The Canadian equity market has had an exceptional 2021. One of the distinctive quirks of low volatility indices is that their relative performance typically suffers when their absolute performance is at its best, a pattern that we saw again this year. The S&P/TSX Composite Index was up an impressive 22.0% YTD through Dec. 16, 2021. In this environment, the S&P/TSX Composite Low Volatility Index has done remarkably well, lagging the S&P/TSX Composite by only 2.6% for a 19.4% gain. A defensive strategy designed to offer protection in bad times will typically not outperform (or even keep pace) in great times. The S&P/TSX Composite Low Volatility Index has done a better job at keeping up in 2021, capturing 88% of the S&P/TSX Composite Index’s total return versus its historical average of 66% monthly upside capture.
Strong markets generally imply calm volatility levels, and Exhibit 1 shows that volatility declined in the last three months across all sectors of the S&P/TSX Composite Index.
In the latest rebalance for the S&P/TSX Composite Low Volatility Index, effective at the close of trading on Dec. 17, 2021, the biggest allocation shift came from the Industrials and Real Estate sectors; the former gave up 5% and the latter gained 4%. Exhibit 2 shows that Financials and Real Estate, each with a 26% weight, are currently the two biggest sectors of the low volatility index. Health Care, which had disappeared from the index a year ago, has reappeared with a 2% weighting.
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