Many Canadian investors should seek to bring their TFSA (Tax-Free Savings Account) back into balance after a strong past two years for the S&P 500. Indeed, many Canadian investors are likely heavily exposed to the U.S. markets. Though the TSX Index is robust and value-rich in its own right, the American names, I believe, also serve as a strong foundation for Canadian TFSA portfolios.
Indeed, if you want dominant AI tech, you’ll probably have to head south of the border to get it! If you have in recent years, you’re probably happy with the results of late. Not only has the AI boom driven up share prices of the dominant tech firms (and now, the broader market), but the sinking Canadian dollar has also given Canadian investors a shot in the arm.
Remember, if you’re buying shares of U.S. companies with U.S. dollars and the greenback strengthens versus the loonie, you’re going to get a nice jolt. With the Canadian dollar now going for around US$0.69, questions linger as to what the next big move will be. Indeed, the loonie may be viewed as nearing a low point for some. But can it get even lower over the near term?
Most definitely. Either way, I would look to a reversion to the mean at some point (perhaps a move toward a US$0.75-0.80 loonie over the next several years), even if the potential catalysts that would propel such aren’t yet visible. In any case, I think the weak loonie and better “deals” on the TSX Index could make rebalancing your TFSA towards domestic securities worthwhile. Here’s a top Canadian exchange-traded fund (ETF) to help get the job done!
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iShares Canadian Value Index ETF
If you’ve become a bit heavy on the U.S. names and are worried about a valuation reset of sorts, it’s only wise to consider re-diversifying your portfolio. Indeed, if Canada comprises a relatively small portion of your investments, perhaps topping up iShares Canadian Value Index ETF (TSX: XCV) could make a lot of sense.
The TSX Index itself looks cheaper than the S&P 500. With a value-based approach, the XCV takes the cheap multiples to the next level. Indeed, value factors could be a great way to re-balance if you’re too heavy on the mega-cap growth names (think the Magnificent Seven companies, which dominate the S&P 500 and Nasdaq 100) after their recent multi-year surges.
With a heavy focus on battered Canadian banks, cheap energy firms, and various other underrated local Canadian names, perhaps the XCV is a great pick-up with an average price-to-earnings (P/E) ratio of 15.6 at the time of writing. Additionally, the 3.72% dividend yield is an added bonus of the low-cost (0.55% management expense ratio or MER) ETF.
Do note that the ETF is heavy on Canadian financials and energy names, which comprise close to 57% and 24% of the XCV, respectively. If you’re lacking in these sectors (and have way too much tech, as many investors may now have), though, the XCV may be worth the price of admission.
