– You’re on the right track when you mention comparing your portfolio
performance with a “benchmark.” A benchmark is a market yardstick
independent of your portfolio against which your performance can be
evaluated. It’s usually an index that tracks the performance of the broader
market, like the S&P/TSX Composite Index or the Dow Jones Industrial
Average, and so on. But with the growth of financial products over the past
20 years or so, especially exchange-traded funds (ETFs), indexes have
sprouted like mushrooms, tracking ever-finer slices of this market or that.
Many indexes have been created solely to provide a benchmark for just one
ETF or one investment fund or pool, and are therefore virtually useless as
a gauge of broader market performance.
So when looking for a benchmark against which to measure your portfolio
performance, make sure you find one that isn’t skewed or biased to your own
A good benchmark has five essential characteristics:
1) It’s unambiguous in that the components of the index or benchmark are
2) It is representative and consistent with your portfolio objectives –
e.g, equity, fixed-income, balanced, etc.
3) It is quantifiable and its performance can be measured frequently.
4) It is current and based on marketable securities
5) It is investable, meaning that it can be replicated as a portfolio and
its components can be purchased separately.
A benchmark is important from a couple of perspectives. It provides a basis
to compare how your portfolio performance compares with a passive (that is,
not actively-managed) alternative, and it provides a gauge to measure the
performance of the entire portfolio, not just the individual securities
within the portfolio.
Some of the most widely watched benchmarks for Canadian investors include
S&P/TSX Composite Net Total Return Index, the
FTSE TMX Universe Bond Index, the
S&P 500 Composite Index Canadian dollar hedged, and the
MSCI EAFE Index in Canadian dollars.
It’s important to compare apples to apples when measuring performance. In
other words, match your fixed income holdings against the fixed-income
benchmark, Canadian equities against the Canadian equity benchmark, and so
One of the most commonly used benchmarks for fixed income in Canada is the
FTSE TMX Universe Bond Index or the ETF that tracks it, the
iShares Canadian Universe Bond Index ETF (TSX: XBB). You might use this benchmark for your fixed-income portfolio portfolio. One of the
most widely used Canadian equity indexes is the S&P/TSX Composite Index
or the ETF that tracks it, the
iShares S&P/TSX Index (TSX: XIU). You might compare the performance of your Canadian equity portfolio
against this kind of benchmark. Remember that if you use the ETFs, there will be a small tracking error because of the ETF cost structure.
If you’re looking to compare your overall portfolio performance with a
benchmark, make sure that the benchmark is made up of the same kind of
asset mix as your portfolio. In other words, if you have, say, Canadian
bonds and Canadian equity, you would use a fixed-income/equity benchmark to
make your comparison, and not one that, for example, also includes
For a low-risk balanced portfolio, then, you might consider a hybrid index
using two broad liquid benchmarks for stocks and bonds.
If you entrust your portfolio to professional money managers, remember that
an active portfolio manager should beat the applicable benchmark index more
often then they miss it. If your returns consistently do not match or
exceed the benchmark, or if the benchmark mysteriously changes frequently,
then you are in effect paying a manager for poor performance. In that case,
you could simply buy the ETFs that track the underlying benchmark indexes
yourself and not pay the manager at all.
Whether yours is a do-it-yourself or a managed portfolio, it’s important to
do your research, comparing your portfolio performance against the
benchmark over various time periods. That way you’ll have a clearer picture
of your true performance. If you still have concerns, then speak to your
Robyn Thompson, CFP, CIM, FCSI, is the founder of
Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management
for high net worth individuals and families. She is also listed as a
MoneySense Approved Financial Advisor. Contact her directly by phone at 416-828-7159, or by email at
for a confidential planning consultation.
Notes and Disclaimer
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The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
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limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.