In the equity ETF space, low-volatility strategies can take on many forms.
There are numerous ways to measure volatility and even more ways to select,
rank, and weight securities in a portfolio. But the objective is always the
same: to create a portfolio tilted towards the least risky stocks. Here are
two of the best.
Canadian-focused equity ETF contenders
PowerShares S&P/TSX Composite Low Volatility Index ETF (TSX:
This ETF was a FundGrade A+ winner in 2016 and is looking to repeat this
year. At 5.9%, it has the fifth highest year-to-date (YTD) return in the
Canadian Equity category and the eighth highest average annual compounded
5-year rate of return at 10.7%. True to its name, TLV is one of the least
volatile funds in the group, sporting a 3-year annualized standard
deviation of just 6.2%, compared with the category average of 8.1%.
TLV was launched in April 2012 and replicates the performance of the
S&P/TSX Composite Low Volatility Index, which measures the performance
of the 50 least volatile equities in the S&P/TSX Composite Index.
Stocks in the index are ranked by 1-year volatility, and the lowest 50 are
then weighted inversely proportional to their volatility. Current top
holdings of TLV include Intact Financial Corp., BCE Inc., and Emera Inc.
The fund has an MER of just 0.34%, compared with the category average of
1.81%, and a distribution yield of 3.8%.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB)
This BMO offering is another top-performing ETF in the Canadian Equity
category, and is trying to earn its fourth consecutive FundGrade A+ award.
ZLB is up 5.6% YTD, ranking it sixth-best in the category, and has an
average annual compounded 5-year return of 15.2%, second-best in the group.
Average 3-year volatility at 7% is low, although it’s slightly higher than
The fund debuted in October 2011, and in contrast to TLV, which tracks an
index, ZLB is a rules-based ETF that selects and weights the 40 lowest-beta
large-cap Canadian equities. Beta is a measure of sensitivity to movements
in the market, so you would expect low-beta stocks to be less affected by
volatility in the market. Beta is measured over five years; however,
adjustments can be made for stocks with less than five years of history.
There are also caps on security and sector exposure to ensure proper
diversification. Top holdings include Fairfax Financial Holdings Ltd.,
Intact Financial Corp., and Waste Connections Inc. ZLB has an MER of 0.39%
and a distribution yield of 2.8%.
Canadian-focused fixed-income ETF contenders
It is important to remember that long duration bonds are a riskier
investment than short duration bonds, especially in a rising rate
environment. Bond prices move in the opposite direction of yields. So as
yields rise, bond prices fall, and vice-versa. The degree to which a bond
falls (or rises) depends on its duration. The longer the duration, the
greater the price change for each percentage point change in yield. All
this to say that investors seeking to reduce their risk should look to the
short end of the curve. Here are two ETFs that are A+ Award contenders in
the Short Term Canadian Fixed Income space.
iShares Core Canadian Short Term Corporate + Maple Bond Index ETF
This iShares ETF was launched in September 2011 and tracks the FTSE TMX
Canada Universe + Maple Short Term Corporate Bond Index. The index measures
the performance of bonds denominated in Canadian dollars with a duration
less than 5 years. XSH has a duration of 2.8 years and a distribution yield
of 2.9%. It is the top performing fund in the category, with a 5-year
average annual compounded return of 2.5%. The fund is on pace to win
another A+ award in 2017 after winning every year since 2014. Helping fuel
this outperformance is an MER of just 0.12%, third lowest in a category,
which averages close to 1%.
Vanguard Canadian Short-Term Corporate Bond Index ETF (TSX: VSC)
Vanguard’s bond ETF is again vying to add more hardware to its mantelpiece
in 2017, after gaining a FundGrade A+ Award in 2016. It has the second best
3-year average annual compounded rate of return in the group at 2.2%,
behind only XSH. The fund tracks the Bloomberg Barclays Global Aggregate
Canadian Credit 1-5 Year Float Adjusted Bond Index, which measures the
performance of public investment-grade non-government securities issued in
Canada with maturities between 1 and 5 years. The duration of the fund sits
at 3 years, and the distribution yield is 2.8%. VSC was launched in
November 2012, and has the lowest MER is the category at just 0.11%.
Brian Bridger, CFA, FRM, is Vice President, Analytics & Data at Fundata Canada Inc. and is a
member of the
Canadian Investment Funds Standards Committee.
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