Tuesday, 20 February 2007
It has been noted often in the past that actively managed Canadian equity mutual funds suffer a great deal from portfolio overlap due to the small number of companies on the TSX. It is hardly useful to buy several different mutual funds since they end holding more or less the same stocks. That has led me to wonder to what degree the same problem confronts the iShares Exchange Traded Funds. The various funds bear names that suggest different specializations and thus different holdings.
The image shows the summary of the spreadsheet analysis I compiled from the fund holdings on the iShares website as of February 20th. My conclusions are graphically summarized as red = bad, green = good and yellow = mediocre choices of fund combinations. Another way of saying this is that when the overlap of the fund holdings is too great (the red combos), it isn't worth holding both funds since one ends up with more or less the same holdings.
Based on that principle, XIU (iShares TSX 60 Large Cap) and XMD (Mid-Cap) have zero overlap (green cells) and make sense as a combination). So too are XIU and XRE (Real Estate Trusts). On the other hand, XIU with XEG (Energy stocks), XFN (Financial companies) or XDV (Dividend stocks) have too much overlap and do not make sense. XDV and XFN are more or less the same thing, being dominated by the banks. One might even wonder if the XFN and XMD are worth the 0.55% and 0.5% MERs respectively, instead of simply buying the stocks directly. Several funds are so concentrated on a few holdings that they are virtually a play on a couple of stocks. XIT (Information Technology) has only nine holdings and Nortel, RIM and Cognos make up 67% of its total value. ... highly risky if the past is any guide. XMD is a good Canadian compromise - it is middle of the road and has a bit of everything. The last combination that are more less the same thing is XGD (Gold) and XMA (Materials). XMA is more diversified with 61 holdings vs only 30 in XGD.
The number of holdings across all these nine specialty funds is still less than the TSX as a whole, with only 241 separate equities, against 273 in XIC, which is iShares' TSX market fund.
Now that I know, guess I'll have to simplify my portfolio some to eliminate the useless duplications.
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