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The ETF Lab
ETF Spotlight:
Three takeaways from markets in 2024
In this week’s spotlight, we’re highlighting three market developments from early 2024, including US earnings growth, Japanese/International equity gains, and a positive set-up for Canadian fixed income.
US earnings concentration
After market behemoth Nvidia posted another strong quarter of earnings growth, its CEO stated that artificial intelligence is at a “tipping point”. This spurred a flurry of commentary as to whether this was the makings of further market gains or an overblown, concentrated bubble – comparable to the dot-com era.
Source: Bloomberg; as of February 23, 2024, returns in local currency.
Comparisons to the dot-com era made famous by unprofitable companies such as Pets.com are a stretch, even if this rally proves over done. The US large cap equity market is more concentrated today, with over 31% of the market in just the top 10 holdings.1 However, as shown above, YoY % earnings growth in Q4 was markedly different for those of the Magnificent 7 versus those of the rest of the S&P 500 Index.
Year-to-date in 2024, US equities are once again amongst the best performing asset classes and for better or for worse, are once again being led by its biggest components.
Source: Bloomberg
Japan surpassing all time highs… 34 years later
The Nikkei 225 Index, Japan’s most famous index, has surpassed its previous record set in December 1989. While the Nikkei’s market cap weighted and more broadly diversified alternative – the Topix Index – still has a little further to go to pass its long-standing record, this current rally marks a milestone for the Japanese stock market.
Source: Bloomberg; as of Feb. 28, 2024
Japanese stocks have rallied on the back of a weaker currency, but also growing recognition of corporate reforms and strong earnings growth. These fundamentals have provided some comfort that after many false starts this rally is more sustainable.
As we outlined previously in The ETF Lab: International Equity Investing with ETFs, strong macro tailwinds and a growing valuation gap are reasons investors may want to consider investing outside US and Canadian stocks in 2024.
Source: Mackenzie Investments; as of Feb. 26, 2024; **characteristics as of Jan. 31, 2024
Positive outlook on Canadian fixed income
Softening inflation and weakening demand in Canada may further erode the case for GICs and/or money market instruments, as forward policy projections adjust to diverging economic data between Canada and the US.
Below are several Canadian fixed income ETFs sorted by duration, or sensitivity to interest rate moves, and yield to maturity.
Source: Mackenzie Investments; as of January 31, 2024
For a core, actively managed exposure to Canadian fixed income investors can consider MKB (Mackenzie Core Plus Canadian Fixed Income ETF). The core portion of MKB, a minimum of 75% of the ETF, is invested in investment-grade federal, provincial, and corporate bonds, while the satellite portion (roughly 25%) can be allocated to non-investment grade credit, including high-yield bonds, sovereign / quasi-sovereign bonds and leveraged loans from issuers around the world.
This core-plus, active approach has helped MKB, a 5-star Morningstar rated strategy, outperform traditional index ETFs in this category on a risk-adjusted basis.
Source: Morningstar. Period: since common inception to December 31, 2023
ETF News & Notes
A simple ETF solution for long-term growth in registered accounts
To help provide a single ticket solution for RRSP/TFSA/RESP accounts, we launched a full suite of asset allocation ETFs, including the newest addition MEQT (Mackenzie All-Equity Allocation ETF).
Mackenzie’s suite of asset allocation ETFs (MCON / MBAL / MGRW/ MEQT) provides a range of strategic asset allocations and access to thousands of underlying securities, all for a management fee of just 17 bps. These ETFs can help investors achieve their goals by minimizing the need – and associated costs – of trading multiple ETFs, as well as making the rebalancing process easier.
For more information on MEQT, which invests in 100% equities, see our feature page: Mackenzie Asset Allocation ETFs (mackenzieinvestments.com)
A look at covered call ETFs
Prerna Mathews, VP of ETF Product Strategy, recently wrote a great piece taking a look at covered call ETFs. In this piece, Prerna breaks down how they generate income and outlines some potential drawbacks.
For some further notes on covered call ETFs, read: The ETF Lab: Considerations on covered call ETFs.
ETF Trading Tip: Understanding ETF premiums and discounts
A key advantage of the ETF structure is that the price of ETF units generally trades in line with the market value of its underlying basket of securities (net asset value).
However, ETF premiums and discounts can occur for several reasons. Two primary drivers include:
- If the underlying securities trade on an exchange that is open at a different time than the exchange the ETF trades on, there could be deviations between current and stale security pricing, resulting in possible premiums or discounts.
- If the underlying securities become less liquid or markets are experiencing heavy order flow, the result may mean higher transaction costs, leading to larger premiums and discounts.
For a deeper look into this topic, read our white paper: Understanding Exchange Traded Funds premiums and discounts.
ETF Flows Update
- OSFI’s ruling - that bank deposits from HISA ETFs must adhere to 100% wholesale liquidity treatment – took effect at the start of February. The CAD$ HISA ETFs have lost more than $233M in assets in the first three weeks of February.2
- As yields in GICs and HISA ETFs have started to decline, ultra-short duration bond ETFs have attracted significant inflows. QASH (Mackenzie Canadian Ultra Short Bond Index ETF) now has over $80M in assets since launching in mid-November 2023.3
Mackenzie ETF Top Performers
1 Source: Bloomberg, as of Feb. 28, 2024; % of top 10 holdings in QUU – Mackenzie US Large Cap Equity Index ETF
2 Source: Bloomberg, Mackenzie Investments; as of February 27, 2024
3 According to NBF Weekly ETF Flows week ending February 23, 2024
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