Current volatility suggests diversification is back in vogue but in a new way.
By Will Ashworth
While many advisors are fielding calls from clients concerned about their exposure to Canada’s shaky oil industry, many others are executing innovative diversification strategies designed to counter home-country bias.
Share prices of Canadian energy stocks have fallen in the last couple of weeks in sympathy with declining oil prices. There are, however, defensive measures available to financial advisors that can reduce a client’s exposure to energy stocks.
For example, the S&P 500 has a 9.7% weighting in energy stocks, far less than most Canadian broad-market equity ETFs and mutual funds. Regardless of whether the party is over for Canadian stocks, the latest oil shock suggests financial advisors might want to revisit the diversification question when it comes to their clients’ portfolios.
In a phone conversation with Shailesh (Shay) Kshatriya, associate director of client investment strategies at Russell Investments, WP learned more about what Russell is doing for its clients to avoid the double whammy of lower oil prices and a lower Canadian dollar.
Russell believes global diversification is the answer. And not just by country. It suggests clients invest across multiple asset classes. One idea Kshatriya offers is for investors to combine Canadian bank exposure with a global real estate play in order to better cover the world financial sector.
An example of this would be to buy either the iShares S&P/TSX 60 Index ETF, or more specifically, the S&P/TSX Capped Financials Index ETF, in conjunction with the iShares Global Real Estate Index ETF, a global real estate ETF that invests in 75 of the world’s leading real estate companies.
Another possibility according to Mark Noble, head of sales strategy for Horizons Exchange Traded Funds, is for advisors to consider the Horizons Canadian Midstream Oil & Gas Index ETF, which invests in pipelines and other midstream companies less affected by the downward movement of oil prices. Since the ETFs inception in mid-July it’s handily outperformed Horizons’ S&P/TSX Capped Energy Index ETF, which focuses on the entire energy industry.
But what are financial advisors doing to tackle this issue?
Brent Vandermeer is portfolio manager for Vandeermeer Wealth Management in Ottawa. He’s using this latest drop in oil prices to obtain some good buys in Canadian energy stocks. Not a market timer, he’s sticking to a pre-determined energy allocation; these latest tremours aren’t going to send him scrambling for the exits because his clients’ portfolios are fully diversified and designed to withstand the occasional stock price readjustment.
Besides, with much of the damage already factored in, to mess around with allocations at this point might simply be making matters worse.
While many advisors are fielding calls from clients concerned about their exposure to Canada’s shaky oil industry, many others are executing innovative diversification strategies designed to counter home-country bias.
Share prices of Canadian energy stocks have fallen in the last couple of weeks in sympathy with declining oil prices. There are, however, defensive measures available to financial advisors that can reduce a client’s exposure to energy stocks.
For example, the S&P 500 has a 9.7% weighting in energy stocks, far less than most Canadian broad-market equity ETFs and mutual funds. Regardless of whether the party is over for Canadian stocks, the latest oil shock suggests financial advisors might want to revisit the diversification question when it comes to their clients’ portfolios.
In a phone conversation with Shailesh (Shay) Kshatriya, associate director of client investment strategies at Russell Investments, WP learned more about what Russell is doing for its clients to avoid the double whammy of lower oil prices and a lower Canadian dollar.
Russell believes global diversification is the answer. And not just by country. It suggests clients invest across multiple asset classes. One idea Kshatriya offers is for investors to combine Canadian bank exposure with a global real estate play in order to better cover the world financial sector.
An example of this would be to buy either the iShares S&P/TSX 60 Index ETF, or more specifically, the S&P/TSX Capped Financials Index ETF, in conjunction with the iShares Global Real Estate Index ETF, a global real estate ETF that invests in 75 of the world’s leading real estate companies.
Another possibility according to Mark Noble, head of sales strategy for Horizons Exchange Traded Funds, is for advisors to consider the Horizons Canadian Midstream Oil & Gas Index ETF, which invests in pipelines and other midstream companies less affected by the downward movement of oil prices. Since the ETFs inception in mid-July it’s handily outperformed Horizons’ S&P/TSX Capped Energy Index ETF, which focuses on the entire energy industry.
But what are financial advisors doing to tackle this issue?
Brent Vandermeer is portfolio manager for Vandeermeer Wealth Management in Ottawa. He’s using this latest drop in oil prices to obtain some good buys in Canadian energy stocks. Not a market timer, he’s sticking to a pre-determined energy allocation; these latest tremours aren’t going to send him scrambling for the exits because his clients’ portfolios are fully diversified and designed to withstand the occasional stock price readjustment.
Besides, with much of the damage already factored in, to mess around with allocations at this point might simply be making matters worse.
