“I wonder if it’s wise to not buy a Canadian Index ETF because these funds are so over-weighted in financials and energy equity (as high as 65% in November in some indexes).A great virtue of market weighted indexes is that when a stock’s price changes, it remains market-weighted. No trading is needed to rebalance as stock prices fluctuate. However, with equal market weighting or anything other than market-weighting, price changes put the allocation out of balance and ETFs must make trades to get back into balance.
“I note a more equally-weighted fund, ZLB has beaten the index since its inception, and is doing better than the Canadian index during these unsettled times. It's designed to defend against volatility, but its composition of generally equal-weighted stocks also offers more diversity than a Canadian Index ETF. Index funds seem to be better investments when they have greater diversification, like those mirroring the US market. At least that's the hunch of this investor who is still learning the ropes.
“If ZLB is not for some, they could try a strategy of setting up their own Canadian portfolio of equally-weighted stocks.”
This means that market-weighted indexes will tend to offer the lowest cost way to invest. Any other weighting method must outperform a market-weighted index by enough to cover the extra trading costs (and in taxable accounts income tax costs).
These higher costs may not be large, but I’ve cast my lot on the assumption that ETFs based on alternative weighting methods will not give better results after costs than market-weighted ETFs. I don’t know for certain whether I’m right or wrong about this, but that’s the choice I’ve made.
As for the concern about the concentration of financials and energy in Canadian stocks, I deal with this by only having 30% of my stock investments in Canada. The rest are in the U.S. and international index ETFs.
I can’t resist commenting on “during these unsettled times.” The present is always unsettled, and the future is unknown. The past seems more settled because we know the outcomes and they can’t change. The human tendency of hindsight bias makes us believe we knew the past would unfold as it did even though the truth is we didn’t know what was going to happen.
It’s true that over short periods of time some non-market-weighted indexes have outperformed market indexes. I’ve decided to bet this won’t persist. The bigger the gap in total costs between a non-market-weighted ETF and a market-weighted ETF, the more skeptical I am that the outperformance will persist. Others may see things differently.