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SNC-Lavalin proves the ETF point.


On Tuesday February 28th, 2012 SNC-Lavalin (SNC) opened 20% below its previous day’s close. Risk-averse individual investors can avoid this type of individual security surprise by using Exchange Traded Funds (ETFs) as a risk management tool.

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On Monday February 27th, SNC-Lavalin (SNC) stock closed at $48.37. But on Tuesday, February, 28th before investors could rip back the lid from their first coffee of the day, SNC-Lavalin stock opened 20% lower at $38.

SNC Lavalin proves the ETF point.Chart source: globeinvestor.com

SNC-LAVALIN GROUP INC. is an engineering and construction group and in the ownership of infrastructure and in the provision of operations and maintenance services. The SNC-Lavalin companies have offices across Canada and in over 35 other countries around the world and are currently operating in 100 countries.

To the panicking investor, rumours (or news) of earnings revisions, misdirected payments or links to Gadhafi’s son are irrelevant. The urge is to sell. Like buying insurance after the accident. ‘Just do something!’

Investors have seen this before.

Investors are reminded of similar single day drops from CIBC and others (RIM, Potash …). Recall CIBC’s August 3rd, 2005 surprise Enron related write-off of $2.4 billion causing CIBC stock to drop 7.5% that day.

Nasty surprises like these make it emotionally and financially challenging to practice ‘buy low, sell high’, ‘long-term investing’ dictums.

How does the average individual investor participate in the stock market while avoiding individual stock blow-up?

For many, the answer for the average individual investor is (still) Exchange Traded Funds (ETFs).

To review, an ETF is simply a low cost, broadly diversified index fund. ETFs mimic an entire market index by holding ALL the securities in the index. (There are plenty of sector-specific ETFs too).

SNC is a component in both the iShares S&P/TSX composite index ETF (XIC) (with a 0.48% weighting) as well as the iShares S&P/TSX 60 index ETF ETF (XIU) (with a 0.66% weighting).

So on the same day that SNC dropped 20%, XIC was up 0.45% and XIU was up 0.44%.

Because ETF’s contain all stocks in the index, the impact of an individual stock like SNC is buffered by the diversification inherent in the ETF. That’s what ETF’s do. They moderate the impact from the worst but still allow the investor to participate with the best. The good offset the bad. Overall performance is therefore smoother. And smoother performance means a portfolio is more predictable.

It also means morning coffee is more enjoyable too.

Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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