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Canadian ETF Industry Report: April 2019

The Canadian ETF Industry reached a new record high of $178.7-billion in assets under management at the end of April. Three new ETFs were added to the product line during the month.

APRIL ETF LAUNCHES:

With the reintroduction of the STATES Act in the United States, which would protect states’ rights to determine their own policies on marijuana and limit cannabis prohibition at the federal level, cannabis investing is at another turning point. Two ETF providers want to exploit this untapped market by introducing U.S. Marijuana ETFs.

Evolve ETFs launched the Evolve U.S. Marijuana ETF (“USMJ”). USMJ seeks to provide long-term capital appreciation by actively investing in a diversified mix of equity securities of issuers that are involved in the U.S. marijuana industry where state and local laws regulate and permit such activities. Evolve ETFs’ other marijuana-focused fund, the Evolve Marijuana Fund (“SEED”), was Canada’s Top Performing Equity ETF listed on the TSX over the past year with one year total return of 71.37%1 as of April 30, 2019.

After launching the world’s first marijuana ETF, which attracted over $920-million in assets under management, Horizons ETFs added to the suite of Cannabis-focused ETFs with the introduction of the Horizons U.S. Marijuana Index ETF (“HMUS”). HMUS seeks to replicate, to the extent possible, the performance of the U.S. Marijuana Companies Index. The underlying index is designed to provide exposure to the performance of a basket of North American publicly-listed life sciences companies having significant business activities in, or significant exposure to, the United States marijuana or hemp industries. The ETF is also available in U.S. dollar under the ticker HMUS.U.

Both the Evolve U.S. Marijuana ETF and the Horizons U.S. Marijuana Index ETF trade on Aequitas NEO Exchange.

StockPointer® Canadian Equities Model Portfolio Transactions – April 2019

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, which will be effective on April 18th after market close. Here are the details:

Ins:

  1. Great-West Lifeco Inc. (GWO) – Market Trend. Increase in Financial sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. Norbord Inc (OSB) – Market Trend. Increase in Materials sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  3. Open Text Corporation (OTEX) –  Market Trend. Increase in Information Technology sector as seen in the Top 100 index therefore increasing our position in the portfolio.

Outs:

  1. The North West Company Inc (NWC) – Market Trend. Decrease in the Consumer Staple sector as seen in the Top 100 index.
  2. Parkland Fuel Corporation (PKI) – Market Trend. Decrease in the Energy sector as seen in the Top 100 index.
  3. CAE Inc. (CAE) –  Market Trend. Decrease in the Industrials sector as seen in the Top 100 index.

April 2019 Portfolio Manager Commentary

The S&P/TSX Total Return Index increased by 13.3% in the first quarter. This gives the Canadian market a very strong start in 2019 which has actually slightly outperformed the MSCI Global (10.4%) and is performing in line with the S&P 500 (13.7%).

The stock markets are currently on the rise due to positive economic expectations. Over the past couple of weeks, the depth and longevity of constructive global perspectives have increased in importance following the most recent economic comments and political statements made by major central banks including that of China, Europe, and the United States.

This staggering global economic bull cycle over a longer horizon has a principal effect on the anticipations of investors in the stock market and it has clearly overcome the contradictions related to the softening of the short-term growth. Even though economic growth and corporate profits growth are presently lower than they were a year ago, their persistence and resilience over the long run are the key factors affecting investors’ psychology.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 0.6% in March, leading to a YTD positive return of 11.4%, slightly underperforming the market. Looking at contribution factors to the NQICA returns, the best performing stock up 11.16%, was Parkland Fuel Corporation (PKI). On the contrary, the worst performer was The North West Company (NWC), down 9.3% in March.

