What’s Up (With Your Investments)?

No, I’m not asking how you’re doing (sorry, I know everything sucks right now!). I’m talking about your investments. Active managers love to tout their ability to capture all of the upside of the market while deftly avoiding the downside. We know empirically that is not the case (the SPIVA scorecard shows that more than 90% of equity funds underperform their benchmark over 10-year periods) but individual investors still buy this sales pitch hook, line, and sinker.

Global stock and bond markets are down significantly this year. Could a skilled investor have safely steered his portfolio through these choppy waters to avoid major losses? Could he have even made money? Let’s take a look at year-to-date market returns across different countries, sectors, and asset classes to see what’s up with your investments, if anything.

Stocks by region

Canadian stocks have held up fairly well compared to the rest of global markets. That’s mainly due to the performance of energy stocks, which we’ll get to later. Still, the broad Canadian stock market (represented by XIC – iShares Core S&P/TSX Capped Composite Index ETF) is down 9.67% year-to-date.

U.S. stocks had an incredible run from 2009 to 2021, which prompted many investors to change their equity allocation to only include U.S. stocks. Unfortunately, this year has not been kind to U.S. equities, and the S&P 500 (as represented by XUS – iShares Core S&P 500 Index ETF) is down 19.70% year-to-date. 

International stock returns have largely trailed Canadian and US stock returns over the past five years. This year, so far, international stocks (represented by XEF – iShares Core MSCI EAFE IMI Index ETF) are down 18.32%. 

Finally, emerging market stock returns have arguably been the weakest amongst all other equity markets. This year is not much better, as emerging markets (represented by XEM – iShares MSCI Emerging Markets Index ETF) are down 15.34% year-to-date.

Region ETF Symbol YTD Performance (June 20)
Canada XIC -9.67%
United States XUS -19.70%
International XEF -18.32%
Emerging Markets XEM -15.34%

Stocks by Sector

One active investing strategy involves rotating the investment portfolio in and out of different sectors. The idea being that one could correctly time the movement out of a falling sector (like technology) and into a rising sector (like energy). Let’s take a look at the year-to-date performance of different sectors and styles to see this in action:

Speaking of technology, these stocks were all the rage since at least 2019. The famous FAANG stocks led the way, but other tech stocks also emerged as the NASDAQ returned 37%, 45%, and 27% respectively over the past three years. 

But all good things must come to an end, and tech stocks have been absolutely crushed this year. The iShares NASDAQ 100 Index ETF (XQQ) is down 31.43% so far this year, which has contributed to the overall drag on the U.S. stock market. Even in Canada, Shopify briefly became the most valuable company in the country before its share price plummeted nearly 73% this year.

Canadians love investing in big banks as they are seen as safe, blue-chip, profit churning, dividend generating stocks. The iShares S&P/TSX Capped Financials Index ETF (XFN) holds 29 of Canada’s largest banks and insurance companies. It’s currently down 11.14% year-to-date, so it has underperformed the broad Canadian market by about 1.5%.

What about utilities? We all need to heat our homes and keep the lights on. The iShares S&P/TSX Capped Utilities Index ETF (XUT) holds 16 of Canada’s largest utility companies. It is currently down just 2.85% year-to-date, which is nearly 7% better than the broad Canadian stock market.

Energy stocks had a rough 2020 – remember when the price of oil briefly went negative for the first time in history? Energy stocks lost nearly 35% in 2020 before rebounding in a big way in 2021 – rising by an incredible 83%. So far this year, energy stocks have continued their strong performance with a return of 43.69%. That outperformance has started to slip, though:

XEG price chart

It’s a reminder of the highly volatile nature of energy stocks. From June 2008 to April 2020, energy stocks were down a whopping 89.61%.

Sector ETF Symbol YTD Performance (June 20)
Technology XQQ -31.43%
Financials XFN -11.14%
Utilities XUT -2.85%
Energy XEG 43.69%

Dividends

Canadians also love their dividends. But how have dividend stocks held up in this market environment? In Canada, about the same. The iShares Canadian Select Dividend Index ETF (XDV) holds 30 of the highest yielding companies in Canada. It is down 9.22% so far this year.

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) holds about 94 Canadian companies that have increased dividends for at least the past five years. CDZ has performed better than the overall market, but is still down 6.93% year-to-date.

