iShares: The One-Minute Portfolio 2013

On the iShares S&P/TSX 60 and more.

Larry MacDonald 1

 

(Photo: Will Crocker/Getty)

It’s time for the annual update to the One-Minute Portfolio, the tenth since it was launched in early 2003. The portfolio consists of two exchange-traded funds (ETFs): the iShares S&P/TSX 60 Index Fund (XIU) and the iShares Canadian Bond Index Fund (XBB).

In 2012, there was a gain in the portfolio of nearly 6% on a total-return basis. Both ETFs recorded increases, with XIU ending up slightly ahead of XBB. The average annual gain in the portfolio since inception is approximately 9%. It has been slipping of late as lackluster equity returns over the past three years (and a sharp drop in 2008) chip away at the strong gains registered prior to 2008.

In some respects, the One-Minute Portfolio is similar to a balanced mutual fund. Where it mainly differs is in having a much lower management expense ratio cost (about 2 percentage points per year) and the freedom to choose the allocation to stocks and bonds.

The allocation to stocks and bonds is determined each year with reference to stock-market valuations. This is done by comparing the average annual return on equities (usually over the three most recent years) to the historical annual return for stocks (7% to 9%).

If the average annual return noticeably exceeds the historical average, the relative weight for XIU is decreased at year end. Conversely, if the annual return falls noticeably below the historical average, the relative weight for XIU is increased at year end.

So far, this rule has worked out well in compelling the portfolio to buy low and sell high to a greater extent than rebalancing back to fixed asset allocations. By the time the 2008 stock crash came along, the weight for XIU had been adjusted downward to 40%, from 70% in 2004. After 2008, the allocation to XIU was raised back to 70%. It will remain there for 2013, since average annual gains for stocks are still trailing the historical average.

The One-Minute Portfolio was intentionally designed without foreign diversification. This was due to uncertainties over the performance impact of exchange-rate fluctuations. Besides, historical returns on Canadian stocks have been similar to the U.S. stock market, the best performing market over the past century. Thus, foreign diversification was not deemed essential. However, with the Canadian dollar now so strong (minimizing the risk of adverse currency fluctuations), “home bias” remains under review.

Note:
Unfortunately, due to the recent (and prior) redesign of the canadianbusiness.com web site, links to past updates are currently unavailable. However, I am working on compiling a Word file containing updates stretching back to 2003. Once completed, copies can be made available to those who submit a request to mccolumn@yahoo.com.

One comment on “iShares: The One-Minute Portfolio 2013

  1. RE foreign diversification: You can eliminate currency fluctuations by using any number of ETF’s that hedge out currency risk. For the US, I use Vanguard’s US Broad Market Cdn Hedge ETF – symbol VUS
    While over time the Canadian and US markets may perform fairly closely, there are many periods when they don’t. Hence the importance for Canadians to ensure they diversify outside of Canada. For instance, in the past year ending Nov. the S&P500 had a total return of 16% ($us) vs a meagre 3% for the TSX.
    The US market has outperformed the Canadian market quite significantly over the past 3 years as well – a significant missed opportunity. And, to add more perspective, the Canadian market is not a diversified market. It has a very cyclical bias. For this reason alone, Canadians need to broaden their exposure.

    Reply

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