# Thoughts on First Asset Morningstar Canada Value Index ETF (TSE:FXM)



## andrewf (Mar 1, 2010)

Well, it's been about 10 months since this ETF (FXM) was listed. I was going to wait until 12 months to start a thread about it, but I guess I couldn't hold out.

It first caught my eye when on the CCP blog, Dan wrote a rather skeptical piece about this new ETF (or rather the index it was based on). There was a pretty good discussion in the comments of that post: http://canadiancouchpotato.com/2012/02/16/inside-morningstars-new-strategy-indexes/

It caught my eye because the alpha (outperformance) number from the morningstar index vs the TSX was rather eye popping, or 5-10% per year (depending on the time frame). At any rate, I've been watching this fund since then and it has so far managed to outperform XIU by +11.32% vs 0.45% (excluding dividends--both funds pay a comparable dividend rate). Nearly 11% outperformance in less than a year is pretty impressive.

I personally liked the fund because the index methodology it uses helps to provide a better diversified sector allocation (not just financials+natural resource firms), while avoiding firms with unreasonable valuations (*cough* Nortel *cough*). The MER is on the high side at 60 bps, but so far the fund has more than earned its keep. This is an 'active' fund in that it has higher turnover than a pure broad market index tracking fund, but it uses rules based methodology rather than manager discretion. 

I'm also surprised that the fund has been slow to pick up AUM. 

Anyone else have thoughts?


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## CanadianCapitalist (Mar 31, 2009)

Andrew: You were the one who pointed me to this ETF when I wrote a post about TSX index concentration in two sectors. If I were to give a value tilt to the portfolio, I would pick FXM over XCV because FXM is better diversified (XCV has a 60% allocation to financials) and it is not much more expensive. I'm not sure whether comparing FXM with XIU tells us anything. The former has is a value fund, the latter gives you just market exposure.

Speaking of value and small cap tilts, any input on what folks who are slicing and dicing are using? Here's my initial picks:

Canada Value: FXM
Canada Small Cap Value: ???
US Value: VTV
US Small Cap Value: VBR
DM Value: EFV
DM Small Cap Value: SCZ


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## andrewf (Mar 1, 2010)

I compare it to XIU, as it would be a substitute, if anything, for Canadian equity allocation.

There aren't many products offering value tilts in Canadian equities, so there isn't much to compare it to. Nonetheless, XCV returned 3.10% (excluding dividends, and XCV seems to pay out about 4% per year vs FXM's ~2.0%).

Also, looking at XCV vs XIU over the past 5 or so years does not show as much difference in performance. 5 year annualized returns are 2.19% for XCV and 0.08% for XIU, vs 5.63% for FXM's index (less their MER for perhaps 4.9% - 5%).


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## CanadianCapitalist (Mar 31, 2009)

In a registered account, I agree that it is worth considering FXM as a replacement for XIU. In taxable accounts, I'm not so sure because FXM might close shop and equal weighting plus quarterly rebalancing means more turnover and ongoing taxes. It is really interesting that the FXM index has a specific rule to stay diversified by putting in a five securities per GICS sector rule. Do you own this fund?


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## andrewf (Mar 1, 2010)

I own some in my TFSA. Not going whole hog until the fund has more of a track record.

To be fair, this fund has some concentration risk in that is is sampling ~20% of the overall index. The index has historically not underperformed too badly, but the risk remains that your returns will deviate significantly from the index (and not in the direction you want). Over longer time frames, this concern is reduced.


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## andrewf (Mar 1, 2010)

I thought I would bump this thread to point out that in the past 6 months, this fund outperformed XIU by about 13%.


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## brad (May 22, 2009)

Yeah, it's currently the performance star in my own portfolio.


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## mrPPincer (Nov 21, 2011)

Interesting, thanks for bumping this thread, I must've not noticed it last december.

I will no doubt have regrets about it, :stupid:, but I've let human nature win over the science, and started buying individual stocks to balance my sector exposure in CDN-based equity, and increased my Canadian allocation to 40% so far.

By global cap ratios I'm still low in CDN allocated consumer def.& cycl., tech., healthcare, and maybe a little low in basic materials, or would be if I kept buying stock in the other sectors.

FXM will be interesting to drill into to look at it's holdings, and it does seem worth considering holding directly for the reasons you mentioned; the discipline of index methodlogy, with valuation screening and sector balance.

One might even say it seems cheap at the price for all that work, and peace of mind, you can buy it and forget it, unlike with individual stocks.


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## Synergy (Mar 18, 2013)

I thought I'd bump this thread after hearing about this ETF on BNN. Decent 5yr return compared to the TSX. This may be of interest to those indexers who aren't comfortable with the weightings of the Canadian index. The management fees are quite high however.

I'm more interested to simply learn more about some of their top holdings and how they weight the ETF.


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## andrewf (Mar 1, 2010)

In 2014, this fund trailed the TSX by 2.5%, though it still has outperformed over the past two. Banks and resources did well last year, and they are weighted higher in the TSX than in this fund. It will be interesting to observe the relative performance over time.


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## Park (Sep 11, 2010)

I thought that I would bump this thread. There's not a lot of choice, when it comes to value ETFs investing in Canadian stocks. The MER of FXM is 0.67%. There's 30 stocks in FXM. The stock universe is drawn from those that have an average monthly volume (12 month) in the top third of stocks of Canadian stocks listed on the TSX. 

Could one do better with a DIY approach? Admittedly, it's more work. But one might be able to get a stronger value tilt, as as individual investor can invest in less liquid stocks. And one could forgo the 0.67% MER.


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## james4beach (Nov 15, 2012)

People frequently post on CMF about how the TSX Index isn't very good, and how it's trivial to do better. I question that assertion. If it was that easy to do better, there'd be a whole bunch of index ETFs that consistently beat the TSX.

FXM initially outperformed the TSX, then underperformed for the next 4 years. After all these years, FXM has had the *same* total return as XIU (benchmark TSX 60 index) since inception. At times it's done better, at times it's done worse, but they end up in the same place, shown in this chart: FXM (green) versus XIU (black)

Doing better with DIY is a long shot too. You'd have to come up with a solid methodology, consistently do your portfolio updates and management, and accurately benchmark yourself. I think you might actually be better off going with a portfolio manager who has a solid long-term track record, examples being Mawer Canadian Equity, or Beutel Goodman Small Cap.

There are some ETFs that have outperformed the TSX for several years now, but are not as well tested as the above mutual funds. Two well diversified ones that come to mind are ZLB and WXM.

By the way, First Asset's *momentum* fund, WXM, has been the consistent outperformer since inception. Kind of funny since it was launched at the same time as FXM but not mentioned once in this thread. Here's it's chart compared to XIU since inception: http://schrts.co/au9XBL


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## andrewf (Mar 1, 2010)

Value factor has been struggling in general for the past few years, and not just in Canada. I would expect this to change.


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## Park (Sep 11, 2010)

FXM stock picks based on a composite of trailing P/E, P/CF, P/B, P/S and 3 month EPS estimate revision. The first four are value metrics, and the last looks like a momentum metric. This isn't that different than "trending value" from "What Works On Wall Street". You probably could do something similar with portfolio123 as an individual investor.


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