The most recent rebalancing required the sale of three titles, The North West Company, Parkland Fuel and CAE. They were replaced by Great-West Life Co, Norbord, and Open Text. North West Company saw its ROIC decrease because of an increase in assets without being offset by a corresponding increase in its NOPAT. The catalyst for the sale of Parkland Fuel was the rise in stock prices. The sale of CAE was due to the significant decline in economic value added (EVA) as determined by our quantitative model. Great-West Life Co experienced a substantial increase in NOPAT and that is why we decided to add it to the portfolio. Many cyclical commodity companies have had strong bullish profits for a while and our approach is to increase the sector weights in those cases. Norbord is a holding which entered the portfolio for this reason. Finally, the entry of Open Text is explained both by a high fundamental rating and by an attractive valuation.

Canadian ETFs: March’s Launches and Terminations

In this research report created this week for The Globe And Mail, we look at Canadian ETF’s: March’s launches and terminations

The industry recovered from a tumultuous year end, finishing the first quarter of 2019 with assets under management of $172.7-billion.

RBC iShares introduced their first suite of ETFs since they announced a strategic alliance earlier this year. The offering provides equity or fixed income exposure to environmental, social and governance (ESG) investments. Socially responsible investment has been taking off as investors become more socially conscious.

The ESG equity ETFs seek to track MSCI ESG Focus Indices. The indices are designed to target companies with positive environmental, social and governance (ESG) characteristics while closely representing the risk and return profile of the MSCI Canada Investable Market Index, the MSCI USA Index, the MSCI EAFE Index or the MSCI Emerging Markets Index, respectively.

The ESG fixed income ETFs seek to replicate Bloomberg Barclays MSCI ESG Fixed Income Indices, designed to reflect the performance of Canadian investment-grade bonds, emphasizing bonds from issuers generally evaluated for favourable ESG practices, while exhibiting risk and return characteristics similar to those of the Bloomberg Barclays Canada Aggregate Bond Index or the Bloomberg Barclays 1-5 Year Canada Aggregate Bond Index, respectively.

Equium Capital exited the industry by closing its only ETF, the Equium Global Tactical Allocation Fund ETF Series (“ETAC”). The ETF struggled to attract sufficient assets since it was introduced back in November 2017 with AUM under $15 million. In an investment commentary, Equium Capital attributed the termination to “intensifying competition in the ETF market”.

Competition is indeed fierce in the market. ETF product line-up almost doubled, and the number of ETF providers tripled in the past five years. The arrival of the remaining biggest banks, Scotiabank and CIBC, and their massive distribution network exacerbate rivalry. More ETF terminations are expected with a few ETF providers exiting the industry this year.

Read more in this article written by Kimberly Yip Woon Sun, ETF Analyst at Inovestor Inc.

StockPointer® Canadian Equities Model Portfolio Transactions – April 2019

We have rebalanced the Nasdaq Inovestor Canadian Index based on our Canadian Model Portfolio, which will be effective on April 18th after market close. Here are the details:

Ins:

  1. Great-west Lifeco inc. (GWO) – Market Trend. Increase in Financial sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  2. Norbord Inc (OSB) – Market Trend. Increase in Materials sector as seen in the Top 100 index therefore increasing our position in the portfolio.
  3. Open Text Corporation (OTEX) –  Market Trend. Increase in Information Technology sector as seen in the Top 100 index therefore increasing our position in the portfolio.

Outs:

  1. THE NORTH WEST COMPANY INC (NWC) – Market Trend. Decrease in the Industrials sector as seen in the Top 100 index.
  2. Parkland Fuel Corporation (PKI) – Market Trend. Decrease in the Energy sector as seen in the Top 100 index.
  3. CAE Inc. (CAE) –  Market Trend. Decrease in the Industrials sector as seen in the Top 100 index.

You can also find the transactions on Inovestor For Advisors, in the Model Portfolios – StockPointer Canada section.

Please contact us for more information.

The Inovestor Team

Canadian ETFs: February’s launches

In this research report created this week for The Globe And Mail, we look at Canadian ETF’s: February’s launches

Middlefield Group is the latest asset manager to join the ETF industry.

