Portfolio lessons from Soviet hockey

Advisors can learn from Gabe Polsky’s astonishing film about Russian hockey, Red Army. The sold-out Canadian premiere audience at TIFF 2014, which included Wayne Gretzky, Scotty Bowman and Paul Coffey, was treated to a story of pride, discipline, teamwork and creativity.

The film also chronicled the story of Viacheslav Fetisov, the star defenseman who battled the Soviet system and eventually was allowed to play in the NHL. Canadians may think we’ve got superior players, but may see things differently through Polsky’s lens.

Selection and price

Russian players have always had strong skills and conditioning, but they get short shrift on the international stage. Sometimes it is difficult to tell what characteristics to emphasize when screening for players or investments. Do you go for low-cost Russian players, or higher-cost North American ones? The investment equivalent: in a non-taxable Canadian portfolio, which of the two ETFs (see Table 1, this page) would you select for U.S. equity exposure?

Using only the information provided here, XUS has:

• modestly higher 1-year return (26.87%) versus 26.23% for VUN (VUN commenced trading August 2, 2013, so longer comparisons aren’t possible);
• better 12-month trailing yield (1.36%) versus 1.31% for VUN;
• lower MER of 0.10% versus 0.17% for VUN; and
• a target index, the S&P 500, that is better known than VUN’s CRSP U.S. Total Market.

Looking closer, the iShares S&P 500 Index ETF holds U.S.-traded ETFs and pays withholding tax at the ETF level that is unrecoverable in Canadian registered accounts. After tax, the Vanguard ETF offers higher return. Further, with 3,744 holdings, VUN offers broader diversification.

We always prefer lower-cost products. This example is an exception. Picking the right player (or investment) for the role is essential.

Consider the broad U.S. S&P 500-like equity choices available on the TSX (see Table 2, this page). Tax-conscious investors may prefer the compounding efficiency of derivatives-based Horizons S&P 500 Index (HXS), which pays a total return with no taxable distributions along the way. Longer-term investors may prefer a non-hedged offering, since hedging can be expensive. Quants may prefer Powershares S&P 500 Low Vol (ULV), since it reduces exposure to return-dampening volatility drag. Confused? Default to a low-cost ETF. Like the Russians, they will provide reliable performance cheaply.

Teamwork and portfolio construction

The Red Wings’ Russian lineup of Kozlov, Larionov, Fedorov, Fetisov, Mironov and Golubovsky typified the Red Army style of play: control and teamwork. Each player possessed both offensive and defensive abilities, but working the puck into optimal scoring position was the focus. Portfolios of ETFs can be similarly constructed. Much is made of uncorrelated returns, but experience has shown us that this kind of diversification fails when needed most. A balance of offense and defense is best but, as Fetisov proved, a stronger defence is the best foundation.

ACTION STEP Construct ETF portfolios using complementary funds. Don’t just look for the lowest fees or highest returns.

Mark Yamada

Investments

Mark Yamada is president of PÜR Investing Inc., a software development firm specializing in risk management and defined contribution pension strategies.