RM Portfolios Update: March 2018

Here's the March update for the different portfolios which I track here at The Rich Moose. I use Canadian-listed ETFs for the models I share to keep the tracking, purchasing, and selling easy for Canadian readers. Only the 3x Leveraged Portfolios use U.S.-listed ETFs.

See the list of my favourite Canadian ETFs on this page.

Vanguard All-in-One Portfolio ETFs

These Vanguard ETFs hold multiple assets inside a single ETF. It's nearly a perfect solution for investors who want to buy just one ETF and hold it forever without worrying about re-balancing, tax trigger issues, and excessive costs. These ETFs are completely managed for you at a very low 0.22% fee. Read my post reviewing these products to get an idea of how they are designed.

Here are the March monthly returns of these portfolio products (benchmark data).

Vanguard Growth ETF:  -0.60%
Vanguard Balanced ETF:  -0.24%
Vanguard Conservative ETF:  +0.12%

The decision between choosing the Growth ETF, Balanced ETF, or Conservative ETF depends on your tolerance for risk and your investment time-line. The Growth ETF should have the highest returns and highest draw-downs over time while the Conservative ETF will show lower returns with more stability. The Balanced ETF is a middle-of-the-road option.

Dual Momentum Strategy (RM Style)

Dual Momentum is a strict, rules-based investing approach which uses an easy performance evaluation to decide your investment holding for each month. Most months the holding will stay the same; trades occur around two times per year on average. By evaluating just once each month, you can eliminate the negative effects of market noise and spend very little time investing.

The Dual Momentum strategy—as tested by Gary Antonacci of Optimal Momentum—has shown fantastic results of complete market cycles. Read his website, book, and research papers to get a full understanding of how the strategy works.

See our version of Dual Momentum performance since 2014 by visiting the Portfolios page.

This month is the first trade of 2018. The signals show a switch from International stocks to U.S. stocks. If you're following this strategy, it's time to sell XEF.TO and buy XUU.TO.

YTD Performance:  +1.38%
Last month's performance:  -1.27%
Current recommendation: XUU.TO (trade from XEF.TO)

When determining our monthly position, we consider the past performance of just three eligible holdings: XUU.TO, XEF.TO, VSB.TO. The best performer based on specific criteria becomes the only holding for the next month.

Leveraged Barbell Portfolios

The Leveraged Portfolio strategy uses a unique mix of short-term bonds and leveraged stock ETFs to achieve growth while limiting downside risks. It's essentially a barbell strategy where all the risk and growth is contained in a small portion of the entire portfolio.

If you choose to implement the strategy, make sure you treat each account as a whole portfolio. Do not put bonds in one account and leveraged stock ETFs in another account!

Leveraged portfolios are re-balanced just once per year. For this reason, I will always track the Year-to-Date returns only.

Canadian-listed ETFs (2x Leverage Stock ETFs)

HSU.TO (50%) & XSB.TO (50%):  -1.80%
HSU.TO (30%) & XSB.TO (70%):  -0.01%

U.S.-listed ETFs (3x Leverage Stock ETFs)

UPRO (40%) & BSV (60%):  -2.87%
UPRO (30%) & BSV (70%):  -2.29%

These allocations are just a few examples of how Leveraged Portfolios can work. Leveraged ETFs amplify positive and negative returns so they should always be paired with low-risk assets to meet your personal risk tolerance. In a non-registered account, you may use margin debt to purchase your stock index ETF for somewhat better tracking.

Comments & Questions

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18 Replies to “RM Portfolios Update: March 2018”

  1. I am still holding XEF in my DM implementation. I use a 1 year look back period. It would be interesting to see how your “averaged look back period” performs vs the 1 year look back period recommended by Gary 🙂

    I am a little risk averse so I am implementing GEM70. A version of DM in which at least 30% is always invested in aggregated bonds. I’ll share my returns eventually here. I have not been running the strategy for long…

    1. Daren (Editor) says:

      Using US funds, the return since 2001 for the standard 12 month look back is 8.67% CAGR with a -22.48% max drawdown. For my averaged model it’s a 9.44% CAGR with a -17.33% max drawdown. Of course future returns are unknown, but to me the logic behind averaging is sound.
      GEM70 sounds interesting for added risk protection. Do you correct to 30% bonds based on a time period like annual re-balancing? Or do you just correct it every time you get a new trade signal?

  2. First, I use my periodic contributions (from my salary) and the dividend distributions of the ETF to keep the mix as balanced as possible.

    Second, I wait for a signal to adjust the bonds. The bonds are often times lagging behing so I just buy them when I have to switch between the two equity ETFs.

    I haven’t figured out what I would do if the bonds grow beyond 30%. Any ideas here?

    In general I am not a stickler about keeping exactly 30% bond allocation. It is fine with me if it goes down to X% while I am waiting for a signal. I would definitely worry about the bonds growing above 30%.

    1. Daren (Editor) says:

      When bonds go significantly above 30%, it seems to me that the stocks will be moving down and the possibility of the portfolio going to bonds or cash is likely. I think it’s likely best to stick with your strategy of resetting only when a new trade signal comes along.

  3. Daren, I came across VDU the other day. I think I will be using this ETF instead of XEF for my DM implementation. I would love to hear your opinion about this.

    I think VDU better represents international equities for the purpose of DM. VDU includes Canada and Korea, while XEF does not. It is very interesting the Korea inclusion; because MSCI considers Korea an EM.

