Initial Value $25,031.92
February 20, 2012
Update Value $54,681.02
August 17, 2020
By Gordon Pape
We last reviewed our model RRSP Portfolio in mid-February, when the world was a very different place and the coronavirus was a distant problem in China.
Much has changed since then, so let’s take a fresh look at this portfolio and see what the impact has been.
This portfolio was launched eight and a half years ago, in February 2012. It has two main objectives: to preserve capital and to earn a higher rate of return than you could get from a GIC. The original value was $25,031.92.
About 30% of the portfolio is in bonds and cash. The balance is in growth-oriented assets that offer exposure to the Canadian, U.S., and international equity markets. The portfolio contains a mix of ETFs, stocks, and limited partnerships so readers who wish to replicate it must have a self-directed RRSP with a brokerage firm.
These are the securities currently in the portfolio with comments on how they have performed since the last review. Results are as of the afternoon of Aug. 14.
PIMCO Monthly Income ETF (TSX: PMIF). This global bond fund has been a disappointment. It dropped as low as $16.35 in March and, while it has recovered somewhat, it is trading below our book value. We received distributions of just over $0.31 per unit for the period.
iShares Canadian Universe Bond Index ETF (TSX: XBB). This ETF tracks the performance of the total Canadian bond universe including government and corporate issues. It has performed well, with the unit value up $1.14 since the last review. We received distributions of $0.431 per unit.
iShares Canadian Corporate Bond Index ETF (TSX: XCB). This fund invests exclusively in corporate issues. It was added to the portfolio in February 2019. It continues to perform well, with a gain of $0.59 since the last review. Monthly distributions are $0.052 per unit, for a total of $0.312 for the period.
iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (TSX: XHY). This fund tracks the performance of the U.S. high-yield bond market. It was added to the portfolio in February 2019 and generated a total return of 8% in its first twelve months. However, the pandemic has hit high-yield bonds hard because of default concerns. This fund has become too risky for an RRSP, so we will sell it.
iShares Convertible Bond Index ETF (TSX: CVD). This fund invests in bonds that can be converted into common stocks under certain conditions. It offers a play on the stock market while providing cash flow. As everyone knows, the stock market took a beating in late March, driving these units down to $13.12. They still haven’t fully recovered.
iShares Core U.S. Aggregate Bond ETF (NYSE: AGG). This ETF aims to replicate the returns of the total U.S. bond market. It was added one year ago to give us more exposure to American bonds. The total one-year return is a respectable 6.9%.
CI First Asset Canadian REIT ETF (TSX: RIT). No sector was harder hit by the pandemic than REITs. This ETF is down $4.51 per unit (22.4%) since the last review. Distributions have remained steady at $0.0675 per month but that’s a drop in the bucket compared to the capital loss. Fortunately, 2019 was a good year for this fund so our overall loss to date is minimal.
iShares Edge MSCI Minimum Volatility USA Index ETF (CAD-Hedged) (TSX: XMS). XMS invests in low-beta U.S. stocks such as Coca-Cola, Visa, McDonalds, and Verizon. Low beta means they are less sensitive to broad market movements and, in theory, less risky. But none of our low beta funds could stand up to the March market plunge. This one lost $2.90 per unit, virtually wiping out the gains of the previous 12 months.
BMO Low Volatility Canadian Equity ETF (TSX: ZLB). This ETF invests in a portfolio of large-cap Canadian stocks that have a low beta history. As with XMS and ZLD, it took a big hit in March, falling as low as $24.20.
BMO Low Volatility International Equity Hedged to Canadian Dollar ETF (TSX: ZLD). This ETF focuses on international stocks and is hedged to Canadian dollars, so the currency risk is removed. The story is the same; it was trashed in March, dropping as low as $18.71.
Brookfield Renewable Energy Partners LP (TSX: BEP.UN, NYSE: BEP). This Bermuda-based limited partnership owns a range of renewable power installations (mainly hydroelectric but also some wind and solar). At the end of July, investors received one share in a new company, Brookfield Renewable Corporation (TSX, NYSE: BEPC) for every four units of the BEP. We owned 100 units, so we received 25 shares of BEPC. It’s currently trading at a significant premium to the parent partnership. We have adjusted the cost base and added BEPC to the portfolio.
Brookfield Infrastructure Partners LP (TSX: BIP.UN, NYSE: BIP). This limited partnership invests in infrastructure projects around the world. As with BEP, it has also spun off a Canadian-based corporation, known as Brookfield Infrastructure Corporation (TSX, NYSE: BIPC). We received one share of the new company for every nine partnership units. It too is trading at a premium to the parent. We have made the cost base adjustments and added BIPC to the portfolio.
BCE Inc. (TSX, NYSE: BCE). We added BCE to the portfolio in February. It turned out to be bad timing, but this is a quality company and the shares will recover. Meantime, we’re collecting a healthy dividend.
Interest. We invested $2,052.59 in a Renaissance high interest savings account paying 1.6%. We received $16.42 for the period.
Here is how the RRSP Portfolio stood as of Aug. 14. Commissions have not been factored in and Canadian and U.S. currencies are treated at par for ease of tracking.
IWB RRSP Portfolio (a/o Aug. 14/20)
Comments: The pandemic hit this portfolio hard. Several of the bond funds did not perform to expectations and the low-volatility funds did not provide as much protection as I anticipated.
The end result was a loss of 6.1% over the six-month period. That’s not terrible considering the market volatility and the fact the last review was at a time of near-record highs. That said, I never like to have to report a loss.
Fortunately, the gains we achieved over the previous eight years have resulted in a total return of 118.4% since the portfolio was launched. That’s an average annual return of 9.63%, still well above target.
Changes: There are two ETFs that are now at much higher risk than normal. They are the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) and the CI First Asset Canadian REIT ETF. We will sell both for a total amount of $4,495, included retained earnings.
Also, we will reduce our position in XMS by half, selling 150 units for a total of $4,170. That gives us a total of $8,665 to reinvest.
We have no technology exposure in the portfolio, so we will add 400 units of the Harvest Tech Achievers Growth and Income ETF (TSX: HTA) at a price of $12.40. Total cost is $4,960. This fund invests in an equally weighted portfolio of 20 large cap tech companies such as Apple, Cisco, Facebook, and Adobe. The managers write covered call options to generate income. As of July 31, the fund was showing a one-year gain of 21.47%.
As well, we will boost our position in XBB, buying 110 units for a cost of $3,697.10. We now own 200 units.
That leaves $7.90, which will be added to our cash holdings.
We’ll make one more move by using the retained earnings in BIP.UN to purchase 12 shares of the new BIPC, bringing our position to 25 shares. The cost will be $799.08, which will leave BIP.UN with retained earnings of $51.83.
The new cash balance (including retained income) is $1,752.52. We will invest this in an Alterna Bank High Interest Savings Account, which is RRSP eligible. The current rate is 1.4%.
Here is the revised portfolio. I’ll review it again in February.
IWB RRSP Portfolio (revised Aug. 14/20)