Middlefield Group is a specialty investment manager that creates and manages specialized investment products for individual and institutional investors. The new ETF issuer converted two closed-end funds, together representing more than $150-million in assets, into ETFs. The Middlefield Healthcare & Life Sciences ETF (LS) focuses on securities of issuers operating in the health care, life sciences and related industries, while the Middlefield REIT INDEXPLUS ETF (IDR) provides low-cost exposure to the global real estate sector through a combination of indexing and active portfolio management.

Desjardins expanded its suite of responsible investment ETFs with the launch of the Desjardins RI Emerging Markets Multifactor Low CO2 ETF (DRFE) and the Desjardins RI Global Multifactor – Fossil Fuel Reserves Free ETF (DRFG).

DRFE seeks to replicate the performance of the Scientific Beta Desjardins Emerging RI Low Carbon Multifactor Index. The index is composed of securities selected based on a multifactor approach: size, valuation, volatility, momentum, profitability and investment. These securities are also selected to significantly reduce the weighted average carbon intensity and ensure that all constituent issuers meet predetermined environmental, social and governance (ESG) standards. It charges a management fee of 0.65 per cent.

DRFG tracks the Scientific Beta Desjardins Global RI Fossil Fuel Reserves Free Multifactor Index. The index is composed of securities selected based on a multifactor approach. These securities are also selected to significantly reduce the carbon asset stranding-risk exposure and ensure that all constituent issuers meet predetermined ESG standards. The management fee on DRFG is 0.6 per cent of net asset value.

Following the steps of other major ETF providers, Bank of Montreal launched a suite of risk-based asset allocation ETFs. Each ETF charges a management fee of 0.18 per cent and invests in global equity and fixed income ETFs, according to their risk specifications. The BMO Conservative ETF (ZCON) targets a 60-per-cent fixed income and 40-per-cent equity exposure, the BMO Balanced ETF (ZBAL) targets a 40-per-cent fixed income and 60-per-cent equity exposure, and the BMO Growth ETF (ZGRO) targets a 20-per-cent fixed income and 80-per-cent equity exposure.

In addition to the one-ticket solution ETFs, BMO also introduced three U.S. equity ETFs: the BMO Covered Call US Banks ETF (ZWK), the BMO Equal Weight US Health Care Index ETF (ZHU) and the BMO Nasdaq 100 Equity Index ETF (ZNQ). The BMO Ultra Short-Term US Bond ETF (ZUS.U) was also added to BMO’s product lineup. It provides exposure to short-term U.S. fixed income asset classes, with a term to maturity of less than one year or reset dates within one year. The ETF is also offered in accumulating units under the ticker ZUS.V.

Read more in this article written by Kimberly Yip Woon Sun, ETF Analyst at Inovestor Inc.

Portfolio Manager Commentary – February 2019

The S&P/TSX Total Return Index increased by 3.1% in February, adding to the strong January returns (8.1%) and leading to a YTD return of 12.2%. This gives the Canadian market a very strong start so far in 2019 which has actually slightly outperformed the MSCI Global (11.2%) and the S&P 500 (11.8%). Most sectors of the Canadian market were positive contributors in February, with Information Technology being the strongest one at an 8.4% increase.

The Canadian central bank & the FED comments have remained highly constructive for the equity markets. Although some analysts were expecting a more hawkish tone for the future, central banks have not indicated such act. Furthermore, the overall earnings and guided earnings have been positive over this period.

In addition, commodity prices, including energy and metals, have been stable which is crucial for the Canadian market. Finally, Canadian banks’ results were in-line to slightly below expectations, except for BMO, that came higher than expected.

Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose by 2.1% in February, leading to a YTD positive return of 10.7%, slightly underperforming the market.  Looking at contribution factors to the NQICA returns, the best performing stock up 14.6%, was Constellation Software (CSU), that outperformed earnings expectations. On the contrary, the worst performer was CCL industries (CCL.B) which was down 3% in February as a result of weaker than expected results.