On the U.S. side of the border, iShares US Dividend Growers Index ETF (CUD) holds 118 high yielding U.S. stocks that have increased dividends for at least 20 consecutive years. CUD is down 11.23% so far this year, which is about 8.5% better than the S&P 500.

Even better, the iShares U.S. High Dividend Equity Index ETF (XHD), which holds 75 high dividend yielding U.S. stocks, is down just 3.42% on the year.

Dividend Style ETF Symbol YTD Performance (June 20)
CDN High Yield XDV -9.22%
CDN Dividend Growth CDZ -6.93%
U.S. Dividend Growth CUD -11.23%
U.S. High Yield XHD -3.42%

Bonds

Rising interest rates have smacked bond prices in the face, leading to double-digit losses over the past 6-12 months. 

Short-duration bonds are less sensitive to interest rate movements and held up better than aggregate bonds and long-duration bonds. 

Indeed, the iShares Core Canadian Short Term Bond Index ETF (XSB) is down just 5.02% year-to-date. XSB has a weighted average maturity of 3.27 years.

Moving up the curve we have the iShares Core Canadian Universe Bond Index ETF (XBB), which was a weighted average maturity of 10.2 years. XBB is down 13.53% so far this year.

Finally, the iShares Core Canadian Long Term Bond Index ETF (XLB), with a weighted average maturity of 22.73 years, is not surprisingly the worst performer of the bunch and is down a painful 24.10% this year.

Bonds ETF Symbol YTD Performance (June 20)
Canadian Short-term XSB -5.02%
Canadian Aggregate XBB -13.53%
Canadian Long-term XLB -24.1%

Alternatives

Other asset classes, like REITs and gold, have long been thought of as inflation hedges and may have been considered as part of a diversified portfolio. But how have these alternatives to stocks and bonds held up this year? The results are mixed.

The iShares S&P/TSX Capped REIT Index ETF (XRE) holds 19 Canadian REITs. The fund had a banner year in 2021, returning 34.2%, but has struggled so far in 2022 and posted a negative return of 20.28%.

The iShares S&P/TSX Global Gold Index ETF (XGD) holds about 47 gold producing companies. The fund is roughly flat on the year, down 0.36% as of June 20, 2022.

Alternatives ETF Symbol YTD Performance (June 20)
REITs XRE -20.28%
Gold XGD -0.36%

Final Thoughts

One of the dangers of looking at past performance is that we fall victim to performance chasing. That’s what led people to abandon perfectly sensible globally diversified portfolios to invest solely in U.S. stocks, or to add an extra dash of technology stocks to their holdings, or to dabble in crypto and other individual stocks throughout the pandemic.

Listen, we can’t go back in time and capture past returns. All we can do is invest with future returns in mind. Do you know which regions, sectors, asset classes, or individual stocks will outperform in the future? I don’t. That’s why I hold a small slice of them all by investing in Vanguard’s All Equity ETF (VEQT).

Related: Exactly How I Invest My Money

Here are my takeaways from looking at what’s up with your investments:

  1. Past performance tells us very little about expected future returns
  2. Stock returns are mostly random
  3. Cycling in and out of regions, sectors, and asset classes is a guessing game. Good luck predicting which investments will outperform over the next 6-12 months

Even worse is trying to time the markets in general by selling everything and moving to cash. The typical argument is that you’re going to wait until things “settle down”, but when is a market of risky assets that are priced daily truly calm and settled?

Don’t fall into the greed and fear trap:

Fear and Greed index

In 2020 and 2021, this was characterized by investors plowing money into technology stocks. Now that tech stocks are getting crushed, investors are looking for the next thing. Today, that looks like energy stocks. But energy stocks are already up big (an incredible 425% from March 2020 to June 2022). Do you think your experience with energy stocks will be similar if you buy in today?

Manage your expectations. Vanguard’s VBAL posted double-digit returns in 2019, 2020, and 2021. It’s currently posting a negative double-digit return for 2022. The annual return since inception is 4.53%, which is pretty much exactly the expected return I use for a balanced portfolio in financial planning projections.

Similarly, Vanguard’s All Equity ETF (VEQT) posted double-digit returns in 2019, 2020, and 2021. It’s currently down double-digits in 2022. The annual return since inception is 10.21%, which is still much higher than the 6% expected return I use for an all-equity portfolio in financial planning projections.

What’s up with your portfolio this year?

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Robb Engen

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