Investoid

The Globe had a good article on how the TSX is quite overweight in financial and commodity companies over the weeknd. Because the index is a market-cap weighted index, when certain sectors or companies have strong outperformance over a long period of time, they begin to take up an ever-increasing proportion of the index.

This has major implications for the average investor using a passive index strategy. If the index is supposed to be broad market but is not really representing all the sectors adequately, you are at a higher risk than you may think. For instance, if you’re an XIU holder, over 77% of the ETF’s funds are in financials, energy and materials companies. If the any of these sectors begins to fall precipitously, then you’re more likely to experience higher losses than if you were in a more diversified fund.

I personally hold XIC instead of XIU, since it caps the maximum weight each company can take in the fund, but that does not really address the sector overweighting that the index has. So, if you’re looking to gain some exposure to sectors that have little representation in the S&P/TSX index, and at the same time beef up your international exposure, here are some options:

• Vanguard Health Care ETF (VHT) represents a mixture of medical device suppliers and pharmaceutical/biotech companies in the US. As we all know, health care is in a long-term growth cycle in the developed world due to demographics, and is one that typically provides a lot of cash flow in the US. With an MER of only 0.25%, this is an excellent low-cost way to get exposure to the health care sector.
• iShares S&P Global Utilities ETF (JXI) has a broad base of utilities stocks from around the world. While it’s expense ratio is higher (0.48%) than a similar Vanguard product, its international exposure makes it a more compelling stock to own.
• SPDR Consumer Staples (XLP) is a collection of large cap companies specializing in the consumer retail sector. Most of these companies are US based but have a strong global presence, like Proctor & Gamble, WalMart and General Mills. The ETF has a small 1% dividend and an expense ratio of 0.24%.

All of these ETFs are listed on US exchanges, which means that you’ll be facing some currency risk if you invest in them. If you have a very long term investment horizon, I believe that you will have little to worry about since we are at historically high levels for the US/Cdn exchange rate. However, if you are looking to hold these funds for a 5-10 year time horizon, you may want to discuss some currency hedging strategies with your financial advisor.