- the iShares S&P/TSX 60 Index Fund (TSX symbol: XIU), which selects its holdings and weights based on market capitalization and thus tracks market sentiment, against
- the iShares Canadian Fundamental Index Fund (CRQ), which chooses holdings based on past hard accounting results likes sales, dividends, cash flow and book equity value
The table below shows the companies and the sectors colour-coded - Darlings in Green and the Dogs in Red with the really big differences between XIU and CRQ highlighted in Yellow. The table also shows the change in internal weighting over the past six months for each ETF, which tells us stocks and sectors that have been moving up or down, either in terms of price (XIU) or fundamentals (CRQ). The bigger shifts are highlighted in Bold.
(click on table image to enlarge)
Finally, just to be sure the sector differences are not due to the fact that CRQ has 29 more holdings than XIU (which might tend to result in XIU being more concentrated and have higher individual percentages than CRQ) we've re-calculated weights as if CRQ only had 60 holdings like XIU. As the table shows that makes little difference to the results.
Financials - The revived love of a few big banks makes for a couple of Darlings, TD Bank (TD) and Scotiabank (BNS), is mixed in with some, Bank of Montreal (BMO) and CIBC (CM), where market and fundamental weights are in line, along with same Dogs as last August, Manulife (MFC) and Sun Life (SLF). Financials have been increasing in weight in both XIU and CRQ at the same pace but CRQ continues to have a much heavier weighting in Financials, mostly because a number of companies that are in CRQ don't even figure in the XIU portfolio (see the list of the main stocks not held by the other fund at the bottom of the table).
Energy - The market's anticipation of future results appears to have been borne out as this sector's weight in CRQ, which we recall is determined by actual results, has dropped substantially since August. Overall this sector is neutral, being neither Darling nor Dog. Suncor (SU) and Enbridge (ENB), still qualify as market Darlings. We wonder, will the market optimism about these two companies be right?
The one sector Dog is Encana (ECA) has become even more so. The poor quarterly results released in November confirmed market pessimism but the fundamental weighting drop still has not nearly caught up with XIU's market weighting. There may be more bad news to come. The recent retirement of the CEO is a sign the company needs to make changes.
Materials - Perpetual Darlings seems to be an apt description. The same three companies are the belles of investors (or is it speculators ?) - Potash Corp (POT), whose market value weight is still a massive 2.3% more than its accounting fundamentals justify, Barrick Gold (ABX), which is still 1.47% over-weighted with only a slight drop in that over-weighting since August, and Goldcorp Inc (G), which has dropped some too but is still 1.55% over-weighted.
Telecommunications - The two Darlings BCE Inc (BCE) and Telus (T) continue to set the market's heart a fluttering, being vastly overweight in XIU compared to CRQ. Those may have attempted to short the stocks, a possibility we raised last August, will have lost money so far. It's a lesson to dig deeper before making investment decisions.
Industrials - neutral, neither Darling nor Dog as a sector, though there is one Darling company, Canadian National Railway (CNR).
Consumer Discretionary - another neutral sector, where market views and fundamentals are closely in balance.
Consumer Staples - still a Dog: The sector is still severely under-weighted in XIU compared to CRQ because almost every company has a market cap weight below its fundamentals.
Health Care - a mild Darling: Valeant Pharmaceuticals (VRX) is the sole health care company in both XIU and CRQ. Its weighting is still more than two times in XIU what it is in CRQ, a sign of a definite market Darling.
Utilities - This is the one sector where taking account of the different portfolio sizes of XIU and CRQ matters. Individual companies are neutral. However, the sector is only mildly a Dog when we adjust for the fact there are several other utilities included in CRQ and not at all in XIU - Canadian Utilities (CU), Emera (EMA) and Atco (ACO.X) - that cause the sector to be under-weight.
Information Technology - remains a Dog because of Research in Motion (RIM). The large day to day shifts in price reflects the enormous uncertainty about the company's future results that are likely to bear little relation to past results.
The Darling and Dog sectors and stocks since 2010
As the table below shows us, some sectors and companies have been stuck in a rut of being either Darlings - Materials (Barrick, Potash Corp and Goldcorp) and Suncor - or Dogs - Consumer Staples, Utilities, Financials (Manulife and Sun Life) and Encana. The other sectors and stocks have shifted into or out of favour.
(click on image to enlarge)
How do the Darlings and Dogs stocks' numbers look?
We plugged the stocks into a Globe&Mail WatchList to see if the stock evaluation data it contains could back up or refute their attractiveness or not. The table screenshot below shows that ranking the stocks by Return on Equity puts the Dogs at the bottom. Moreover, the other numbers, whether it is P/E, dividend growth, 5-year total returns, are generally worse for the Dogs. Poor RIM gets a rare Analyst Under-perform (i.e. Sell) rating. Among the Darlings, CN Railway has a surprising Analyst Hold rating. Maybe those stellar results have got ahead themselves.
(click on table image to enlarge)
And, as ever, we can simply buy these ETFs themselves, or similar Canadian equity ETFs (our reviews here, here and here), which spread the risk of individual companies and sectors over a much broader base of holdings.
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.