03 Nov 2017

Deprecated: get_the_author_ID is deprecated since version 2.8.0! Use get_the_author_meta('ID') instead. in /var/www/www.inovestor.com/wp-includes/functions.php on line 5211
admin

Launching Horizons Inovestor Canadian Equity ETF (INOC)

03 Nov 2017

ETFs over Mutual Funds

With less than 10 days away of Inovestor’s ETF launch on November 14th, we are seizing the opportunity to discuss this milestone for us and our affiliated company Inovestor. A couple years ago, we made a survey on future investable solutions and results were mixed between an ETF and a mutual fund. Back then, the timing wasn’t right for us and we kept the project on the back burner. Last year, we polled our clients again on the same topic and they largely requested an ETF.

INOC in a Nutshell

INOC seeks to replicate the performance of the Nasdaq Inovestor Canada Index (NQICA), which tracks Inovestor’s Canadian Equity Model Portfolio Strategy. Unlike other quantitative strategies, the key differentiator is the reliance on economic profit factors to assess companies. Briefly, the economic profit is estimated by substracting the cost of capital from the net operating profit. After nearly a decade of outperformance which generated more than 7.6% annualized alpha over the S&P/TSX TR, approximately 300 investment advisor teams across Canada are using this Strategy in their practices.

Although we are launching this product to meet our client’s needs, this ETF is suitable to any investor looking for a factor-based quantitative Canadian Equity exposure. Today we will put emphasis on the fact that the methodology between the Strategy and the NQICA is identical except for the rebalancing method. The rebalancing for the Strategy is calendar rule-based while the NQICA is Equal-Weighted rule-based. You will find below the key features of those two rebalancing methods:

Calendar Rule-Based ─ Strategy

Pros

  • Clients know it that way: Inovestor strategies are using this methodology;
  • Simple to implement: Requires less time to implement at each portfolio rebalancing;
  • Tax efficient: Doesn’t require buying / selling positions all the time, very tax efficient.

Cons

  • Specific risk: There is an increased dependency on the performance of a few stocks;
  • Larger weights: The portfolio is built to drift towards heavy weighted stocks;
  • Size effect: Losers are replaced by new candidates at smaller weights.

Equal-Weighted Rule-Based ─ NQICA

Pros

  • Easy to understand: All positions are readjusted at the same weights, very intuitive;
  • Tends to outperform: Based on academic studies, although not the case right now;
  • Specific risk mitigation: Tends to minimize the impact of a few stocks inside a portfolio.

Cons

  • Higher portfolio turnover: All positions are readjusted at every portfolio rebalancing;
  • Stocks with less liquidity: The strategy tends to favour smaller / less liquid companies;
  • More time consuming: The rebalancing is costlier to implement as AUM increases.

Both rebalancing methods have different advantages and disadvantages. While it is true the Strategy did outperform the NQICA by 180bps since 2008, it did in a bullish environment where a few stocks drifted to large weights and accounted for a significant part of this outperformance. If these specific stocks underperform at some point, the NQICA is expected to outperform the Strategy. After all, positions are capped at 4%, the same as for all the 25 holdings.

Conclusion

The Horizons Inovestor Canadian Equity ETF (INOC) follows the same philosophy we are known for: 1) Quality At Reasonable Price (QARP), 2) Undexed (not following the S&P/TSX TR weights in this case), 3) Concentrated (25 positions) and 4) Low portfolio turnover (to lower trading costs and improve tax efficiency). We invite you to visit the ETFs section for all documentations related to this ETF launch. If you have any question, please contact us and we will assist you as soon as possible.

 

Canadian ETFs: The latest launches

ETFs over Mutual Funds With less than 10 days away of Inovestor’s ETF launch on November 14th, we are seizing the opportunity to...

Read more

Amalgamations and New ETF Launches

ETFs over Mutual Funds With less than 10 days away of Inovestor’s ETF launch on November 14th, we are seizing the opportunity to...

Read more
Latest news

What’s in the news

Oct 07, 2021
Signs of Elevated Risk in Lofty Tech Stock Valuations
Read more
Aug 07, 2020
New Stockpointer Beta
Read more
Apr 28, 2020
FREE access to Canadian Fixed Income Securities End of Day Prices by EDI
Read more
Aug 13, 2019
Portfolio Manager’s August comment For July Results
Read more

Generate Higher Income

Discover our factor-based alpha generators

Discover our factor-based alpha generators

    What product(s) are you interested in?

    StockGuideMarket InsightsFor AdvisorsAsset Management

    StockGuide

    Market Insights

    For Advisors

    Asset Management

    What product(s) are you interested in?

    StockGuide
    Market Insights
    For Advisors
    Asset Management