Model Portfolio Returns for 2022 – Canadian Portfolio Manager Blog

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Unless you were actually born yesterday, you probably already know that 2022 is an extraordinary year for investing… extraordinarily bad, that is. It doesn’t matter which asset mix you invest in. Both the stock and bond markets suffered double-digit losses, so even conservative investors with high bond holdings saw their portfolio values ​​decline.

It’s an investment for you. We may not like it, but we expect some years, sometimes across the board, to help accumulate perceived risk. This is the price we pay to expect these same markets to deliver long and strong future returns.

With this in mind, we hope you’ll keep your eyes and your asset allocation focused on the future as we review the 2022 performance for Vanguard, iShares, BMO and Mackenzie Asset Allocation ETFs.

Before looking at 2022 returns for our asset allocation ETFs, let’s start with equity ETFs and look at year-end results for their underlying portfolio.

2022 Equity ETF Income

Canadian Equity ETF Earnings were similar across the board, with losses around 6%.

Disappointing, of course, but their performance was still better than global stock markets, which lost 12% in value to the Canadian dollar. This is in large part due to the Canadian stock market’s heavy weighting in energy companies. The energy sector has had a stellar year with over 50% returns in 2022.

US Equity ETFs 2022 ended on a low note, with the US dollar losing about 20% of its value. During this time, the US dollar rose 6.8% against the Canadian dollar, reducing losses for unhinged Canadian investors. If we factor in withdrawals from US dollar exposure, our selected US equity ETFs lost about 12%-14%, in Canadian dollar terms, before withholding taxes.

BMO’s three U.S. stock ETFs had significantly higher returns than the others. This is largely due to the methodology used to create the S&P indices tracked by BMO’s ETFs. For these indices, an S&P Index Committee selects which companies to include in each index. Indexes tracked by Vanguard, iShares and Mackenzie ETFs have a less subjective process. This means BMO has the most active decision-making in the three S&P indexes tracked by its ETFs, leading to a wide short-term return gap between BMO and other passive index-tracking providers in 2022.

International Equity ETFs It ended the year disappointingly, losing 8% to 10%.

Two factors explain most of the performance differences among our international ETF providers:

First, small-cap international stocks underperformed their large and mid-cap counterparts. In 2022, small-cap international stocks lost more than 15%, while large international stocks lost less than 8%. The Vanguard FTSE North America Index ETF (VIU) created Expin All Cap And this iShares Core MSCI EAFE IMI Index ETF (XEF) Follow broad market indices, including large, mid, And Small stocks. This explains why they underperform BMO MSCI EAFE Index ETF (ZEA) And this Mackenzie International Equity Index ETF (QTX)It is both exemption Small stocks.

Second, there were market classification differences in the indices each ETF followed. This difference can best be seen by comparing VIU and XEF. As both track broad market indices including large-, mid- and small-cap companies, they give us a more apples-to-apples comparison.

VIU follows the FTSE index, which classifies South Korea and Poland as developed countries, so VIU includes shares of these countries in the fund. XEF follows an MSCI index that classifies South Korea and Poland as emerging countries, instead assigning them to MSCI’s emerging markets stock indices.

In 2022, the South Korean and Polish stock markets lost 24.2% and 19.1%, respectively, against the Canadian dollar, far worse than the international stock market as a whole. The inclusion of underperforming South Korean and Polish companies in the FTSE’s developed market indices reduced VIU’s performance relative to the XEF and others.

Emerging Markets Equity ETFs It was the worst among all our asset classes, with negative returns of 13%-16%. This time, VEE has a smaller profit than others because of it exclusion South Korean and Polish stocks underperformed.

Now all together: Aggregating these equity asset classes according to their target asset allocation ETF weightings, rebalancing monthly portfolios and adjusting for additional product charges, we find that their overall equity returns are similar across the board. BMO managed to do slightly better than others, with an estimated return on equity of around 10% negative. This is a result of their high US equity ETF returns and small-cap equity divestment within their international equity allocation.

And for those of you who have invested in all these equity ETFs Vanguard All-Equity ETF Portfolio (VEQT)The BMO All-Equity ETF (ZEQT)And this iShares Core Equity ETF Portfolio (XEQT)You’ll notice that their 2022 returns are in line with the average returns of their underlying ETF.

Next, you can look at fixed income returns, as your asset allocation ETF may also hold some bonds.

2022 Fixed Income ETF Returns

Canadian bond ETFs started the year with an average yield to maturity of 1.9%, but increased to 4.3% by the end of the year. Remember, a officer in yield decreases bond prices, so it caused double-digit losses in most of the fixed income bonds included in these asset allocation ETFs.

Broad Market Canadian Bond ETFs A total loss of 12% by 2022. Canadian bonds make up the bulk of the fixed income component of these asset allocation ETFs, so they have the biggest impact on performance.

Short-term Canadian corporate bond ETFs 15% of iShares portfolios’ fixed income allocation. They had less impact, but performed slightly better, with a loss of less than 5% in 2022.

US currency-hedged bond ETFs performed worse than their Canadian counterparts, with negative returns of around 14%–16%.

This is because US bond yields diverged (and rose) from Canadian bond yields after the end of August. In turn, U.S. bond ETF values ​​fell more than Canadian bond ETFs over the same period.

Currency-hedged foreign bond ETFs Outside the U.S. performed similarly to their Canadian and U.S. counterparts, with losses of around 13%.

Local currency emerging markets bond ETFs Currency-hedged developed markets bond ETFs fared slightly better in 2022, with the Canadian dollar losing about 4%. However, this asset class only made up a small portion of Mackenzie Asset Allocation ETFs, so it had little impact on overall performance.

Now all together: To estimate the ballpark return for each portfolio’s fixed income allocation, we can once again take the average return for each ETF, rebalance monthly and adjust for additional fees charged on asset allocation ETFs. Doing so provides an estimated negative return of 11%–13% across various ETF providers.

2022 Asset Allocation ETF Returns

Again, it doesn’t matter which asset allocation ETF provider you use in 2022. For almost every risk level, their returns were within 1% of each other. Since our ratings put BMO at the top of the equity sector, it’s no surprise that they outperform others in their balance, growth and all-equity allocations. The iShares Core Portfolios have outperformed more conservative asset allocation ETFs because they include short-term Canadian corporate bonds that perform well.

However, as we suggested at the outset, we advise against reading too much into these short-term variations. BMO may have made some progress in 2022, but that doesn’t give us any meaningful information about what to expect in the future. Over the long term, we continue to expect similar returns for comparable asset mixes.

As always, we advise you to focus on what you can control, such as reducing costs; maintaining asset allocations aligned with your personal financial goals; And above all, ignore the temptation to chase past returns or run away. If anything, the broader market smack-down of 2022 positions us to drive forward the expected growth in the future… IF Whenever and wherever it comes, we are there. We hope this year in review gives you the perspective you need to invest accordingly.


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