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I currently have 50% ZAG.TO, 35% XAW.TO, 15% VCN.TO.

My current compensation at work is highly correlated to the performance of the financial industry in Canada (i.e. the top 5 banks). XAW holds 10% non-Canadian banks and VCN is 25.5% Canadian banks. Therefore, I think it is appropriate for myself to move away from this basic portfolio. I have 3 thoughts at the moment:

  1. I am thinking of adding an ETF that tracks small cap stocks - for example, something that tracks the Russell 2000 index (i.e. small caps) which tracks the 2000 smallest cap stocks in the Russell 3000. What would you suggest to a Canadian investor who want to invest in small cap stocks without financials exposure? On US markets, I could buy iShares Russell 2000 ETF. Should I open a US account for that?

  2. Another method of diversifying away from financials might be to buy consumer staples ETF. For example, I might consider iShares S&P/TSX Capped Consumer Staples Index ETF. My other line of thought with this ETF is that consumer staples might fair better during a market crash: everyone needs to eat! This is backed up by the 2008 financial crash.

  3. Another method of diversifying away from financials might be to buy utilities ETF. For example, I might consider ISHARES S&P/TSX CAPPED UTIL. Again, my line of thought with this ETF is that utilities might fair better during a market crash. This is backed up by the 2008 financial crash.

Which of these lines of thoughts do you agree with?

Ryan J. Shrott
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I agree with all your lines of thoughts, in theory. In practice, however, I think a more simple solution might be more suitable.

Your ideas are all good examples of a "completion portfolio" where your overexposures in some areas (in this case to the health of banks) is balanced by modifying your investment portfolio to counterweight that overexposure. Each of the ideas are good theoretical methods to balance out your excess financial exposure. However, each has significant awkwardness due to the exposure to Canadian/U.S. Dollar exchange rate.

However, your best solution may be to not change your portfolio at all. To start with, your portfolio is already 50% bonds meaning your portfolio exposure to market cycles is already significantly dampened. Also, large banks tend to be not nearly as cyclical as other financial firms say hedge funds or mortgage firms (remember not all crisis are like the last crisis). Finally, even if your particular job is strongly tied to market performance, the kind of person that works at a large bank and can understand these sort of portfolio subtleties generally won't have too much trouble finding a job in a similar field, if necessary.

So, your "total portfolio" of future income and investment income doesn't seem to me to be significantly overexposed to financial companies or market cycles. However, if you still believe your exposure is too concentrated, you could look for a global rather than U.S. specific solution similar to the ones you mention. Or even take a more simple solution of just raising your bond allocation a few points.

rhaskett
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