Portfolio Manager Commentary – February 2019

Horizons Inovestor Canadian Equity ETF (INOC)

The S&P/TSX Total Return Index ended the month of January up 8.1% offsetting in one month most of last year decline of 8.9%, making it one of the best month in the last 20 years. This upturn has been driven by several catalysts including a softening in the tone of last minutes of the FED, relatively strong results from earnings releases of large North American corporations, and the end of the US government shutdown. Meanwhile, prices of most key commodities including crude oil and gold were stronger in the month. Our Nasdaq Inovestor Canadian Equity Index (NQICA) rose 8.1% for the same period, 60bps below the benchmark. Our sector allocation removed 110bps as our decision to underweight Energy and underweight Healthcare proved to be unfruitful in January. However, our stock selection contributed a positive 50bps as a several of our stocks outperformed.

INOC’s constituents were changed on January 18th

Ins:

  1. THE NORTH WEST COMPANY INC (NWC)
  2. PAREX RESOURCES INC (PXT)

 

Outs:

  1. NFI GROUP Inc. (NFI)
  2. WEST FRASER TIMBER CO. Ltd. (WFT)

Best,

The Inovestor Asset Management Team

Canadian ETFs: January’s launches and terminations

 In this research report created this week for The Globe And Mail, we look at Canadian ETF’s: January’s launches and terminations

Three new ETF providers entered the industry in January. CIBC Asset Management introduced a suite of two actively-managed fixed income ETFs and two multifactor equity ETFs, which seek to replicate CIBC’s in-house indices. The indices consider the following factors in selecting equity securities: low volatility (low sensitivity to market fluctuations), quality (high profitability and low financial leverage), value (low price to earnings and price to book), and high price momentum characteristics.

SmartBe Wealth Inc. launched the SmartBe Global Value Momentum Trend Index ETF (SBEA) listed on NEO exchange. The ETF tracks the Alpha Architect Value Momentum Trend for Canada Index, which is based on three factors: value, momentum and trend-following. The index is designed by Alpha Architect LLC, a research-intensive asset management firm that delivers concentrated factor exposure.

National Bank Investments Inc. joined the herd of ETF sponsors with the launch of four ETFs. Its initial suite includes the NBI Active Canadian Preferred Shares ETF (NPRF), the NBI Canadian Family Business ETF (NFAM), the NBI Global Real Assets Income ETF (NREA) and the NBI Liquid Alternatives ETF (NALT). NALT’s investment objective is to provide a positive return while maintaining low correlation to, and lower volatility than, the return of the global equity markets. The ETF will seek to achieve this objective by investing primarily in long and short positions on financial derivatives that provide exposure to different major asset classes, such as government bonds, currencies, equities or commodities.

Another ETF Issuer has filed a preliminary prospectus to issue liquid alternatives ETFs. Accelerate Financial Technologies Inc., established by a team with a track record of successfully managing award-winning hedge funds, intends to launch a suite of exchange traded alternative funds.

Accelerate’s initial suite consists of the Accelerate Absolute Return Hedge Fund (HDGE), the Accelerate Enhanced Canadian Benchmark Alternative Fund (ATSX) and the Accelerate Private Equity Alpha Fund (ALFA). The ETFs’ fee structure will be similar to that of hedge funds. They have a 0% management fee and will only earn a performance fee if they outperform their high-water mark. For instance, HDGE will charge a performance incentive fee of 20% of the excess NAV in between quarters, ATSX’s performance incentive fee is 50% of the positive amount by which ATSX’s performance exceeds the performance of the S&P/TSX 60 TR Index for the quarter and ALFA will charge a performance incentive fee of 15% of the excess NAV in between quarters.

Read the full report here.

This article is written by Kimberly Yip Woon Sun, ETF Analyst for Inovestor Inc.