Horizons ETF screens Canadian stocks for quality at a reasonable price

Rudy Luukko 14 November, 2017 | 6:00PM
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Horizons Inovestor Canadian Equity Index (symbol INOC), holding an equally weighted portfolio of 25 large-cap Canadian companies screened for positive growth and value attributes, opened for trading today on the Toronto Stock Exchange.

The underlying index for the exchange-traded fund is the NASDAQ Inovestor Canada Index, whose bottom-up quantitative discipline is described as QARP, an acronym that denotes high quality at a reasonable price. The index was designed by Inovestor Inc., an affiliate of the ETF's Montreal-based sub-advisor Inovestor Asset Management.

Using a multi-factor approach, Inovestor's screening process seeks to identify Canadian companies that achieve high levels of "economic profit" and are trading at attractive valuations.

As noted in the prospectus, the economic profit of a company is estimated by subtracting its cost of capital from its net operating profit after tax. In the first stage of the screening, the methodology identifies the top 100 securities by economic profit.

Next, the sector weights of this group of 100 securities is calculated. These weightings are applied in selecting the final portfolio of 25 securities. A scoring system, employing both growth and value criteria, is applied to select securities from each sector.

The index is rebalanced quarterly. At that time, new constituents may be added and existing ones dropped, creating a revised equally weighted portfolio. Between rebalancing dates, the weightings of the individual constituents will vary.

The management fee charged by Horizons ETFs Management (Canada) Inc. is 0.5%, which does not include operating expenses.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

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