Maximum safety with the widest exposure to Canadian Stocks

Markets have behaved perversely in recent months. Good economic news was sometimes greeted with a selloff as investors feared better times would only encourage the U.S. Federal Reserve to begin tapering sooner rather than later. The tendency of the market to selloff on good news reminds us of that old-time traders’ maxim that advises you to “buy on bad news, sell on good.” There’s something to that, we think, if you apply a pair of investment caveats that we’ve stressed over the years.

First, apply it to funds that invest mostly in high-quality companies. We’re talking about funds like Mawer Canadian Equity, which is heavily invested in Canada’s big banks and other high-quality companies. With stocks like these, the bad news ultimately gives way to good. News from less well-established companies is more liable to go from bad to much, much worse.

Second, focus mostly on funds that diversify across economic sectors. Take healthcare stocks for example. Funds that focus on a particular sector, such as TD Health Sciences (one of our recommended high-risk international specialty funds), are okay for a small portion of your portfolio. But when you focus too much on a particular sector, you’re bound to be disappointed, or worse, eventually.

Like life itself, investing is full of uncertainty. But, despite the uncertainty, you can thrive in the long run — prosper when times are good and survive the inevitable setbacks — by following these two simple rules.

Keeping the above strategies in mind, remembering to buy it as part of a well-diversified portfolio, we’ve added a broadly-diversified Canadian ETF to our list of the best ETFs. It offers you a one-stop solution to investing in Canadian stocks.

We believe VANGUARD FTSE CANADA ALL CAP INDEX ETF (TSX-VCN) is an excellent choice for investors seeking the widest possible exposure to Canadian stocks with different market capitalizations at a low cost.

This ETF’s objective is to seek to track, to the extent reasonably possible and before fees and expenses, the performance of a broad Canadian equity index that measures the investment returns of large-, mid- and small-cap stocks. Currently, that index is the FTSE Canada All Cap Index.

The ETF’s market-cap breakdown is as follows: large, 60.6 per cent; medium/large, 16.2 per cent; medium, 9.4 per cent; small/medium, 4.8 per cent; and small, 8.9 per cent.

Index focuses on finance and resources

Like Canada’s larger-cap indices, the FTSE Canada All-Cap Index is primarily focused on the financial and resource industry sectors. The Index’s sector breakdown is as follows: financials, 36.1 per cent; energy, 23.8 per cent; materials, 12.6 per cent; industrials, 8.6 per cent; consumer services, 6.8 per cent; health care, 2.6 per cent; consumer goods, 2.4 per cent; telecommunications, 2.5 per cent; utilities, 2.5 per cent; and technology, 2.1 per cent.

Altogether, FTSE Canada All Cap Index ETF contains 249 holdings with a median market-cap value of $25.3 billion. The ETF’s top holdings, along with their portfolio weightings, were as follows as of Dec. 31, 2013: Royal Bank, 6.5 per cent; TD Bank, 5.9 per cent; Bank of Nova Scotia, 5.0 per cent; Suncor Energy, 3.6 per cent; Bank of Montreal, 2.9 per cent; Canadian National Railway, 2.9 per cent; Canadian Natural Resources, 2.5 per cent; Valeant Pharmaceuticals, 2.4 per cent; Manulife Financial, 2.4 per cent; and Enbridge Inc., 2.4 per cent.

The ETF was started last August, so, according to Canadian law, its performance results won’t be published until it’s at least a year old. But its benchmark index has gained 13.1 per cent over the last year, a 2.9-per cent annualized gain over the past three years, 11.8 per cent over five years, and 8.1 per cent over 10 years.
The ETF’s management fee is just 0.12 per cent.

Remember, though, the heavy focus of the Canadian stock market in the financial and resource sectors make it particularly vulnerable to setbacks in either of these areas. For this reason, we strongly recommend you include this ETF in a well-diversified equity portfolio that has substantial exposure to foreign ETFs or managed funds.

Recommendation:
Buy Vanguard FTSE Canadian All Cap Index for broad exposure to the Canadian stock market.

 

 

Canadian Mutual Fund Adviser, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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