Tuesday, 20 April 2010

Canadian Equity Market Darlings and Dogs - the Tale of Two ETFs

Want a quick snapshot of those sectors and companies which are currently in or out of fashion with investors and to possibly get a clue to over- or under-valuation? A comparison of the two Canadian ETFs - iShares Large Cap 60 Index (XIU) and Claymore Canadian Fundamental Index (CRQ) - provides the means to do so.

XIU reflects market sentiment since it weights its holdings according to market capitalisation based on current market prices. CRQ reflects recent past actual accounting results since it weights its holdings according to a combination of four accounting (which Claymore calls Fundamental) factors - cash flow, dividends, sales and book equity value. XIU reflects expectations of the future, while CRQ reflects the past. The two are a pretty good match since XIU holds the 60 largest stocks by market cap while CRQ holds the 65 biggest by fundamentals. If a stock or industry sector in XIU has a bigger percentage of the ETF's total assets than CRQ does, it means the market has bid up prices on that stock or sector in the expectation that higher returns will occur there. In the table below, these are called the Market Darlings. The opposite is true for underweight holdings - the market thinks those stocks/sectors will do poorly in future. These are the Market Dogs.

Market Darlings
  • Energy and Materials - big bets are on oil and mining companies, like Suncor (SU), Canadian Natural Resources (CNQ), Barrick (ABX), Potash Corp (POT), Goldcorp (G), Cenovus (CVE). That's where the gold is thought to lie, literally and figuratively.
Market Dogs
  • Financials! - wow, the over 13% under-weighting difference is huge; the markets dislike banks and insurance companies - especially Manulife (MFC) and SunLife (SLF)
  • Consumer Staples and Consumer Discretionary - no company in these sectors even appears in the top twenty holdings of XIU; companies like Magna (MG.A), Tim Hortons (THI), Shoppers Drug Mart (SC) and George Weston (WN) are definitely out of favour
  • Utilities - as a group are virtually absent from XIU, with tiny holdings of companies like Fortis (FTS) and TransAlta (TA)

The Chart for Details The Darlings are Green while the Dogs are Red. Wikipedia's article on the S&P/TSX 60 Index shows all the 60 stocks with their sector.

The Big Question for the Investor: Are those stocks which are overweight in XIU overvalued, or those underweight possibly undervalued? In the former case, there may be short-selling opportunities while in the latter case, simply buying the stock would produce good returns.

The above observations in this post can only be a starting point for further investigation since it is quite possible also that the overweight stocks are not overvalued at all (or the reverse, for the underweight stocks).

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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