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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?

  • 1
    What's the question? – RonJohn Jan 16 '18 at 3:35
  • Are you beginner? What do you want? – sanaris Jan 16 '18 at 11:38
  • @sanaris yes, to gain input on my thinking and get expert advise – Ryan J. Shrott Jan 16 '18 at 12:27
  • ETFs are for (a) lazy people, (b) beginners for the first stage. If you done with your first stage, dump this portfolio, fix your profits and start with more serious instruments - buy stocks/bonds directly. – sanaris Jan 16 '18 at 12:32
  • Only been investing for a year, so I’m still beginner and prefer a simple strategy. I also tend to get very anxious and so need something simple – Ryan J. Shrott Jan 16 '18 at 12:34
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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.

  • 8% of my pay cheque is also in stock, so there’s an automatic over exposure to financials – Ryan J. Shrott Jan 16 '18 at 12:39
  • Interesting. That could give you an over-exposure to financials though it does still depend the relative size of your portfolios. Can you sell the stock? That is usually the easiest solution as your companies stock is certainly significantly correlated with your employment. – rhaskett Jan 17 '18 at 0:47
  • Otherwise as you mention Utilities and Consumer Staples are the sectors least correlated to financials while still giving you stock exposure. There are ETFs out there that are even more directly applicable like SP500 ex Financials. I would still recommend global solutions like Global consumer staples, though. That diversifies you away from U.S. Dollar specific risk. Be very mindful of fees and finding solutions that are available to you in Canada can be a bit harder. You are on the right track. – rhaskett Jan 17 '18 at 0:55

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