    Canada’s markets are also heavily correlated with EM (lately not but I think is because of NAFTA worries). By having Canada and Korea together in VDU we are kind of gaining EM type of exposure.

    Other plus is that VDU pays distributions 4 times a year vs XEF only twice. So the odds of missing distributions because of a sell signal are lower with VDU.

    Finally, VDU has a slightly smaller MER and higher yield.

    1. VDU is nice for DM because it includes a 7-8% allocation to Canada, but because VDU gets its exposure to the index by holding an underlying US-listed Vanguard fund (VEA), there is an additional layer of foreign withholding tax on dividends. This represents an additional drag of about 0.6% a year in addition to the MER in a TFSA or RRSP (you can recover a little more than half of that if you are investing in a non-registered account).

      In contrast, XEF and VIU hold the foreign stocks directly and the annual tax drag is more like 0.2% – 0.25% per year, depending on the yield that year.

      If you decide the Canadian component is necessary in an RRSP or TFSA DM portfolio and your allocation would significantly exceed about $6000 to Canada, and you assume you’re making one pair of $10 trades per year, then it’s worth splitting your Canadian and International equities out with VCN and VIU (or XIC and XEF).

      Alternatively, if you are investing in an RRSP and you’re willing to convert CAD to USD, you can avoid the foreign withholding tax by holding the US-listed ETFs directly.

    2. Daren (Editor) says:

      @Andre Thanks for the comment and I agree. However, if your account is large enough to consider splitting out Canada, I think the better move would be adding EM instead, pairing XEF with VEE for example.
      @Yanniel Although I think FTSE has better indices than MSCI because they are little more forward thinking, the tax drag of the Vanguard ETFs is too high to justify their use.

  4. Thanks for the insights Andre.

    1. Yanniel says:

      @Daren, @Andre. This is my updated view after putting your feedback together.
      I prefer VIU over XEF because it covers one more country: Korea. Korea is in the border of EM/Developed Markets; so I like the exposure to Korea. Both ETFs have similar tax drag. Incidentally VIU has been done better than XEF during the last calendar year (I know 1 year only proves nothing but I thought to mention this)

      1.) Both VEE and XEC have the same tax drag than VDU. 2.) Canadian markets are heavily correlated to EM. Given this I rather buy Canada than VEE/XEC; because Canada provides EM type of exposure without any tax drag.

  5. Thanks Daren.

  6. What do you folks think about implementing DM with Momentum ETFs like ZXM.B, YXM.B?

    1. Daren (Editor) says:

      To begin with, trading volume is an issue. You would probably have to use comparable U.S.-listed ETFs.
      Gary did a post addressing factors (“smart beta”) with a section dedicated to stock momentum. In a nutshell, there’s not a sustainable advantage there due to the amount of money invested in momentum products. http://www.dualmomentum.net/2017/02/factor-zoo-or-unicorn-ranch.html
      Not sure though how it would stack up in a DM investment style. I don’t think any products on the market have been there long enough to do a proper analysis.

  7. I implement DM in my TFSA and RRSP. Like Daren suggested, I split up the international equity as XEF and VEE in my TFSA. MY RRSP is completely in USD with US funds where one can simply use VXUS and VTI. In my non-registered account I implement a buy & hold strategy which roughly splits equally the allocation to US, INTL and Canadian equities.

    1. Yanniel says:

      @Andre. XEF/VEE would leave Korea out. Do you really mean that? I rather do either XEF/XEC or VIU/VEE.

      Is there any particular reason for not using DM in your taxable accounts?

    2. @Yanniel you are right about VIU/VEE or XEF/XEC being better matches with each-other. When VIU first started it used representative sampling of the index, which leads to tracking error. Now that it’s been around for more than a year, VIU now holds closer to the full index directly. I will probably start using VIU in the future.

      I use buy and hold in my taxable accounts because I do not want to realize capital gains when I switch ETFs. Also, I like to hold a sizeable Canadian allocation due to preferential taxation of dividends. I use Horizon’s swap-based ETFs for US and INTL exposure in the taxable account. Also, I think that diversity of strategy is wise, so roughly half of our investments are using DM and the other half are using buy and hold. I do not know if how often there are going to be major bear markets in the future, and long bear markets are where DM really shines.

  8. @Andre. Thanks for your comments.

    About your taxable account: what about using just absolute momentum to limit the downside? Using just absolute momentum (and not using relative momentum) will limit the number of trades you do. This will help you not to trigger too many capital gains (losses). A bear market will come eventually and an all equity portfolio might suffer losses that could take years to recover. An exit strategy might be wise.

    Question: how do you exchange your CADs to USDs in your RRSP? Do you do something like Norbert’s Gambit?

    1. @Yanniel, it’s certainly an idea to use absolute momentum to minimize trading costs, but then again we just don’t know whether the future will be filled with markets trending up over long periods with lots of volatility (momentum strategies could under-perform due to whipsaw losses) or if drawdowns will be fast with a slow recovery (absolute momentum under-performs under these conditions). So I split the difference and buy-and-hold with some money and do DM with the rest. When you make that choice, then it’s clear that buy-and-hold should be in taxable accounts while DM should be in TFSAs and RRSPs in my opinion.

      Also to answer your question, yes I use DLR and DLR.U to convert CAD to USD in my RRSP with Norbert’s Gambit. Otherwise you are losing too much on currency transaction spreads unless you use a broker with small spreads which I think Darren has mentioned in a previous post.

  9. @Andre: thanks for the FX tip.

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