Blogs & Comment

Growth ETF lagging

Nearly every equity exchange-traded fund (ETF) has had a big price run-up over the past year. In Canada, one exception is the iShares CDN Growth Index Fund ( XCG) — at least in relative terms.
Its at the bottom of a ranking of equity iShares ETFs by 1-year performance (see below) — with only a 24.5% gain compared to 46.8% for the CDN Composite Index ETF and 76.6% for the CDN Small Cap ETF.
Yet, we are moving toward the stage in the business cycle when growth stocks should do well. Thats the stage when gross domestic product gathers momentum after a period of fiscal and monetary stimulus aimed atjump-starting a recessionary economy.
Its also the stage when interest rates typically climb off their lows, as central banks withdraw stimlus and bond markets fret more about inflation. While this makes many of the interest-rate sensitive stocks less appealing (aftera good run-up in the early stage of the recovery), growth stocks are supported by their rising earnings.
Time then to add a growth tilt to the portfolio? Some considerations:
1. Whenthis growth-friendly stage arrives is another question. I plan to post soon on some leading indicators that suggest the North American economy will enter a slow period this summer.
2. Trading volumes are on the low side for XCG, with just over 6,000 shares per day (over the past 10 days). The management expense ratio (MER) is 0.50%. Tracking error is nearly all due to the MER (since inception in 2006).
3. Two-thirds of the index is made up of basic-materials and energy stocks. Is this a growth ETF or a commodity ETF? Top ten stocks are (as of March 15): Suncor Energy (8.4%), Canadian Natural Resources (7.1%), Barrick Gold (6.9%), Potash Corp. (6.7%), RIM (6.6%), GoldCorp Inc. (5.2%), CN Railway (4.9%), Encana (4.6%), Cenovus Energy (3.5%) and Rogers Communications (3.1%).
More details.
Table: Ranking of equity iShares ETFs by 1-year return (to Feb.28, 2010)
CDN SmallCap Index Fund75.57% CDN Financial Sector Index Fund74.31% CDN REIT Sector Index Fund71.30% CDN Tech Sector Index Fund67.17% CDN Value Index Fund 66.54% CDN Completion Index Fund 64.51% CDN Income Trust Sector Index Fund63.85% CDN Russell 2000 Index – Canadian Dollar Hedged Index Fund59.16% CDN Dividend Index Fund52.71% CDN S&P 500 Hedged to Canadian Dollars Index Fund50.00% CDN Jantzi Social Index Fund48.33% CDN Energy Sector Index Fund 46.91% CDN Composite Index Fund46.85% CDN LargeCap 60 Index Fund42.52% CDN MSCI EAFE 100% Hedged to CAD Dollars Index Fund38.55% CDN Materials Sector Index Fund32.86% CDN Growth Index Fund (XCG) 24.49%