ETF STRATEGY

ETF Strategy:
Tactical
Asset Allocation:
November
2013
Tactical
Asset
Allocation:
November
2013

FINANCIAL PRODUCTS RESEARCH

FINANCIAL PRODUCTS
RESEARCH
November
5, 2013
November 5, 2013

With continued Fed-driven excess liquidity we remain overweight equities both short and long term
We overweight developed markets including U.S. and EAFE with Canada & Emerging equal weight
Our recommended sectors continue to be consumer staples and consumer discretionary
We remain negative on Federal bonds but prefer lower credits including U.S. high yield

Our recommended ETFs to express National Banks Asset Allocation Strategy:

Table 1 - Recommended ETFs
Asset Class

Equity

U.S.

EAFE

Fixed
Income

Consumers
High Yield
Short Term
High Yield

Ticker

Fund Name

ZSP/U CN
VFV CN
HXS/U CN
XUS CN
XEF CN
VDU CN
XLY US
XLP US
ZHY CN
XHY CN
HYI CN
HYS US
SJNK US

BMO S&P 500 ETF

Vanguard S&P 500 Index ETF
Horizons S&P 500 Index ETF
iShares S&P 500 Index ETF
iShares MSCI EAFE IMI Index ETF
Vanguard FTSE Developed ex North America
Consumer Discretionary Select Sector SPDR
Consumer Staples Select Sector SPDR Fund
BMO High Yield US Corporate Bond CAD-H
iShares US High Yield Bond CAD-Hedged
Horizons Active High Yield Bond ETF
PIMCO 0-5 Year High Yield Corporate Bond
SPDR Barclays Short Term High Yield Bond

Price
($)
19.57
32.68
15.44
22.98
22.67
26.72
63.78
42.55
15.93
21.66
10.66
106.13
30.75

Type*
USD
UnH
USD
UnH
UnH
UnH
USD
USD
C$H
C$H
C$H
USD
USD

QMV**
($M)
775
212
150
55
49
20
7,032
6,758
613
597
39
3,449
2,638

20D ADV
(000)
175
28
41
28
32
31
6,457
9,284
97
101
19
259
1,210

MER
(%)
0.17
0.15
0.17
0.14***
0.30***
0.28***
0.18
0.18
0.62
0.61
0.67
0.55
0.40

*Type: US dollar (USD); CAD with currency hedge (C$H), and Non-currency hedged (UnH); **ZSP/U and HXS/U 's QMV and 20D ADV
include both CAD and USD units; ***Stated Management Fee; Source: NBF, Bloomberg; Data as of 05-Nov-13

Asset Allocation Strategy Report: Are we in a risk-off

rally? Nov. 4, 2013
Reference: Martin Lefebvre, Asset Allocation and Investment
Strategist
As the Fed continues to keep its excess liquidity backdrop in
place and since we expect growth to accelerate in 2014, we
remain overweight equities with both the short and long
term in mind, with a preference for developed markets
over emerging markets. We are reducing our emerging
markets weighting to neutral and raising exposure to EAFE
equities to an overweight position.
In the short run, our approach is to adopt a more defensive
equity stance by rotating from early cyclical to counter cyclical
sectors. Our preferred sectors remain consumption
stocks (both staples and discretionary). Financials remain
a favourite in the long run, but should be underweighted until
the Fed signals anew its intention to taper its bond purchases
program.
A softening of growth in emerging market, combined with
declining commodity prices, doesnt bode well for Canadian
equities on a relative basis. Moreover, the fall in commodity
prices and a more dovish stance on the part of the Bank
of Canada should exert downward pressure on the loonie
which could result in foreign capital outflows.

Table 2 - Global Asset Allocation 3-Month Horizon

Asset Classes

Weight
Min Under Equal Over Max

Cash
Bonds
(Duration)
Federal
Investment Grade
High Yield (USD)
Non-traditional Income
World Equities
S&P/TSX
S&P 500 (USD)
Growth vs. Value
Large Cap vs. Small Cap
Defensives vs. Cyclicals
MSCI EAFE (USD)
MSCI EM (USD)
Alternative Investments
Commodities
Energy
Base Metals
Gold
Hedge Funds (USD)
REITs
Source: Consulting Investment Committee, NBF

Pat Chiefalo, CFA | 416.869.7931 | pat.chiefalo@nbc.ca

Daniel Straus, M.Fin., PhD | 416.869.8020 | daniel.straus@nbc.ca
Ling Zhang, M.Fin. | 416.869.7942 | ling.zhang@nbc.ca

ETF Strategy: Tactical Asset Allocation: November 2013

FINANCIAL PRODUCTS RESEARCH
November 5, 2013

Favour a defensive equity stance in a risk-off environment

Developed markets for the long run?

Source: NBF, Datastream

Source: NBF, Datastream

The drop in the economic surprise index since midSeptember suggests that the outperformance of
cyclical sectors over more defensive ones could
reverse course until there is evidence that interest
rates are bottoming out, or until analysts lower their
expectations far enough to create positive surprises
Sector wise, in the United States consumption stocks
look the most appealing in the short term for two
reasons. First, consumer staples have broken out of
their trading range and they have started to bottom
out on a relative basis
Second, although consumer discretionary stocks
have outperformed the market by nearly 12% over the
past 12 months, they remain in a clear uptrend and
their relative value should bounce off the 50-day
moving average

We favour developed markets over emerging markets

where growth has been faltering lately due to tighter
financial conditions.
Although postponing the tapering measures has
helped emerging markets lately, interest rate hikes in
developed markets remain the most likely scenario and
this represents an impediment to growth in countries
that are the most in need of structural adjustments.
We are reducing our emerging markets weighting to
neutral and raising exposure to EAFE equities to an
overweight position.

Pat Chiefalo, CFA | 416.869.7931 | pat.chiefalo@nbc.ca

Daniel Straus, M.Fin., PhD | 416.869.8020 | daniel.straus@nbc.ca
Ling Zhang, M.Fin. | 416.869.7942 | ling.zhang@nbc.ca

ETF Strategy: Tactical Asset Allocation: November 2013

FINANCIAL PRODUCTS RESEARCH
November 5, 2013
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Levered and Inverse Exchange-Traded Funds are very different from most ETFs. They pursue leveraged investment goals, and they are riskier than alternatives that do not use leverage
because they magnify the performance of the benchmark on an investment. These ETFs seek daily leveraged investment results. The return of an inverse or levered ETF for periods
longer than a single day, especially in periods of market volatility, may be completely uncorrelated to the return of the benchmark over such longer periods. Levered and inverse ETFs are
intended to be used as short-term trading vehicles for investors managing their portfolios on a daily basis. They are not to be used by, and are not appropriate for, investors who intend to
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Pat Chiefalo, CFA | 416.869.7931 | pat.chiefalo@nbc.ca

Daniel Straus, M.Fin., PhD | 416.869.8020 | daniel.straus@nbc.ca
Ling Zhang, M.Fin. | 416.869.7942 | ling.zhang@nbc.ca