Author Topic: Canadian index without energy - shoot down my idea  (Read 873 times)

YoungInvestor

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Canadian index without energy - shoot down my idea
« on: March 31, 2018, 07:24:24 AM »
Hey there,

I'm building my portfolio with some allocation to Canadian stocks and I want to make sure I avoid the energy sector. There doesn't seem to be a reasonably priced ETF that does this, so I was looking into a replacement option. I'd like to pitch this idea to see how it flies with mustachians (fully expecting to get shot down):

My plan is to hold Canadian stocks in my tfsa (the yearly 5500$ limit is close enough to the allocation I want to begin with). Would it make sense to individually buy shares for 2750$ of each company, going down in the index list, matching the sectors?

Currently I could invest in about 20 of them(around 55k$ in my TFSA), which would be close enough to the index that it would replicate it fairly well, with the caveat that it would be equal weighted instead of cap-weighted, although not rebalancing will change individual weights over time. The fees would be equivalent to 0.35% in the first year, but roughly 0 afterwards.

I don't plan on rebalancing, and dividends would be used to purchase new securities down the list along with new deposits.

Does this even make sense? I can already see problems with rebalancing my allocation to can stocks with the rest of the portfolio, for instance, but I like the efficiency, the equal weighting and the avoidance of energy stocks.

Thoughts?

Edit to add: Obviously the individual stocks would be selected by going down the index list while avoiding energy stocks.
« Last Edit: March 31, 2018, 07:27:11 AM by YoungInvestor »

frugal_c

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Re: Canadian index without energy - shoot down my idea
« Reply #1 on: March 31, 2018, 09:25:42 AM »
Not a bad idea.

The one concern I would have is the TSX is already financial heavy, and without energy this will be even more concentrated.  I think you would have about 50% in canadian financials.  Historically they have performed very well but they are not without their risks. 

I could suggest you try to balance across sectors.  Maybe 4 stocks in each of the sectors: financial, industrial, consumer services, technology, consumer goods.  There are many ways to go about it but you get the idea.  I have been thinking of doing something similar.

Prairie Moustache

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Re: Canadian index without energy - shoot down my idea
« Reply #2 on: April 03, 2018, 12:42:15 PM »
Another point that goes without mentioning is are you using Questrade or something similar, or one of the institutional brokerages? If you're conducting tons of trades on Investorline for example, that $9.95 trade fee could definitely add up if you're picking through the index, as opposed to just buying an ETF. Not that it's a huge sum but just something I keep in mind.

Goldielocks

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Re: Canadian index without energy - shoot down my idea
« Reply #3 on: April 03, 2018, 02:19:03 PM »

This is not easy to do, as the TSX 60 has 20% weighting for energy stocks.

There are a few choices.   

1.  Why specific to Canada only -- are you trying to get eligible dividends in a non-reg portfolio?   If not specific to Canada, you can get financial , agricultural, healthcare global ETFs, or other market sectors there.

1b.  Canadian sector funds- check out Blackrock for a good fund screen for canadian equities.   There are several non-energy Canadian ones to choose from, financials, IT, consumer staples,

2.  Do you want low exposure or ZERO exposure?   One way would be to buy the ETF as your baseline for 50% of your investment, then buy the top 10 stocks individually, or a fund that does not include energy, for Canadian for the remainder.   This is what I have been doing, but I must say that my stock picking success is marginal at best.  I do this in my non-reg fund to make use of the capital losses that I incur, and preferential dividend taxes on my low income right now...  It is a tax strategy, not an investment strategy, due to my results thus far.

3.  Hmm.. why no energy at all?  I personally have been more worried about over exposure to CDN banking, especially now with the overlap of insurance and banking in one company.it is 41% of the TSX60..   Energy doesn't dominate as much as it once did.  Is this a philosophical reason, like not wanting to invest in tobacco or guns?  Are you anti-oil but ok with electricity and natural gas?  What is it?

daverobev

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Re: Canadian index without energy - shoot down my idea
« Reply #4 on: April 03, 2018, 03:17:59 PM »
Canada is ~4% of global market cap. I am strongly against the common weighting suggestion, of 25-33%.

Putting Canadian stuff in your TFSA is inefficient when you get to having anything unregistered due to the dividend tax credit.

I would suggest maybe just picking up two Canadian ETFs - TSX 60 equal weight, and Composite normal. Or perhaps 50/50 Composite and 'completion' which is composite less 60.

Energy is a bit part of our lives. If you don't want so much of it, just have less Canada, IMHO.