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Diversification with a Fundamental index.


Does a Fundamentally weighted index complement and diversify a market value (capitalization) based index?

The iShares, market value (capitalization) based XIU replicates the performance of Canada’s largest (by market value) 60 stocks. (the S&P/TSX 60). To help avoid Canadian market, over-concentration risks, (Banks, Energy, Materials roughly 1/3rd of the index each), an investor might offset XIU with a Claymore Investments Fundamentally weighted index ETF … like CRQ.

Does CRQ offset and broaden the exposures of XIU?

It doesn’t. The top 10 weights (representing ~40+%) are too similar (Note: the weights change daily).

Is the addition of CRQ worth it?

It isn’t. It has higher cost (4x) and low trading volume.

Same with the new Bank of Montreal Dow Jones Canada Titans 60 Index ETF, (ZCN). The top 10 are not different. The volume is minimal. But the MER is a bit cheaper @ 0.15%. Still … it duplicates rather than complements XIU).

iShares.ca S&P/TSX 60 (XIU) MER 0.176% ClaymoreInvestments.ca Canadian Fundamental Index ETF (CRQ)          MER 0.69%
ROYAL BANK 6.67% ROYAL BANK 6.34 %
TORONTO-DOMINION BANK 5.81% TORONTO-DOMINION BANK 6.11 %
SUNCOR ENERGY 5.21% BANK OF NOVA SCOTIA 5.54 %
BANK OF NOVA SCOTIA 5.15% MANULIFE FINANCIAL 4.06 %
POTASH CORP. 4.24% BANK OF MONTREAL 3.84 %
BARRICK GOLD CORP. 4.03% ENCANA CORP 3.69 %
CDN NATURAL RESOURCE 3.92% MAGNA INTERNATIONAL 3.63 %
BANK OF MONTREAL 2.93% CIBC 3.21 %
GOLDCORP INC. 2.76% SUN LIFE FINANCIAL 2.80 %
CN RAILWAY 2.73% TECK RESOURCES 2.77 %

Tomorrow?

Is there added diversification by complementing a market value / cap index with an Equal weight index?

Doug Cronk, CFA is Manager, Investments for a Canadian Pension fund.

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