Something on the order of 30/70 Canada/Global could do the trick and still give you a home bias vs. Canada's market cap ranking/weight in the world. The black gold, rocks, and trees will have a very small weight if you do that and then balance it with some bonds. Voila - problem solved ;)
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