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Sep 1, 2016

Update: The Canadian MoneySaver Portfolio

by Michael Southern

Michael SouthernCurrent holding:


Replaced with:

Vanguard FTSE Dev Europe All Cap


Effective June 01, 2016, we will be updating the ETF holding used to achieve the Canadian MoneySaver portfolio’s European exposure. The switch will be from SPDR EURO STOXX 50 (FEZ) to Vanguard FTSE Dev Europe All Cap (VE). While both are appropriate as a core European position, we prefer the diversified approach and fee structure of VE.

From a geographical, sector and style perspective, we think VE offers the investor a superior diversified allocation over FEZ. The biggest win is likely from a regional perspective. Both ETFs are of course allocated entirely to Greater Europe. However, while FEZ is entirely invested in Europe, VE provides exposure to both Europe (69.0%) and the United Kingdom (31.0%). In the case of FEZ, 68% of the

European allocation is to France and Germany; for VE, 59.0% of the European exposure is to France, Germany and Switzerland. Overall, FEZ has its allocation to seven European countries where VE has exposure to 15 countries.

Another distinct advantage is that VE is an “all-cap” strategy. This means mid- and small-cap stocks are better represented in the fund vs. a traditional market-cap strategy where large/mega-caps dominate and provide little to no room for other style exposures. Indeed, FEZ has an 88.0% allocation to mega-cap names. VE on the other hand has a 51.0% allocation to mega-cap, 30.0% to large-cap, 15.0% to mid-cap and 3.0% to small-cap. We think this exposure is a good value-added diversifier.

From a sector perspective, FEZ does a good job balancing its exposure; however, we think VE does a little better. We like the roughly 3.0% financials underweight of VE vs. FEZ, as the typical Canadian investor has a high allocation to bank stocks. The majority of remaining variances are 2.0% or less and provide no distinct growth or value tilt of one fund over the other.

Another distinct element of the two ETFs is that FEZ trades in USD$ and VE trades in CAD$. There is no CAD$-hedge on VE, so the investor is still exposed to currency movements in calculating return but does not have to worry about an FX impact when buying or selling. This is more a matter of investor preference, particularly if one needs USD$ from their investments. However, most readers are likely aware of the large gains in the USD$ over the past two years. While we think the USD$ will continue to do well, we would also think the majority of the appreciation is behind us for the time being. For the opportunistic investor, this may be a good time to take some currency related gains off of the table.

It is not a clear-cut victory for VE, as the ETF currently trades at a premium to FEZ on a P/E and P/B basis while offering slightly less yield. While the difference is not large, a more active investor may wish to wait for some convergence on the valuation. We also like that FEZ holds roughly 50 holdings, giving each underlying position a higher conviction and greater role in the overall portfolio (VE holds 1,221 positions). This is due to the different benchmark indices employed by the respective funds. The relative advantages of VE over FEZ have lead us to swap the two funds for one another.

Michael Southern is an Analyst with 5i Research in Kitchener, Ontario.