A solid defensive Canadian equity strategy

This strategy will likely offer better returns than a market-cap-weighted portfolio of comparable volatility.

Alex Bryan 22 August, 2017 | 5:00PM

 IShares Edge MSCI Minimum Volatility Canada ETF (XMV) offers a well-crafted approach to reduce volatility for a low fee. It should offer a smoother ride and better risk/reward profile than most of its peers, and our confidence in that assessment has grown, warranting an upgrade to a Morningstar Analyst Rating of Silver from Bronze. That said, this strategy has not yet been tested in a major market downturn.

The exchange-traded fund attempts to construct the least volatile portfolio possible with stocks from the MSCI Canada Index, which includes large- and mid-cap names, under a set of constraints. These include limiting turnover, exposure to individual names and sector tilts relative to the MSCI Canada Index, helping to mitigate unintentional bets. This strategy doesn't just target the least-volatile stocks. It also takes into account each stock's exposure to common risk factors and how they interact with each other to affect the portfolio's overall volatility.

The portfolio includes around 70 holdings, such as  The Toronto-Dominion Bank (TD),  Thomson Reuters (TRI) and  TransCanada (TRP). While many of these firms have lower volatility than average, more-volatile names can make the cut if they have low correlations with the other stocks in the portfolio and help reduce the overall portfolio's volatility.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Basic member.

Register For Free

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
TC Energy Corp58.63 CAD-4.17
The Toronto-Dominion Bank60.17 CAD-1.23
Thomson Reuters Corp103.70 CAD-0.28

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

© Copyright 2020 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy        Cookies