etf-portfolio-construction-knight

Aggressive investors are a varied breed. Some novice investors seeking to maximize returns think that aggressively pursuing every “hot” opportunity and trading every market rally is what they want their advisor to do. These investors quickly learn how difficult it is to maintain consistency with this approach. More often, the aggressive investor either has a long time horizon that allows her portfolio to recover after market downturns or identifies a portion of her overall portfolio that can be invested with a higher risk profile. Regardless, careful risk management can reduce volatility drag—the result of maintaining a risky portfolio during volatile markets—and ultimately lead to higher returns. In this instalment of our series, we explore investing for an investor with a high risk tolerance defined by the worst 12-month decline that can be tolerated being -24%. We explore three strategic portfolio construction approaches: global macro, core/satellite and target risk.

Investor profile

  • Portfolio size: $250,000
  • Tax status: non-taxable
  • Time horizon: over 10 years
  • Risk: aggressive
  • Objective: growth

Benchmark

  • 27% Canadian equities (S&P/TSX Composite)
  • 27% U.S. equities (S&P 500)
  • 26% International equities (MSCI EAFE)
  • 20% Canadian bonds (DEX Universe)

Global Macro

Weight Ticker Exchange Name Mgt Fees Benefit
25% HXT Canada Horizon S&P/TSX 60 Index ETF 0.05% Resource-driven, Canadian equities provide inflation protection. Relative economic strength. Overweight
20% HXS Canada Horizons S&P 500 Index ETF 0.15% Recovering U.S. economy with U.S. dollar exposure. Overweight
15% VGK U.S. Vanguard MSCI Europe ETF 0.14% Diversified exposure to the European equities. Credit issues persist. Underweight
10% XMM Canada iShares MSCI Emerging Markets Minimum Volatility Index Fund 0.40% Diversified exposure to the growth of emerging markets mitigated by minimum volatility overlay. Overweight
10% ZCA Canada BMO Agriculture Commodities Index ETF 0.65% Diversifying and inflation-hedging exposure to the agriculture commodities
5% XHY Canada iShares U.S. High Yield Bond Index Fund (CAD-Hedged) 0.60% Diversified exposure to high-yield U.S. bonds with moderate interest rate risk as measured by a duration of approximately four years
5% ZCA Canada BMO Emerging Markets Bond Hedged to CAD 0.50% Diversifying exposure to emerging fixed income markets
10% VSC Canada Vanguard Canadian Short-Term Corporate Bond Index ETF 0.15% The short three-year duration of this corporate bond portfolio provides a hedge for interest rate risk in low interest rate environment
100%   0.24%*  

*weighted

Global macro is a traditional “top down” approach that starts with a view about the overall economy to influence portfolio construction and asset class selection.