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Fund in Focus: Invesco’s fundamental Canada ETF
3/25/2019 6:36:32 AM
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By Dave Paterson  | Wednesday, December 12, 2018


The Invesco FTSE RAFI Canadian Fundamental ETF continues to lag, as market sentiment has not yet rotated away from the growth story to fundamentals, although the volatile environment over the past several weeks suggests a shift may well be underway. Together with heavy exposure to the energy sector, this has contributed to the fund’s underperforming the broader S&P/TSX Composite Index Total Return benchmark in the shorter term, dropping 3.4% in the 12 months ending Nov. 30, compared with a loss of 2.5% for the S&P/TSX. But the fund still outperformed the Canadian Equity category as a whole.

Instead of using market capitalization to select stocks, as is done in traditional indexing, fundamental ETFs use factors that are believed to better predict outperformance. These factors include sales, cash flow, book value, and dividends. The main criticism with a traditional market-cap-weighted index is the potential for overconcentration, as bigger companies take up a disproportionate weight in the portfolio. Fundamental indexing reduces that likelihood, at least at the stock level, as position sizes are determined by their fundamental attractiveness.

At the sector level, however, the risk of concentration is real as there are no set limits on sector weights within the ETF. This can result in levels of sector concentration that are as high as, or even greater than, what you would see with a traditional market-cap index. For example, at the end of November, this ETF had nearly 65% invested in just two sectors – energy and financials. In comparison, the S&P/TSX Composite Index had approximately 50% in those two sectors.

Theoretically, fundamental indexing should result in a better-built and more diversified portfolio than an index that is simply made up of the largest publicly traded companies in Canada.

From a performance standpoint, while the shorter-term numbers have lagged the broader markets, the longer-term numbers have outperformed the traditional cap-weighted index. Its 3-year average annual compounded rate of return was 8.7%, compared with 7.2% for the index. However, volatility has also been with a 3-year average standard deviation of 9.04%. I suspect that much of this higher volatility is the byproduct of the larger exposure to energy.

Looking ahead, I still believe in the theory behind fundamental indexing, and believe that as the overall level of market volatility increases, a fundamentally constructed index is likely to outperform the traditional cap-weighted indices. Further, looking at the valuation levels and growth outlook, PXC is well positioned to deliver above-average growth over the long term.

Invesco FTSE RAFI Canadian Fundamental ETF
Fund company:
Invesco Canada
Fund type: Canadian Equity
FundGrade rating: B (November)
Style: Large Cap Blend
Risk level: Medium
RRSP/RRIF suitability: Good
Manager: Invesco Canada
MER: 0.51%
Trading symbol: TSX: PXC

Dave Paterson, CFA , is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2018 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.


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