New Non-Market Cap Weighted Canadian ETF

There will be a new ETF in Canada starting tomorrow, February 22, the Claymore FTSE RAFI Canadian Index Fund (TSX:CRQ). You can find the press release here [pdf] and here. The FTSE’s RAFI series of indexes are part of a “new range of non-market cap weighted indices” and its “index constituents are weighted using four fundamental factors, rather than market capitalization. These factors include total cash dividends, free cash flow, total sales and book equity value.”

After a little digging I managed to find out exactly what stocks are in the Canadian RAFI index. You can view it in HTML, or you can also view it as a CSV (comma-separated values) file, import it into Excel or OpenOffice Spreadsheet and sort by whatever column you want. I did just that, sorting by weighting, and here’s what you get for the top 10 holdings. They do not say outright what the percent holdings are for each constituent stock, but they give the “% wght RAFI.” This is actually a stock’s percentage within the entire global RAFI index. I used those numbers to come up with the percentage holdings within this Canadian RAFI ETF/Index alone.

Royal Bank Of Canada 5.50%
BCE Inc 4.40%
Bank of Nova Scotia 4.28%
Alcan 4.22%
Manulife Financial 4.08%
Bank of Montreal 3.85%
Toronto-Dominion Com 3.78%
Canadian Imperial Bank of Commerce 3.50%
Sun Life Financial 3.04%
Thomson Corporation 3.00%

The next 10 stocks in the list are mostly energy/oil/gas stocks. No big surprises although I just had a quick look at the list. There are 63 stocks in total, of which all but 6 pay a dividend (or have paid “some” dividend before) and 27 of them yield greater than 2%. The stocks are still very much weighted by their market capitalization as you can see here:

FTSE RAFI Canadian Index Weightings vs. Market Cap

It makes me wonder why it is called a non-market cap index. They have used factors such as “total cash dividends, free cash flow, total sales and book equity value” which (I guess) are directly or indirectly correlated to the market capitalization (looking at the factors they used, it makes sense). Why is “total sales” used as a “factor”? I would never want to buy a stock just because it had high revenue. If they are spending 10 times as much it does not really matter now does it? Using “book equity value” makes some sense though. If a company stock has skyrocketed a la Nortel Networks, it’s book value may not necessarily go up, meaning that this index/ETF will not start overweighting in momentum stocks. On the other hand, all things considered equal, I am not sure that a stock with a higher book value really makes a better investment.

Personally from what I have seen so far, I liked the TD Select Canadian Value Index Fund better. But this index/ETF compared to the TD/S&P 60 (iUnits XIU) or TD/S&P Composite (iUnits XIC)? I think I am definitely in favour of using those four factors mentioned above compared to just market capitalization for passive index investing. I will have to look into this RAFI Index methodology in greater detail (if I can find details that is). This is a start anyways. At least we now have some other choices available for large cap semi-passive ETFs in Canada after the demise of TD ETFs.

Thanks to the Canadian Capitalist for pointing this out to me in a recent comment to my blog post about non-market cap weighted indexes. He originally blogged about it here.

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